Krispy Kreme - Forecast Gross Profits Per Store

1. Forecast Gross Profits per Store

These vary greatly by business. For company stores they have increased to 18%. Royalty income has a 65% margin, and KKM&D is 17%. The CIBC analysts have forecasted that margins increase to 19% for company stores, 70% for franchise operations, and 18-19% for KKM&D. Using these values we get the following costs:

FEB. 3, FEB. 3,

2003 2004

Gross Profit

Company stores (18%) $ 54,405 $ 59,789

Franchise operations (65%) 13,912 20,784

KKM&D (17%) 29,108 43,486

$ 97,425 $ 124,059

2. Forecast Other Costs

G&A and Depreciation costs have averaged 9% of sales for the last three years. The CIBC analysts show this 9% declining marginally in 2004 to 8.74%. In addition, minority interest (presumably in franchisees) has been around 0.3% of the franchise revenues for the last two years.

FEB. 3, FEB. 3,

2003 2004

Other expenses (9% of sales) $ 44,539 $ 55,794

Minority Interest (0.3% of franchise sales) 1,605 2,398

Note that there are other items that tend to cancel each other out (joint venture income, minority interest). The analysts forecast a lower MI item.

3. Forecast Interest Expense

This requires assumptions to be made about the firm’s capital structure. The beginning capital structure is given, and shows that the company has negative net debt of $20 million. This arises from the prior year’s decision to raise new equity to meet