Description

Krispy Kremes makes a lot of dough, for doughnuts that is. Believe me, if
you've never had one (especially the glazed doughnuts, piping hot from the
grease), you're really missing an incredible experience for your palate.

KREM has a delicious product, but it is fattening. The USA has an aging
baby-boomer population. Much of the fascination with KREM is the novelty of
consuming your first Krispy Kreme doughnut. Okay, let's be brutally honest
and say your first dozen doughnuts! But the novelty will wear off at some
point in the future.

However, the stock sports a very lofty P/E (over 60 depending on which
price/earnings figures you desire to use) and it IPOed only last year.
KREM executives and management have used the IPO monies to pay off all of
their pre-existing debt (likely a very sound management decision), but that
leaves them short on cash for their very aggressive future expansion plans.

Investors have bid the stock price up to a level that may be unsupportable
(as measured using revenues and earnings). Revenues are forecast to grow
at a rate in excess of 15% per annum, while earnings sport a rather lofty
projected growth rate in excess of 35%. Much of the growth has to do with
the opening of new outlets in areas that have never had a Krispy Kreme
store before, or expressed differently, the novelty of Krispy Kreme.

My recommendation is to short the stock. The company is wonderful. The
stock has been bid up to unsupportable levels in my opinion. I really think
that this is as obvious a no-brainer as you'll ever see.

If the above isn't a big enough argument for you, consider this. This past
week, KREM announced announced that it has filed a registration statement
with the SEC for the offer and sale of 2M shares of common stock. Of these
shares, 1.85M shares will be sold by selling shareholders and .15M shares
will be issued and sold by Krispy Kreme. In addition, Krispy Kreme & the
selling shareholders will grant the underwriters an option to purchase an
additional .3M shares to cover over-allotments. The Company will not
receive any proceeds from the sale of shares by the selling shareholders.

Why? Well, remember I said that KREM IPOed last year? Guess when the
lock-up period expires? April 05, 2001 that's when... Might you think that
someone wants to get some shares sold before the lock-up date is reached
and while the stock still trades at lofty levels? I think so.

Catalyst

Quite obviously, the catalyst will be the quickly approaching end of the lock-up period. Just how many locked-up shares might enter the market? Well, KREM has about 13M shares, of which about 3.5M are free trading. The other approximately 9M+ shares are in lock-up. In other words, the locked-up shares exceed the free trading shares by almost 2.6 to 1. The share price is artificially supported by a dearth of free-trading shares. Which way will the stock go when these other shares become free-trading? You do the math. These other shares will most certainly saok up any outstanding demand or momentum for the stock. And after that, it's downhill…