Krispy Kreme Free Essays

INTRODUCTION First, I will discuss the environment of Krispy Kreme and my analysis as to what led to the company’s position in 2004. Second, I will discuss the financial health and current condition based upon the historical income statements and balance sheets. Third, I will discuss the financial ratios in relation to the financial statements. We will write a custom essay sample on Krispy Kreme or any similar topic only for you Order Now Fourth, I will discuss if Krispy Kreme was financially healthy at the end of 2004. Fifth, I will discuss my assessment of Krispy Kreme’s health and why I think the stock price dropped by 80% between 2003 and 2004. Sixth, I will discuss why I think the market reacted so negatively to the disclosures about adverse results and the revelations in the Wall Street Journal regarding the firm’s accounting methods for the franchise rights. Lastly, I will provide my recommendations for turning around Krispy Kreme Doughnuts’ business. COMPANY POSITION Krispy Kreme Doughnuts started small by selling directly to grocery stores. Their doughnuts became so popular they began selling directly to customers. They sold a delicious doughnut and a viewing experience. When Beatrice Foods bought the company, her business model did not succeed because it expanded the product line in the opposite direction of what consumers wanted and she inputted cheap ingredients into a popular recipe which sacrificed taste. When she sold the company to the group of franchisees, it pushed the company back into a positive direction by bringing back the original recipe. Krispy Kreme was debt-free by 1989 and their IPO left them with a market capitalization of nearly $500 million in 2000. They appeared to be on the right track but, it seemed they were expanding too rapidly. They allowed franchisees to place their stores in locations that were not favorable, resulting in the franchises not doing well enough and owing Krispy Kreme Doughnuts millions. Krispy Kreme relied on the income from franchised stores purchases of equipment and mixes too much. They also had their product in too many locations, creating an increase of supply and a decrease in demand. HISTORICAL FINANCIAL STATEMENT ANALYSIS On further analysis of the historical income statement, it seems that Krispy Kreme Doughnuts’ operating expenses are increasing gradually every year and are over 75% of total revenues for each year. The only income statement item that has decreased significantly was interest income from 2002 through 2004. Everything else seemed to point towards a profitably company because both gross profit and net income were increasing by at least 2% every year. On further analysis of the historical balance sheet there we some large red flag items. Property and equipment, net of depreciation was a significant portion of total assets each year. Most of the equipment they created was sold to franchisees and used in each company owned or franchisee owned factory stores. The significant amount on their balance sheet could have meant that they were manufacturing equipment faster than they were selling it to their franchises or due to the fact that they were expecting to expand, but were not able to expand to the extent they wanted to. As a percent of total assets, accounts receivable declined from 17% in 2000 to 7 % in 2004. Inventories were significantly increasing each year, but one would assume that some of their inventory would have to be written of due to the items expiration date (doughnuts can only last so long, so they appear to not be selling as much). Reacquired franchise rights, goodwill and other intangibles significantly increased starting in 2002, and every year after that. It rose in those years to be close to one third (30%) of total assets, which was the biggest item percentage wise other than property and equipment. The most significant item on the liabilities and shareholders’ equity section of the balance sheet is common stock. Every year common stock was close to 50% of total liabilities and shareholders’ equity. In my opinion, Krispy Kreme Doughnuts, recognized they were in trouble with the increasing failures of franchises and kept issuing more stock in hopes to bail themselves out. FINANCIAL RATIO ANALYSIS In exhibit seven the time series of the ratios raise one specific question. The inventory turnover raises the question as to why it was taking longer for their inventory to sell. When converted to days, the ratio determined that their inventory took over twenty-three days to turnover in 2003. It seems that Krispy Kreme Doughnuts’ inventory was over saturated in the market. With an abundance in supply, it seems that their doughnuts were not as in demand. When comparing Krispy Kreme Doughnuts’ financial ratios to others in the industry, I determined that Krispy Kreme was doing better in some areas than those in the industry such as with their liquidity ratios. Krispy Kreme’s liquidity ratios were significantly higher than any company in its industry. In other areas, such as profitability ratios, Krispy Kreme was about average compared to other companies. Krispy Kreme’s activity ratios were significantly lower than any other company in its industry, meaning their assets are not turning over as much as other companies. In such an industry, product seems to move fast, which further supports my notion that their product was becoming less popular due to the saturated market. It seems a lot more companies in this industry support operations with debt rather than capital, Krispy Kreme was doing the opposite. Exhibit nine supports this position because no other company had a significant amount of shareholders’ equity like Krispy Kreme. Other companies were better able to handle their operating expenses keeping them closer to 50% of net sales, unlike Krispy Kreme who kept theirs closer to 75%, but Krispy Kreme also had a higher percent of net sales in relation to operating profit and profit before taxes. FINANCIALLY HEALTHY AT YEAR END 2004? In my opinion, Krispy Kreme Doughnuts is not completely healthy at the financial year end of 2004. Their income statement shows an increased net income from the year before, but I believe that increase can only last so long. With the inability to expand further, and current operations decreasing more than they are making, I do not expect their net income to increase by year end 2005. Everything on their balance sheet is increasing, including their inventory. They need to realize that they are simply not selling product. Although their debt is low, that is from the increasing stockholders’ equity in the form of stocks. With the outlook of the company not good, they cannot expect to support their operations with the issuance of new stock. They need to find a new way to finance their operations and ecrease their operating costs. STOCK PRICE DECREASE AND NEGATIVE MARKET REACTION In my opinion investors recognized the same warning signs that I did when analyzing Krispy Kreme Doughnuts’ financial statements and decided to drop their losses while they could still make some kind of profit selling off the stock. When Krispy Kreme announced to investors to expect earnings to be â€Å"10% lower than anticipated, claiming that the recent low-carbohydrate diet trend in the US had hurt wholesale and retail sales,† I think they further expected that something was not right with the picture they were portraying. The Wall Street Journal article, revealed an accounting practice that was not commonly followed by others in Krispy Kreme’s industry. When the SEC launched an informal investigation into the â€Å"franchise reacquisitions,† investors jumped ship as fast as they could. The significant decrease in stock from 2003 to 2004, was investors getting nervous and protecting themselves from their stock being worth near nothing. RECOMMENDATIONS In my opinion Krispy Kreme Doughnuts needs to make radical changes to the way it conducts business. I think they should completely stop off-premise sales, making their product only available in factory stores. This would hopefully decrease their inventory and decrease operating expenses related to the fleet of trucks that deliver product to grocery stores. Selling their product in factory stores only will hopefully recreate the demand for the doughnuts that there once was. I also believe that they should decrease the amount of franchises and refocus to company owned stores. Franchisees might not properly know how to pick a location or be properly trained, as seen with the increase of failing franchises. This would decrease the large amount on their balance sheet from reacquiring franchises. Focusing their business to one or two types of primary sources of income and reducing expenses would be a way to help lower market saturation of their product. Having more company owned factory stores, provides Krispy Kreme a chance to have more control over their operations and not depend on franchisees to make a profit for them. How to cite Krispy Kreme, Papers Krispy Kreme Free Essays Krispy Kreme Doughnuts, Inc. FIN Professor XXX XXXX Month xx, xxxx History Krispy Kreme was founded by Vernon Rudolph after he purchased the famous secret recipe of yeast-raised doughnuts in 1937 from a French chef in New Orleans. Rudolph began to sell these doughnuts wholesale to supermarkets. We will write a custom essay sample on Krispy Kreme or any similar topic only for you Order Now The demand for his doughnuts grew quickly, and by cutting a hole in the wall of the factory to sell directly to customers the concept of Krispy Kreme retail stores was born. The retail concept for Krispy Kreme doughnuts allowed Rudolph to grow his factory stores to 29 shops in 12 states by the late 1950’s. When Rudolph died in 973 Beatrice Foods bought his company and expanded it to more than 100 locations and expanded the menu to include soups and sandwiches. Beatrice tried to reduce costs by changing the appearance of the stores and using cheaper ingredients. This negatively affected the company and Beatrice sold the company to a group of franchise owners. This group of owners was led by Joseph McAleer, who was the first Krispy Kreme franchisee. The leveraged buyout was completed for $24 million in 1982. The new group brought back the original recipe and logo. By 1989 the group was almost debt free and they were beginning to expand. The company CEO, Scott Livengood, took the company public in April of 2000. The share price after the first day was $40. 63. Holes in Doughnut Accounting Practices In May of 2004 Krispy Kreme announced to its investors that they should expect earnings to be 10% lower than predicted. It was at this time that the low-carb diet had taken the U. S by storm, and Krispy Kreme blamed this low-carb diet for their low wholesale and retail sales. They also announced the sales of a the Montana Mills bakery chain of 28 bakery cafe’s that had been acquired in January of 2003 for $40 million in stock. Krispy Kreme also announced that the Hot Doughnut and Coffee Shops were falling short of expectations and three of them were closing at a cost of $7 to $8 million. Krispy Kreme (KKD) stock price closed down 30% that day. Shortly after on May 25th, 2004 when the Wall Street Journal published a story about how Krispy Kreme handled is accounting for franchise acquisitions. According to the article Krispy Kreme recorded the interest paid by the franchisee as interest income for immediate profit, except that Krispy Kreme booked the purchase cost of the franchise as an intangible asset and did not amortize it. In the repurchase agreement of the 7 stores in Michigan, they allowed one of the franchises top executives to stay on with the company after the repurchase. This executive left the company shortly after closing the deal, and had to pay him $5 million in severance which Krispy Kreme also rolled into the unamortized-asset category. Krispy Kreme claimed it followed GAAP standards and had done nothing wrong. The final shoe to drop as on July 29th, 2004 when Krispy Kreme announced that the Securities and Exchange Commission (SEC) had launched an informal investigation related to â€Å"franchise reacquisitions and the company’s previously announced reduction in earning guidance†. Krispy Kreme (KK) shares fell another 15%. The revelations about the companies accounting practices and showing interest as immediate income and not amortizing the repurchased franchises but rather showing them as intangible assets alone could justify the devaluation of their stock price by approx. 45%. Couple their earnings decline and the announcement of store closings and it easily can be justified. Couple that with the fear of the unknown. If Krispy Kreme was treating their interest and reacquired franchises as they were which seems to be blatantly wrong, what else might the SEC find during their investigation? This fear would certainly drive investors away and their share price down. The facts along with its ratings being dropped by 50% of analysts to â€Å"Hold† from â€Å"buy† a few months earlier. Krispy Kreme Deep Fried and Possible Deeper Issues Krispy Kreme grew incredibly quickly in the years leading up to the nvestigation (as shown in the chart below) and then may have tried to meet Wall Street expectations through some questionable practices such as shipping more product or pulling ahead product orders, then allowing the orders to be returned shortly after for credit. â€Å"Testimony by a former sales manager at a Krispy Kreme outlet in Ohio, said a regi onal manager ordered that retail store customers be sent double orders on the last Friday and Saturday of the 2004 fiscal year, explaining â€Å"that Krispy Kreme wanted to boost the sales for the fiscal year in order to meet Wall Street projections. The witness said the manager explained that the doughnuts would be returned for credit the following week – once fiscal 2005 was under way† (Chin, 2005). It seems pretty clear that Krispy Kreme was using questionable methods to inflate profits. Investors also later found out that Scott Livengood (CEO), the former COO John W. Tate, and the former CFO Randy Casstevens, â€Å"unloaded more than 475,000 shares of Krispy Kreme stock for proceeds of $19. 8 Million†, (Chin, 2005) while they were fully aware sales were declining since January of 2003. During this investigation, Scott Livengood, Krispy Kreme’s CEO announced his retirement. It would seem to me that there may be some deeper issues with Krispy Kreme and if I were a shareholder I would want out, or to be certain that Krispy Kreme’s accounting mess was cleaned up. The chart below shows Krispy Kreme’s performance during the years leading up to the investigation. Krispy Kreme Re-made Fresh Today Krispy Kreme’s stock has not fully recovered, (see chart below), but as of the end of 2012 Krispy Kreme seems to have made a comeback. â€Å"Krispy Kreme Doughnuts, Inc. Krispy Kreme) is a retailer and wholesaler of doughnuts complementary beverages and treats and packaged sweets. The Company’s principal business is owning and franchising Krispy Kreme stores, at which a variety of doughnuts, including the Company’s Original Glazed doughnut, are sold and distributed together with complementary products, and where a broad array of coffees a nd other beverages are offered. As of January 29, 2012, there were 234 Krispy Kreme stores operated domestically in 38 states and in the District of Columbia, and there were 460 shops in 20 other countries around the world. Of the 694 total stores, 292 were factory stores and 402 were satellites. The Company operates in four segments: Company Stores, domestic franchise stores, international franchise stores, and the KK Supply Chain† (â€Å"Krispy Kreme Doughnuts†). As of close of business on Friday last week KKD traded at $14. 80, way below its heyday when the stock traded in the $40’s but it is double its all-time low. Krispy Kreme doughnuts (KKD as of March 22, 2013 When compared to its competitors Krispy Kreme’s P/E is 49. 33. This is much higher than the others but its P/S is in the middle. Krispy Kreme’s competitors are listed as Dunkin’ Brands Group, Einstein Noah restaurant Group, and Starbuck Corporation. Below is the direct competitor comparison. Direct Competitor Comparison| | | KKD| DNKN| BAGL| SBUX| Industry| Market Cap:| 989. 57M| 3. 94B| 253. 09M| 42. 99B| 384. 28M| Employees:| N/A| 1,104| 6,912| 160,000| 10. 87K| Qtrly Rev Growth (yoy):| 0. 16| -0. 04| -0. 04| 0. 11| 0. 30| Revenue (ttm): | 435. 84M| 658. 18M| 427. 01M| 13. 66B| 453. 84M| Gross Margin (ttm):| 0. 17| 0. 79| 0. 21| 0. 57| 0. 31| EBITDA (ttm):| 47. 93M| 304. 86M| 48. 46M| 2. 46B| 47. 5M| Operating Margin (ttm): | 0. 09| 0. 38| 0. 07| 0. 14| 0. 07| Net Income (ttm):| 20. 78M| 108. 18M| 12. 74M| 1. 43B| N/A| EPS (ttm):| 0. 30| 0. 93| 0. 74| 1. 86| 0. 78| P/E (ttm):| 49. 33| 39. 95| 20. 01| 30. 87| 29. 99| PEG (5 yr expected):| 1. 02| 1. 58| 0. 98| 1. 43| 1. 50| P/S (ttm):| 2. 24| 5. 96| 0. 59| 3. 13| 1. 04| | | | | Suggestions for a Krisp/Klean Future Making Doughnuts I three things I might suggest if I were the CFO for Krispy Kreme doughnuts would be to insure open communication with investors and insure them that internal auditing systems are in place. I’m sure that investors lost all trust in the previous management because of the questionable practices that were followed. Krispy Kreme needs to rebuild that trust by having open lines of communication with its investors. I would take a serious look at closing unprofitable stores, and research other markets to open more stores. Some areas may still be underperforming while others are booming. Concentrate on the areas that show better potential and take advantage of that market while it is supporting growth. Because their competitors seem to offer expanded menus I would concentrate on healthy choices for the lunchtime crowd. Everyone is aware of Krispy Kreme’s doughnuts, but I’m not so sure their other menu items are well known as an option for lunch/brunch. Other than the morning rush for doughnuts, they could make their stores more profitable with being the †go toâ€Å" spot for lunch also. References Chin, N. (2005). Krispy Kreme Dougnuts: Empty calories or empty profits? Retrieved from http://www. corporateconflicts. com/index-sb-cases-kk. html Krispy kreme doughnuts. (n. d. ). Retrieved from http://www. google. com/finance? client=obq=NYSE:KKD How to cite Krispy Kreme, Papers Krispy Kreme Free Essays Executive Sumary Matthew Introduction -Lets work on this at 730 Hieu- Analysis: what is the company is about: how is about the industry†¦ environment, consumers Mark -Concept Development: background, what is the problems Recommendation Krispy Kreme opened as a thriving business that truly passed all expectations. MArk- Proposal 1: New product by looking at the consumers wants and by monitoring the competitors – buy or acquire well-known coffee, The problem that Krispy Kreme had was not the ability to not create a new product, but the incorrect timing of the products they made. Krispy Kreme already has twenty five different types of doughnuts which means they have nowhere to expand from there. We will write a custom essay sample on Krispy Kreme or any similar topic only for you Order Now This proves why they were so successful in the beginning years and made them believe that were capable of opening hundreds of more stores because of their early success. If Krispy Kreme was smart they would have limited their product line to at most ten different doughnuts to ensure greater variety later on. They provided too many choices to begin with and when sales started to decrease they had no other offers to show customers which made their products bland and eventually unoriginal. Also it says that they were able to advertise to all major demographics including age and income, but doughnuts are not capable of being advertised to an age group. This would be the equivalent of advertising something such as ice cream to different age groups and income, it just cannot be done because everyone has different tastes so there is no specific market for it. The best thing they could have done was have a limited amount of doughnuts to initially start up their business to make a name for themselves and find their demographics to advertise to from there. Once they made a name for themselves they could then release a new doughnut or two each year to increase their uniqueness with their customers. This could have easily given them an extra seven years or so to separate themselves from other traditional doughnut stores. It would also give them time to find more products to create and other factors that they may not have considered to increase overall quality of their business. Lastly, it says that customers would come in and make large orders to bring to work or parties. What they had lacked with this was an accompanying substitute of some sort of bulk coffee product. An example of this would be dunkin’ donuts and their box of joe that enables customers large amounts of coffee to accompany their large order of doughnuts. This is a new aspect that could be easily incorporated into Krispy Kremes product line. It is at this point that they should have been looking into other products such as coffee. Now I know they have partnered up with Digital Java, Inc. but I believe this was too early of a decision to make. Digital Java, Inc. s a small Chicago-based coffee company which means it does not have national brand recognition. Because coffee is not what made Krispy Kreme what it was, it means they provided too much in too short of a time. This is related to their sudden increase of stores through franchises, which increased overall recognition but unfortunately took away from uniqueness. This too should have been a gradual build up for as they incre ased their overall recognition as a great doughnut shop, they too could have found better coffee companies to pair up with to further increase popularity for their business. If they paired up with a company such as Starbucks they would be able to entice more customers to come to their stores as well as sell more products because those who come for the coffee will be enticed to buy their doughnuts and vise versa. As of 2003, only 10 percent of their sales were from coffee. This means just because you pair up with an unknown coffee shop and will take a greater percentage of the sales you will not make nearly the same if u split coffee sales with a greater known coffee chain such as Starbucks. In the end pairing with the best coffee shop ensures customers will come into your store and will continue to be loyal. Hieu- Proposal 2: brand recognition, hierachy effects for develop marketing strategy, executing the strategy and evaluating process, marketing: spend too little on ads to introduce product Matthew- Proposal 3: marketing research about to satisfy different styles and wants of customers (low calories ) After reading the Case â€Å"Krispy Kreme Doughnuts in 2005: Are the Glory Days Over? † it is evident that Krispy Kreme has a limited understanding of the type of customers they attract. The issue could be that while they were spending all their time and money expanding into new stores they neglected their obligations to understand the people they were serving to. With the great success they had experienced, they certainly reached their customers but as the sales started to decrease market research could’ve helped them to design products made for their customers. The Doughnut business is fairly simple and the consumers could essentially be anyone who doesn’t mind treating themselves to a doughnut every once in a while. The sale of doughnuts has proven successful in other companies and the need to learn more about the type of people who eat doughnuts is irrelevant. This could’ve been Krispy Kreme’s misconception; there are multiple benefits that could be derived from investing in market research. In the case study, Krispy Kreme said that company research revealed that the appeal of Krispy Kreme had extended across all major demographics, including age and income[1]. A lot of mail from happy customers was received by the company and messages would be something like this, â€Å"We got up at 3 o’clock in this morning. I told them I would be late for work. I was going to the grand opening† (pg. 763). This is a sure sign of success but after the initial buzz created by the openings they started to face trouble with consistently low numbers. Using a 5 step marketing research approach we believe that the number of sales wouldn’t have dropped so significantly and they would’ve been able to sell to their customers better. They would first need to use different methods of research to discover the objectives that would help them develop new products that their customers would want. After considering that, they would assess the constraints and limitations and then decide the best way to collect the most relevant data. Krispy Kreme could then obtain secondary data from their financial statements and they could observe the purchase behavior of the consumer and see which doughnut they purchase more frequently. For primary data, they could send out questionnaires that may offer a free doughnut to customers that fill it out or through social networking. After the data has been collected, Krispy Kreme would then nalyze the data and from those findings we would be looking for trends or a common interest that is shared among the Krispy Kreme market. With the new information Krispy Kreme has obtained they can now say they have a better understanding of their markets and either a new marketing campaign or new product development will increase their sales and return them back to their glory days. This case study shows that they are phenomenal at attracting customers to ope nings but the issue is that Krispy Kreme struggles to keep the numbers consistent. The best way to keep these numbers high would be to develop a better understanding of who they are selling to. This way they will create better products and marketing promotions that tend to the needs of the multiple markets they are in. Krispy Kreme has phenominal potential and proven sucess but their are some key changes that can be made to change that and we believe that is marketing research. [1] â€Å"Krispy Kreme Doughnuts in 2005: Are the Glory Days Over? † by Arthur Thompson Jr. and Amit Shah Jordan- Proposal 4: expansion, U. S then global scale by offering: – expansion – distribution How to cite Krispy Kreme, Essay examples