Krispy Kreme Doughnuts,inc

Synopsis and Objectives

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.

The task is to evaluate the implications of those announcements and to assess the financial health of the company. This case is intended to be introductory as it can provide a first exercise in financial statement analysis and lay the foundation for two important financial themes: the concept of financial health, and the financial-economic definition of value and its determinants.

Questions

1. What can the historical income statements (case Exhibit 1) and balance sheets (case Exhibit 2) tell you about the financial health and current condition of Krispy Kreme Doughnuts, Inc.?

2. How can financial ratios extend your understanding of financial statements? What questions do the time series of ratios in case Exhibit 7 raise? What questions do the ratios on peer firms in case Exhibits 8 and 9 raise?

3. Is Krispy Kreme financially healthy at year-end 2004?

4. In light of your answer to question 3, what accounts for the firm's recent share price decline?

5. What is the source of intrinsic investment value in this company? Does this source appear on the financial statements?

Epilogue

On January 18, 2005, amid an accounting inquiry, shareholder lawsuits, and weakening earnings, Krispy Kreme Doughnuts, Inc., replaced Scott Livengood, the company's chairperson, president, and chief executive officer, with a leading restructuring expert. The company's share price rose 10% on the news, and analysts were quoted as saying they believed the company still had a strong enough brand to survive. With the announcement, the company's lenders agreed to give the beleaguered doughnut chain a three-month extension to deliver its restated financials without triggering a default on its $150-million credit facility.

In subsequent months, as part of a program of cost-cutting and restructuring measures, Krispy Kreme cut its corporate, manufacturing, and distribution workforce by 25% and sold off its corporate airplane for $30.5 million in cash. Even so, the company's legal woes mounted as the U.S. Attorney's Office for the Southern District of New York announced its own investigation into Krispy Kreme's franchise repurchases; separately, plaintiffs in a class-action lawsuit alleged the company's employees lost millions of