By its own account, Krispy Kreme Doughnuts, Inc. (KKD-$3.46) is in an uncomplicated business: buy and mix together flour, sugar and a few other ingredients and recognize revenue when the sugary confections are sold to hungry customers. Investors seem to think of the company in such simple terms, having driven the stock price down more than 23 percent in the last few weeks after the company reported lower sales and rising costs.
Yet the company’s most recent SEC filing shows Krispy Kreme has anything but a simple balance sheet. Buried in footnotes are the details of its franchise relationships, which disclose an entirely different set of worries than just sagging demand for high-calorie snacks.
In the final quarter of Krispy Kreme’s fiscal year ending January 2008, the company added $3.2 million to its liabilities related to guarantees the company had made for franchisee debt and lease obligations. Apparently, the franchisee is in default and now Krispy Kreme is on the hook to pay back loan principal and interest.
As of August 2008, Krispy Kreme still had another $8.5 million in such guarantees for its franchisees. The company does not consider any portion of that amount in doubt and therefore has not included any of it in the company’s liabilities. To put those guarantees in perspective, Krispy Kreme’s current liabilities would be increased by 19.2% if those franchisees also went into default. Yet franchisees account for only about 6% to 7% of Krispy Kreme’s total sales.
There is no way to avoid disclosing in those footnotes the $13.3 million in additional loan and lease guarantees that Krispy Kreme has made for franchisees in which the company has an ownership interest. The level is down from the beginning of the 2008 after one franchise operation was dissolved and Krispy Kreme divested its interests in two others. Yet even this reduced level represents 20.8% of equity on the balance sheet in August 2008.
Columnist Debra Fiakas do not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
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