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According to Keith’s quantitative models, KONA is breaking down.

From a fundamental perspective, we have lost confidence in the company’s ability hit the numbers and the recent departure of the CFO, Mark Robinow, does not reassure us.  There have been a string of departures from the executive suite. Confusion surrounding the overall direction of the company is evident in the two latest announcements.

  1. Upon the departure of the CFO, the company announced a share repurchase program of up to $5 million of the company’s outstanding common stock.
  2. In early December, the company announced the appointment of Marci Rude as VP of Development.

While the company is currently generating cash (and has $5 million in cash on hand), it only spent $1.9 million in capital spending over the past twelve months.  This is down considerably from the $12 million invested in new stores in 2009 and $17 million in 2008.  If the company bringing Mr. Rude on board in a development role is an indication that capital spending it about to ramp up again, we would question the prudence of the Board in authorizing a $5 million share repurchase program.

The new CEO, Michael A Nahkunst, said “The company is initiating this repurchase program in the best interests of its stockholders, as we believe our common stock represents an attractive value.” We would contend that buying back stock does not necessarily create shareholder value but rather, in this case, the announcement was merely a defensive move given the departure of the CFO.  The disruption in the senior management team over the past six months will create a disruption in the financial performance of the company. 

As the chart below illustrates, the share price has broken the TAIL line at $5.41.  From both a quantitative and a fundamental perspective, our view on KONA is negative.

KONA: TRADE UPDATE - KONA LEVELS

Howard Penney

Managing Director

Rory Green

Analyst