Krispy Kreme

CASE THREE - KRISPY KREME DOUGHNUTS INC.

Krispy Kreme Doughnuts began on July 13, 1937, in Winston-Salem, North Carolina, when founder Vernon Rudolph started selling his unique doughnuts to local grocery stores. Rudolph acquired the secret recipe from a French chef in New Orleans and after half a century, Krispy Kreme had developed its own doughnut mixing, making, and delivery systems; thus effectively standardizing Krispy Kreme’s signature doughnuts for mass production.

According to the historical financial statements, we can tell that Krispy Kreme has had rapid growth in the past 5 years. Total revenues have been increased from $220 million to $666 million, and net income has grown from about $6 million to $57 million from the fiscal year of 2000 to 2004. Scott Livengood, CEO, took the company public in April 2000, in what was one of the largest IPO’s in recent years. One day after the offering, Krispy Kreme’s share price had almost quadrupled to $40.63, giving the company a market capitalization of nearly $500 million. In their first three years corporate, Krispy Kreme realized tremendous growth in all aspects. Sales grew at a compounded rate of 31% along with EPS growing at 45%. From January 30th 2000 to February 1st 2004, KKD’s balance sheet shows total assets have increased constantly from $105 million to around $661 million, which indicates a 58% compounded growth.

KKD projected expanding its company to 144-500 stores over the next five-year period, and by February 2004 there were a total of 357 factory stores. This was reflected in the company’s accounts receivable and inventory that was mounting lowering the turnover ratio. The activity ratio on Exhibit 7 shows that management’s ability to operate has become less efficient because asset turnover has continually decreased as the company has grown. On the other hand, KKD’s liquidity ratios were very good along with its leverage ratios. Profitability ratios such as: ROA, ROE, and net profit...