Professor Mike Lord Comments on Krispy Kreme’s Largest Shareholder Selling Part of its Stake

Krispy Kreme's largest shareholder sells 26 percent of its stake
Reposted from Winston-Salem Journal | by Richard Craver

The recent run-up in Krispy Kreme Doughnuts Inc.'s share price has persuaded its largest shareholder to take $22.8 million in profits this week.

Mohamed Abdulmohsin Al Kharafi & Sons WLL of Kuwait reported in a regulatory filing Wednesday that it has sold 2.32 million shares, or 26 percent of its ownership stake.

The group controls the Americana Group, the Middle East franchisee for Krispy Kreme.

Even with the sale, the company still owns about 10 percent of Krispy Kreme and remains one of just two shareholders with more than a 5 percent stake.

The other is Robert Stiller, founder and chairman of Green Mountain Coffee Roasters Inc., who took a 5.1 percent stake, or 3.46 million shares, in January.

Krispy Kreme and the Kuwaiti group could not be reached for comment Thursday.

Analysts said the Kuwaiti group is just being rewarded for its patience with Krispy Kreme's financial struggles since 2004. Its share price plunged to an all-time low of $1.18 a share in February 2009.

But in the past year, investor confidence in Krispy Kreme has risen sharply for several encouraging reasons.

It has been buoyed by a return to profitability — $7.6 million in fiscal 2011, which ended Jan. 30. Its international sales growth appears sustainable. It has committed to product diversification that includes three "signature" coffee blends in its stores and non-doughnut products, such as bagels, muffins and sweet rolls, with longer retail shelf life.

Last week, the share price hit a 52-week high of $10.08. It was at $9.84 when the Kuwaiti group completed its sale Tuesday. The price was down 9 cents to $9.70 Thursday.

"This strikes me as a sensible move by their investors to hedge their bets," said Michael Lord, an associate professor of strategy and entrepreneurship at Wake Forest University.

"Krispy Kreme has had a great run recently. There's nothing wrong with a strategic investor taking a little bit off the table and cashing in some at this point. Even after this move, they remain solidly invested."

Some analysts, though supportive of Krispy Kreme's management efforts, say the share price has gotten too far ahead of the company's financial fundamentals.

"Its stock is priced for perfection right now, and seldom does a stock perform perfect for long," said Sam Yake, an analyst with BGB Securities Inc. "The stock has had a huge run, and I would think the Kuwaiti group just wanted to take some money off the table.

"I like Krispy Kreme's potential five and 10 years out because it's such a great brand and management is trying to measure its growth, which is why I have a 'hold' rating on it."

Peter Tourtellot, managing director of Anderson Bauman Tourtellot Vos & Co., a turnaround-management company, said he believes the Kuwaiti group is making "a smart move by intelligent investors."

"You cannot be emotional about your investments," Tourtellot said. "At some point, it only makes good sense to hedge your bet on this stock.

"I think if the stock market pulls back, this type of stock could go down fast not due to anything management may or may not be doing, but because of a consumer pullback."