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Context
This case considers the sudden and very large
drop in the market value of equity for Krispy Kreme
Doughnuts, Inc., associated with a series of
announcements made in 2004. Those
announcements caused investors to revise their
expectations about the future growth of Krispy
Kreme, which had been one of the most rapidly
growing American corporations in the new
millennium.
Objective
To gradually gain back analysts,
investors and lenders confidence in the
company in the succeeding months.
To increase sales and profitability in terms
of its core business, which is selling
doughnuts.
To increase stock price to the previous
levels and thereby increase shareholder
value.
Objectives (continued)
To correct inaccurate entries in the financial
statements and to present a clean and unbiased
report.
To extend further reach to consumers
strategically to achieve significant growth in the
next five years.
To implement extensive marketing measures for
its brand and products and investment strategy
for both on and off premise operations.
Background
Fortune magazine had dubbed Krispy Kreme Doughnut, Inc.
the hottest brand in America, with ambitious plans to open
500 doughnut shops over the first half of the decade.
The company generated revenues through four primary
sources: on-premise retail sales at company owned stores
(27% of revenues), off-premises sales to grocery and
convenience stores (40%); manufacturing and distribution of
product mix and machinery (29%); and franchise royalties and
fees (4%).
Roughly 60% of sales at a Krispy Kreme store were derived
from the companys signature product, the glazed doughnut.
Background (continued)
Analysis
Growth
Rapid growth in revenues and earnings over the
past five years.
Significant asset growth in the past five years.
The bulk of this growth, however, has occurred
in accounts receivables from affiliates and from
reacquired franchise rights.
DuPont Analysis
2000
2001
2002
2003
2004
Return on
equity
12.47%
11.72%
14.06%
12.25%
12.62%
Profit
margin
2.70%
4.90%
6.69%
6.81%
8.58%
Asset
turnover
2.10x
1.75x
1.54x
1.20x
1.01x
Equity
multiplier
2.20x
1.36x
1.36x
1.50x
1.46x
Asset
turnover
5.67%
8.59%
10.33%
8.16%
8.64%
Peer Comparisons
Krispy Kreme is significantly more liquid, turns its
receivables and inventory more slowly, and has less
financial leverage than its peers.
Krispy Kreme has significantly more receivables and
intangibles, higher operating expenses, but better profit
margins than its peers.
Krispy Kreme is growing aggressively, extending
substantial credit to its affiliates, amassing large
unamortized assets on its balance sheet in the form of
reacquired franchise rights, and yet remaining profitable
and competitive with its peers.