Krispy Kreme Case Study

Group 3 (Nick Auer, Nick Yuhas, Chris Wilson)

Finance 435

Dr. Nicol

10 September 2018

Krispy Kreme Doughnuts

Case Overview

Krispy Kreme were innovators in the doughnut business from the beginning. Vernon Rudolph cutting a hole in the wall of his first shop in Winston-Salem, North Carolina was merely foreshadowing how the company would operate in the future. Their unique storefronts helped them become one of the premier doughnut sellers in the country. Their four primary sources of revenue generation are at the forefront of their success, but it also led to a big bump in the road.

The four ways they generate revenue are on premises sales, off-premises sales, manufacturing and distribution, and franchise royalties and fees. Obviously they sell their doughnuts in-house where the patrons get the unique experience of watching the doughnuts being made and often getting a free doughnut right off the line, the “Hot Light” is on. While this attract customers, they are also making doughnuts to distribute to other companies who sell their doughnuts. Each of its stores is a doughnut factory with the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Another important source or revenue comes from franchisees. They make them use their own machines and supplies, which they are able to profit on. They also get royalties from these franchisees’ sales. The Company also sells in its stores drip coffee, other beverages, other bakery items and collectible memorabilia such as tee shirts, sweatshirts and hats. Krispy Kreme differs from their main competitor, Dunkin Donuts. Roughly 60% of Krispy Kreme’s sales are from their glazed doughnut, whereas the greatest portion of Dunkin Donuts’ revenue comes from their coffee.

The case is centered around the time since Krispy Kreme’s initial public offering (IPO) in 2000. That IPO was one of the largest in that recent history. Opening at $40.63 per share gave them a market capitalization of $500 million. After relatively steady growth or no volatility was the norm for their first few years, issues started to arise in 2004. In May of that year, the company told investors to expect 10% lower earnings and that they had plans to divest Montana Mills, which they had acquired only a year prior. Krispy Kreme had plans to open 120 new stores, but cut that number in half. Also in that month, the Wall Street Journal wrote a story describing aggressive accounting practices. So, while the company appears to be doing well financially, they are running into issues and their stock prices begins to fall at this time.

Financial Health and Current Condition

The financial analysis of the income statement and balance sheet below appears to indicate the improved financial health of Krispy Kreme from 2000 to 2004 as a result of them going public with their Initial Public Offering.  However, in 2004, Krispy Kreme was required to restate earnings figures due to accounting errors in recent acquisitions of franchises as well as a formal investigation by the SEC looming causing for shareholder concern. Analysts slashed projected earnings for the coming quarters which directly places sell pressure on the stock price. While financial statements can sometimes give an incomplete picture, they are the best indicator and what investors and shareholders use.