Fin Krispy Kreme Executive Summary

In: Business and Management

Submitted By mbrabh2
Words 579
Pages 3
September 30, 2013
FIN 3717 Case 3 Executive Summary

“Krispy Kreme Doughnuts, Inc.” Executive Summary: * As the millennium began, the future for Krispy Kreme Doughnuts, Inc, looked very promising. * Not only had the company created an iconic status for themselves and gained a cult-like following, it had quickly become a darling of Wall Street. * Less than a year after its IPO, in April 2000, Krispy Kreme shares were selling for 62 times earnings and, by 2003, Fortune magazine dubbed the company “the hottest brand in America.” * With plans to open 500 stores over the first half of the decade, the company’s brand name had become internationally known. * At the end of 2004, however, reality began to sink in as the company made several accounting revelations, after which its stock price sank; from it’s peak in August 2003, stock price plummeted more than 80% in the next 16 months. * Investors and analysts began asking probing questions about the company’s fundamentals but many of their questions remained unanswered… * Was this a healthy company? What had happened to the company that some had thought would become the next Starbucks? If almost everyone loved the doughnuts, why were so many investors fleeing the popular doughnut maker?

Problem: This particular case investigates the factors that caused this “darling of Wall Street’s” stock to drop more than 80% suddenly in 2004. Just 4 years earlier, Krispy Kreme went public and became one of the hottest brands in America. Less than a year after its IPO, the shares were selling for 62 times earnings. What could have caused this dramatic decline in share prices? We also look at Krispy Kreme’s lack of consistency with their accounting, and whether or not what they did was unethical.

Analysis: Personally I think one major cause of the decline of Krispy Kreme is their aggressive…...

Similar Documents

Krispy Kreme

...CASE STUDY OF KRISPY KREME Just like their Donoughts the Krispy Kreme stock seemed irresistible when they went public in 2000. It was even named as IPO of the year and the Forbes named it as the company to look out for. But now it is just a firm with a market capitalization over 300 million. So what did Krispy Kreme did wrong to be in a situation like this. The decline of Krispy Kreme Donoughts Inc. with a market capitalization of over 3 billion to just over 300 million was due to the use of synthetic leases, repurchased franchises, disappointing joint venture results and due to the problems of earnings management. This paper argues that there were numerous warning signals in the doughnut franchisor’s accounting and managerial decisions that investors refused to take seriously as they bid the stock from its IPO price of $6 to its eventual peak of $50 on NYSE. There are lots of lessons that can be learned from this autopsy of the Krispy Kreme and might well make investors and auditors more wary about jumping on the next IPO bandwagon. They bought out a struggling Michigan franchisee and agreed to raise the purchase price from $26 million to $32 million so that the franchisee could afford to close two stores and to settle its overdue debts owed to Krispy Kreme, thus avoiding a bad debt loss. Why would so many large franchisees of a supposedly-successful chain want to get out of their investment when operations seemed to be going so well? As we see in the......

Words: 543 - Pages: 3

Krispy Kreme

...key success factors for Krispy Kreme? Krispy Kreme is a most popular food company in America. There are some key factors of Krispy Kreme to be most strong brand in America. Those are given below: • Old fashioned feel –They have been adopting one tradition for long time serving food to the customers which has worked as brand symbol. • Theater experience works – They perform different types of theater which entertains customs and draws them into the donut-making experience . Showing the manufacturing process – They invite to the people come to see how donuts are freshly made in a clean environment . So that, people are more attractive to buy donuts . • Concern with country people – Krispy Kreme dose not work with franchise. They busy with own country people to serve donuts so that maintaining the best food quality. People buy donut more for the best quality. • Following different way to convince media – Sending boxes of donuts into television media as gift which is one of strategy to bring out of publicity. • Selling in half price – Krispy Kreme is selling donut in half price in charity shows. But charity shows organizer sell donuts at same price .That is why Donuts became popular very frequently. Because people are getting donuts at same price as outside of charity shows. 2.Where is Krispy Kreme vulnerable? What should it watch out for? Krispy Kreme vulnerable into their......

Words: 447 - Pages: 2

Krispy Kreme Financial Analysis

...selling Krispy Kreme doughnuts to local grocery stores in Winston Salem, N.C. People would pass by these stores smelling the delicious scent of Rudolph’s doughnuts and ask to buy hot doughnuts, so Rudolph cut a hole into the wall of his rented building and began selling the Original Krispy Kreme doughnuts to customers who walked by on the sidewalk (History, 2012). By the 1950s Rudolph and Krispy Kreme were doing well with a few family owned chain stores but the business was not consistent. The doughnuts were made from scratch which took up a lot of time and therefore Rudolph decided to invest in technology that would make the doughnuts for them using a dry doughnut mix that would prove to make the perfect doughnut every time. This innovation sustained the company through the 1960s and 70s until Rudolph died in 1973. After Rudolph’s death, Krispy Kreme took a downturn as the company reorganized for sale to the Beatrice Foods Company in 1976 (History, 2012). In 1982, a few of the first franchisees bought Krispy Kreme back from Beatrice Foods and decided to put focus back on the hot doughnut experience. These business owners also branched outside of the southeast region and opened the first store in New York 1996. Krispy Kreme became an American icon having been in business for 60 years in 1997 and donated artifacts from the company to the Smithsonian Institution’s Natural Museum of American History (History, 2012). Today Krispy Kreme is a......

Words: 1799 - Pages: 8

Krispy Kreme

...Krispy Kreme was a thriving doughnut company with rapid growth from 2000-2004. The company tripled its number of stores from the start of 2000 to nearly 500 stores and expanded their sale of doughnuts to 20,000 supermarkets, convenience stores and other outside locations. Krispy Kreme’s Income Statement and Balance Sheet during these years looked promising; however in 2004, the company’s stock price plummeted due to accounting revelations. Krispy Kreme was recording the reacquisition of franchises as unamortized intangible assets, which targeted an investigation by the SEC. Was Krispy Kreme really financially healthy? Historical income statements and balance sheets can give a perception that a company is financially healthy, but they don’t tell as clear of a picture as ratios can. Krispy Kreme’s revenues were composed of on-premise sales (27%), off-premise sales (40%), manufacturing and distribution of product mix and machinery (29%), and franchisee royalties and fees (4%). Surprisingly, 29% of Krispy Kreme’s revenue was generated from manufacturing and distribution of product mix and machinery. The company required each franchisee to purchase equipment from them with a high mark up, which resulted in higher revenue for the company itself, but caused some franchisees to suffer. By expanding its product to so many distribution channels at an aggressive rate, revenues and net income increased each year from 2000-2004. A telling statistic about Krispy Kreme’s sales is...

Words: 527 - Pages: 3

Krispy Kreme

...Krispy Kreme was the hottest brand in America in 2003, however, its stock price plummeted more than 80% in the next 16 months. What had happened to this company? Why investors suddenly fleeing the popular Krispy Kreme? Answer following questions will help us find the solutions. From the historical income statement and balance sheet, we notice that, from 2000 to 2004, the KK grew very fast and its net income increased substantially. For example, form 2003 to 2004, KK’s net income increased by 71%. In turn, the company experienced an increasing EPS which was rose from 0.15 to 0.92, and the price of company’s share jumped up by 120%. The historical income statement indicates that Krispy Kreme has a good profitability, a high market value and a high return. At the same time, the balance sheet reflects that the total asset grew very fast which was caused by the increase in accounts receivable, inventories and intangible asset. The company’s equity increased in an astonishing speed. In Feb. 2004, the shareholders’ equity is almost 10 times the equity in Jan.2000. The increasing equity and also indicates that Krispy Kreme was hot and successful in stock market. However, according to the recent income statement, KK’s profitability turned down sharply. Compared with the same periods in 2003, KK’s net income was deducted drastically by increased expense, discontinued operations and impairment charges &closing costs which arose in 2004. For instance, the company even had a 24......

Words: 1572 - Pages: 7

Krispy Kreme

...Krispy Kreme Doughnuts ACCT 6334. Taiwan – Auditing Fall 2013 Class Research Project                                   STUDENT: Chien-Yun Tseng UTD ID# 2021195349 Table of Contents   INTRODUCTION................................................................ 3 CHAPTER1. THE CLIENT ACCEPTANCE /CONTINUATION PROCESS, INCLUDING ESTABLISHING AN UNDERSTANDING WITH THE CLIENT ... 4 CHAPTER2. OBTAINING AN UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT, INCLUDING INTERNAL CONTROL .................................. 5 CHAPTER3. PRELIMINARY ENGAGEMENT ACTIVITIES ....................... 8 CHAPTER4. ASSESS RISKS AND ESTABLISH MATERIALITY ................. 9 CHAPTER5. CONSIDER INTERNAL CONTROL .................................... 10 CHAPTER6. PLAN THE AUDIT ............................................................ 13 CHAPTER7. COMPLETE THE AUDIT ................................................... 16 CHAPTER8. EVALUATE RESULTS AND ISSUE AN AUDIT REPORT .... 17 REFERENCE ............................................................................................. 18 INDEPENDENT AUDIT REPORT................................................................ 19 ENGAGEMENT LETTER………………………………………………………..20 FINANCIAL STATEMENT .......................................................................... 22   2   INTRODUCTION The history of the Krispy Kreme began in the mid......

Words: 3788 - Pages: 16

Krispy Kreme

...Integrated Visual Systems Shining the light on technology Krispy Kreme Doughnut case study Purchasing a secret yeast-raised doughnut recipe from a French chef in New Orleans, Vernon Rudolf opened the first Krispy Kreme in Winston-Salem, NC in July of 1937. The plan was to supply doughnuts to local grocery stores, but customers soon started inquiring about purchasing hot doughnuts. A hole was cut in a wall of the store and he started selling “Hot Original Glazed” doughnuts directly to customers. Currently, Krispy Kreme produces more than 7 million doughnuts a day. There are 357 retail stores in the US and Canada. All the ambient temperature ingredients and store supplies are shipped from the company’s distribution warehouses in NC, IL, and CA. In October 2002, they shipped their first load of mix to Australia and have added locations in the UK, Korea and Mexico. The original project, installed in March of 1999, automated what was at that time the lone distribution warehouse in Winston-Salem, NC. The goal was to eliminate the manual/paper-based system and go to a real-time, RF-based pick and ship process. Krispy Kreme runs the Macola Progression Series ERP system and needed a WMS that would interface directly to it and provide updates on a real-time basis for inventory, order status, etc. To accomplish the task, IVS developed a Macola interface module that posts transactions to Macola as they occur in the warehouse. ““We have seen an ROI in labor reductions, freight......

Words: 1468 - Pages: 6

Krispy Kreme

...CASE 8: KRISPY KREME DOUGHNUTS Krispy Kreme is a doughnut manufacturer and retailer that were founded in July of 1937. Within its seventy year life time KK went from a small rented out building in Winston-Salem, North Carolina to a global recognizable firm. Through that time KK has become a franchising company that has made changes within its life time. Most of the changes came in the late 1990s and early 2000s. A few years after those changes were made KK management realized that they had made a series of mistakes that gravely hurt the company. This paper will explain what caused the down fall of KK and how they should go about restoring their company. General Information After the company’s IPO KK announced to aggressively expand the number of its stores from 144 to 500 as well as grow internationally. KK revenues are made up of four sections: On-premises, franchised stores, sell (27% of revenues), Off-premises, grocery and convenience store, sells (40%), manufacturing and distribution of product mix and machinery (29%) and lastly franchisee royalties and fees (4%). Roughly sixty percent of all KK sells revenues come from their signature product, the glazed doughnut. This is very different than its number one competitor, Starbucks, whose main profit comes from coffee. The Problems Although the management team of KK made many mistakes there were two major issues as to why the company went downhill in 2003. The first major issue was the aggressive expansion which...

Words: 1072 - Pages: 5

Krispy Kreme

...Krispy Kreme Case Analysis Anthony Jachera, Salma Saeed, Chris Westendorf October 20th, 2014 Executive Summary This case analysis considers the sudden and very large drop in the market value of equity for Krispy Kreme Doughnuts (KKD) and pinpoints the causes behind the downfall of one of the hottest brands in America. Beginning with their highly successful IPO in April of 2000, KKD quickly rose to become one of the most successful companies in the United States. Customers and Wall Street simply could not get enough of the KKD brand and the company experienced significant growth and financial success from 2000 to 2003. The sudden downfall of KKD began when the company first announced adverse financial results in May of 2004. In July of 2004, the U.S. Securities and Exchange Commission announced they were launching an informal investigation into the company’s accounting practices. Both of these events caused investors and Wall Street to begin to change their opinions on KKD and brought to light several significant structural issues within the company. The following analysis reveals the root causes of KKD’s downfall which included overly aggressive growth goals, a poor operating structure, questionable accounting practices, and poor management decisions. Through analyzing KKD’s financial statements, key financial ratios, peer group benchmarking, and business plan, we can begin to clearly see several problems facing the company. Through our in-depth analysis, we have......

Words: 3353 - Pages: 14

Krispy Kreme

...Ishmael Armstrong sold Krispy Kreme to Vernon Rudolph’s father Plumie Rudolph. Second, in 1976 due to Vernon Rudolph’s death, the company was then sold to Beatrice Foods of Chicago. Third, in 1982 Joseph A McAleer Sr. who led a group of Krispy Kreme franchisee bought back Krispy Kreme from Beatrice Foods. Finally, Krispy Kreme Inc. became a publicly traded company in 2000 by joining the NASDAQ as well as joining NYSE in 2001. 3-18. What mistakes did Beatrice Foods make after purchasing Krispy Kreme? Why wasn't Krispy Kreme a good fit for Beatrice Foods? Krispy Kreme was a family oriented business where on the other hand, Beatrice Foods was the complete opposite causing it not to be a good fit for them. Beatrice Foods had a big-business approach where their focus was primarily on raising profits. Beatrice Foods made their first mistake by redesigning Krispy Kreme’s logo. Their second mistake was adding other foods to the menu such as soups, sandwiches and biscuits. Their third and worst mistake was altering the Krispy Kreme doughnut recipe in an effort to cut costs and improve revenue margin. 3-19. What opportunity did the franchise see in buying back Krispy Kreme rather than starting a new company from scratch? The opportunity that the franchise saw in buying back Krispy Kreme rather than starting a new company from scratch was because of the simple fact that Krispy Kreme came with history and a strong foundation. Consumers who once ate from Krispy Kreme associated......

Words: 612 - Pages: 3

Krispy Kreme

...and fall of Krispy Kreme is a cautionary tale of ambition, greed, and inexperience. What could be more perfect than a Krispy Kreme doughnut? Hot from the fryer and loaded with sugar, the Original Glazed is practically irresistible. For a time, Krispy Kreme's stock seemed irresistible, too. When the company went public in April 2000, at the peak of the Internet whirlwind, investors flocked to buy into a business they could understand. An old-fashioned franchise based in Winston-Salem, North Carolina, Krispy Kreme Doughnuts Inc. boasted solid fundamentals, adding stores at a rapid clip and showing steadily increasing sales and earnings. But Krispy Kreme also had a mystique. Its doughnuts, available for many years only in the Southeast, had attracted a devoted, even fanatical, customer base. When the company decided to go national, it opened franchises in locations guaranteed to generate buzz — Manhattan, Los Angeles, Las Vegas — and customers lined up around the block. By August 2003, KKD was trading at nearly $50 on the New York Stock Exchange, up 235 percent from its initial public offering price of $21 on Nasdaq, and Fortune magazine was calling Krispy Kreme the "hottest brand in the land." For the fiscal year ended in February 2004, the company reported $665.6 million in sales and $94.7 million in operating profit from its nearly 400 locations, including stores in Australia, Canada, and South Korea. And then, just as rapidly as its popularity spiked, Krispy Kreme pitched......

Words: 3557 - Pages: 15

Krispy Kreme

...Krispy Kreme Redefines Supply Chain Automation The superior doughnut manufacturer, partnering with J.S. Walker & Company, Inc., incorporates innovative Web-based applications to automate the supply chain process and address communication challenges. The Road to Automation Since its inception in 1937, Krispy Kreme has refined its ability to provide the freshest doughnuts and coffees to its customers and retailers. With three distribution centers, storefronts in thirtyseven states, Canada, and Australia, and with new locations opening at a rate of two stores per week, this fast growing enterprise recognized a need to streamline supply chain and communications procedures. In 1989, Krispy Kreme began using Macola, an inventory management, supply chain, and accounting system. For Krispy Kreme, “supply chain” means getting doughnut mix, frosting and sprinkles from the factory to the local shop, where doughnuts are made fresh on site. Even after introducing Macola, further automation became necessary when subsequent growth made it increasingly difficult to manage day-to-day operations. Krispy Kreme partnered with J.S. Walker & Co. to evaluate the company’s order, product delivery and inventory management life cycle. Analysis revealed that concentrating on process and supply chain communication would deliver the most significant time and money savings. Refining supply chain operations would also free managers to focus on customer relations. The solution: a Web-based intranet......

Words: 907 - Pages: 4

Krispy Kreme

...Krispy Kreme Case Study FINA 470-01 Strategic Financial Management Company Overview: Krispy Kreme is a retailer and wholesaler of “high quality doughnuts and packaged sweets” (2010 10-K report) as well as various beverages. Krispy Kreme consists of stores and franchises that include domestic and international franchises, company stores and the KK Supply Chain. Krispy Kreme is also the sole provider to all their stores and franchises of the ingredients and equipment needed for store operations via the KK Supply Chain. Notably, neither equipment nor ingredients can be purchased from any other vendor and thus the franchises/stores are completely dependent upon Krispy Kreme. Vernon Rudolph acquired the Krispy Kreme recipe from a New Orleans chef and moved to Nashville and opened his own doughnut shop in 1937. Initially selling to grocery stores, he ended up cutting a hole in the building to sell to passersby who inquired about buying hot donuts directly from the bakery. Mr. Rudolph patented Krispy Kreme in 1939. Family members joined the bakery to help Rudolph meet rising demand for his doughnuts. Rudolph invented and built all his donut making equipment. To date, the company still uses only company made equipment. Other stores started popping up around the south in the 1950s and 1960s as the company quickly expanded. Rudolph died in 1973 and as the company began to flounder, it was sold to Beatrice Foods in 1976. Original franchisees repurchased the......

Words: 8117 - Pages: 33

Krispy Kreme teaching note | 14 Krispy Kreme Doughnuts, Inc. Overview With 181 Krispy Kreme stores in 28 states, Krispy Kreme Doughnuts in 2001 was rapidly building something of a cult following for its light, warm, melt-in-your-mouth doughnuts. Sales were on an impressive climb, exceeding 3.5 million doughnuts a day. The company’s business model called for 20 percent annual revenue growth, mid-single digit comparable store sales growth, and 25 percent annual growth in earnings per share. Krispy Kreme had created a flurry of excitement with its expansion into metropolitan markets outside the Southeast—its grand openings in newly entered markets attracted long lines of customers and created traffic jams around its store sites. The first new store in San Diego racked up $365,000 in sales the first week, with 5 TV crews covering the opening day event. The first store in Denver produced first-week revenues of $369,000, drew 50,000 visitors, and had $1,000,000 in sales the first 22 days; the crowds were so large that three off-duty deputy sheriffs were hired to direct traffic from 5 a.m. to 11 p.m. during the Tuesday-Saturday period of grand opening week—one night there were 150 cars in line at the drive-thru window at 1:30 a.m. But despite the enthusiastic reception that Krispy Kreme stores were getting, a number of securities analysts were dubious whether the company’s strategy and growth potential merited a stock price nearly 70 times projected 2002 earnings per share of $0.69 and 85......

Words: 8869 - Pages: 36

Krispy Kreme

...[pic][pic]  KRISPY KREME DOUGHNUTS, INC.: A CASE ANALYSIS27According to a financial statement filed by Krispy Kreme Doughnuts, Inc. filed 10/31/06for the Period Ending 01/29/06, lower average weekly sales had a disproportionatelyadverse impact on company store profitability due to the significant fixed or semi-fixed, asa result, the Company closed 14 stores in fiscal 2005 and 47 stores in fiscal 2006. Thelower sales in the franchise stores had a direct impact on the revenues of the Krispy KremeManufacturing & Distribution (KKM&D), as well as revenues from royalties. Accordingto this financial statement, Krispy Kreme Doughnuts, Inc. is “...vertically integrated to helpmaintain the consistency and quality of products throughout the Krispy Kreme system.”A loss incurred in fiscal 2005 reflects impairment charges of approximately $159.0 millionrelated to goodwill, other intangible assets and property and equipment associated with theCompany Stores business segment, and approximately $35.1 million related to theCompany’s discontinued Montana Mills segment. According to the report, “The Companyincurred a loss from continuing operations of $157.1 million in fiscal 2005 compared toincome from continuing operations of $49.8 million in fiscal 2004. Table 1 below,“Selected Financial Data” is taken from the above referenced financial statement filed byKrispy Kreme Doughnuts, Inc. filed 10/31/06 for the Period Ending 01/29/06.” Table 1: SELECTED FINANCIAL DATA . [pic][pic]  KRISPY......

Words: 2694 - Pages: 11