Long or Short Capital - Short This Lemonade Stand

Short This Lemonade Stand

Published on May 12, 2009 by Johnny Debacle in Research

Failures This Lemonade Stand operates on the corner of Washington Street and Lincoln Avenue, and was founded in 2009. It’s primary business is offering of drinks and assorted packaged commercial food items to customers. The primary drinks are “lemonade “and “cool-aid” to customers at prices of 50 cents for a “small” (approx dixie cup size) and $1 for a large (approx solo cup size). The primary packaged treats are Kellogg’s branded rice krispie treats for $1. Revenue is estimated to be $30 per day. On a non-rent basis they are cash flow positive with 60-70% margins on the drinks and 40% margins on the food; factoring in the rent attributable to their footprint within the greater property owned by the ParentCo (see org chart), and it’s likely this operation is burning cash at a high rate, a situation that is unlikely to abate for at least 15 years.

A Reputation for Poor Quality

This Lemonade Stand was founded on a promise of fresh beverages to keep you cool on a hot day. Instead management oversees an operation which merely adds hose water to powdered mix drinks at incorrect ratios. For this they charge above market prices. The lemonade mix is bought in from Crystal Lite, not made from scratch like a premium lemonade should be. The taste is awful as it has a certain unpleasant bite to it likely from the unholy combination of the municipally treated hose water and the incorrect ratio of powder to water. The “cool-aid” is an unidentifiable sugar free red concoction. Both drinks are of such low quality, that many customers pour out their drinks as soon as they are out of view from this lemonade stand. While management continues to lean on neighborhood sympathy to eke out what revenue they can, their high costs and reputation for poor quality are leading towards a flight towards substitutes such as “people’s own fridge” and “nothing”.

Illegal Work Practices

This Lemonade Stand appears to have no business license, no restaurant license, and no permits of any kind. The hygiene of the staff is notoriously bad as they are frequently seen returning from the bathroom with unwashed hands, picking their noses, and leaving their cups on the ground. They make no effort to hide the fact that they source water straight from the hose. Their claim that a portion of their revenue goes to the local animal shelter is unverifiable and possibly untrue. And the baristas who man the stand appear to be no older than 9, clearly not of legal working age. While their customers have been willing to look the other way when it comes to poor quality product, outrageous prices and unclean operations, they are unlikely to tolerate child labor in the long run.

A Study in Unsustainability

While the lemonade stand is not currently rated by any of the ~~three~~ two rating agencies(who are we kidding, seriously Fitch give it up), Melissa Moody’s Ratings Alternative Service rated it as BFFLSEBDTTWYMBTARD (Best Friends Forever Little Sister’s Edition But Don’t Trust Them With Your Money Because They Are Really Dumb), one notch above default, which calls into question whether they will remain a going concern. They are burning cash at an alarming rate, and to abate that, they would need to increase turnover significantly, while improving on the reputation of their offerings enough to ensure repeat business. At present time their liquidity is acceptable, if only because it appears that ParentCo has the will to continue to fund the losses at OpCo. If ParentCo’s cash flows were to come under stress, OpCo would likely be forced to cease operations.

Recommendation: Short This Lemonade Stand, as they are quickly burning through their endowment of goodwill. It has been difficult to find shares to borrow, as the market seems to be unanimous in the opinion that This Lemonade Stand is a bagel.

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