Why I’d Take a Bagel Over a Krispy Kreme

I prefer bagels to donuts. And if you are an investor in Krispy Kreme Doughnuts Inc. (NYSE/KKD), you may want to exit as soon as possible, if you haven’t already done so. In past columns, I commented on how Krispy Kreme was facing a difficult upward path, trying to fight the consumer trend away from high calorie foods to a healthier lifestyle.

 In 2005, Krispy Kreme has been on a steady decline, trading at $12.95 in January to below $5, a drop of 62%. I hope you’re not still holding the stock. The reality is, Krispy Kreme is in a fight for its life and will need a miracle to pull out of the doldrums.

 The majority of Wall Street is negative on the stock, but there is one curious Buy rating with a target price of $12. My theory is that this particular analyst must love his/her Krispy Kreme donuts in the morning, as there is nothing else to like about the stock. I may be wrong, but, in my view, the stock has a poor risk-to- reward profile.

 Krispy Kreme may miss another deadline (today) to deliver restated financial statements for the past four years, as required by its lenders. Accounting issues and weak governance have basically destroyed the company. If this is not a red flag, then I don’t know what is. The company will probably ask for an extension. We are still waiting for its FY05 statements. Krispy Kreme has not filed a quarterly financial report since October 2004. Why anyone would want to buy a company that has accounting issues and no recent audited statements is a mystery.

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 Perhaps it is a gamble on a positive outcome. But there are much better risk-to-reward trades than Krispy Kreme. Don’t risk your dough on this stock. The trend tells the whole story.