Krispy Kreme Case Summary

Krispy Kreme was dubbed by Fortune Magazine as the Hottest Brand in America in 2003. It was
established in 1937 by a French chef, Vernon Rudolph in New Orleans. It grew in a short time
having 29 shops in 12 states in 1950s and opened the business for franchise. Beatrice foods
acquired it after Rudolf’s death and expanded to more than 100 locations. In 1980s, it was bought
by the first franchisee Joseph McAleer for $24 million. It had its first initial public offering of
$40.63 a share. The company envisioned to expand their number of stores from 144 to 500 within
the next five years.

Its revenue composition are from these four primary sources:

On-premises sales - 27% of the total revenues; came from retail sales at company –owned stores

Off-premises sales - 40% of the total revenues; sales from groceries and convenient stores

Manufacturing and distribution - 29% of the total revenues, income from high profit-margin
equipment sold to new franchised stores

Franchise royalties and fees - 4% of the total revenues

Problem

There was a sudden and very significant flapped of its market value of equity in 2004.It’s buying
recommendation in Wall Street lowered to 25%. Krispy Kreme was falling short of expectations
and had announced to investors that the expected earnings will be 10% lower than anticipated
due to low wholesale and retail sales. It had divested Montana Mills with 28 bakery cafes
previously acquired for $40million and closed 3 more shops.

The business had published that there’s an aggressive accounting treatment for their franchise
acquisition. It had reacquired a struggling Michigan Franchise and recorded the purchased cost
of the franchise as an intangible asset without any amortization.

As a result, shares went down again from 30% at about $22.51 per share to $15.71 per share.

Analysis

 The company’s declining new franchisees indicates a poor investment model.

 Their assets had reached to $661,608 in 2004 and was overstated due unamortized
franchise rights and acquisition goodwill
 Delay in filing financial statements has a negative impact on the company’s credibility and
credit standing
  It is not well prepared for a rapid growth, tripling the number their shops in a short span
of time. It has not focus on operations and trained their franchised stores as how to run
successful their off-premises shops.
 The business’ situation implies inefficiencies. It lacks blocking and tackling, execution and
cost discipline on their end, the company and franchised systems.

Exhibit 6 Stock price Patterns

Krispy Kreme had reached its peak on the stock market price in 2003 and went into a downward
direction in year 2004 and had never bounced back within the latter year.

Exhibit 7 Financial ratios

Liquidity Ratios

The company has 2.72 quick ratio and 3.25 current ratio. The highest quick ratio among quick-
service restaurants stated in this case. This indicates the capacity to pay its short-term debts
without selling its inventory. Based on its liquidity ratios from 2000-2004, it showed that it has
an increasing trend and has the highest rate making among other quick-service restaurants in the
market.

Leverage Ratios

Compared to year 2003, Krispy Kreme has lower debt-to-equity ratio which means it has lessen
its financing with debt.

Its debt-to capital ratio of 10.12 % is better compared to year 2003 of 16.29 %. It shows that it
may have a lower default risk due to the effect the debt has on its business operations.

Activity ratios

A 9.70 receivable turnover in 2004 is the lowest since 2000 which indicates that efficiency of
company’s accounts receivable collection decreases.

Inventory turnover of 17.76 in 2004 is second lowest turnover of the company (higher compared
to 2003 - 15.66). A low turnover implies possible excess in inventory and weak sales.

The rate of asset turnover declined at 1.01. This indicates that company’s performance is weaker
compare to the preceding years. It generates lesser revenue per dollar value of assets.
Cash turnover of 32.79 is better compared to last its ratios in 2002 and 2003 yet is by far lesser
than of years 2000-2001. Increase of its ratio indicates faster regular replenishment the increase
of company’s cash through sales and increase in efficiency.

Profitability Ratios

Return on assets of 8.64% is the second highest ratio from 2000-2004. It indicates how efficient
a company utilizes its assets by determining how profitable a company is relative to its assets.
However, comparing it to the market in 2003 it has been one of the lowest rate (8.16%).

KKD Return on Equity of 12.62% is lower than most of its competitors in the market.

Recommendations

 Restructure its revenue and investment model, franchise systems and store-development
contracts
 Practice cost discipline and proper execution of processes especially in off-premises
operations
 Review accounting system and restructure if necessary to avoid financial errors from
happening again
 Adjust and correct accounting errors
 Request for a waiver on its credit- facility default while fixing the financial statements
Industry Comparison
Common Size Statement
Balance Sheet (Assets) 2003 KKD 2003 Difference
Cash & equivalents 13.7 3.1 10.6
Trade & Other receivables 1.4 10.4 -9
All other Current Assets 3.5 8.6 -5.1
Fixed Assets 55 42.5 12.5
All other Non- current Assets 10 4.5 5.5

Balance Sheet (L&E) 2003 KKD 2003 Difference

Total current 36.4 8.1 28.3
Long-term debt 41.9 7.3 34.6
Shareholder's Equity 12.9 68.4 -55.5

Income Statement 2003 KKD 2003 Difference

Operating Expenses 58.1 76.2 -18.1
Operating Profit 4 15.3 -11.3
Profit before Taxes 2.5 1.1 1.4