Case Project #1: Krispy Kreme Doughnuts, Inc.

CASE INTRODUCTION

When Krispy Kreme1 announced its initial public offering plans in December 1999, the Company was a cult favorite. Two years later, it was a cultural phenomenon. Eager customers would camp overnight to greet new store openings. When Krispy Kreme debuted near Denver in March 2001, traffic was snarled for hours. Six months later, cars lined up in six rows to order doughnuts in October 2001 at the opening of its new Seattle store. After his first taste of a hot glazed doughnut, one customer exclaimed "it was like eating sweet air." Another customer stated, "I don't think of them as doughnuts; they melt in your mouth, like warm cotton candy" (Mulady 2001). The Seattle outlet's opening week sales were $454,000, almost twice as high as the $236,000 opening week sales in Van Nuys in September 1999 and almost four times as high as the $121,000 opening week sales in Las Vegas in March 1998 (Glass and Farmer 2002; Glass and Ma 2000).

On March 8, 2002, Krispy Kreme Doughnuts announced that it earned $0.14 per share for its fourth quarter ended February 3, 2002 (4Q02), beating consensus analyst estimates by one penny. Its earnings per share (EPS) for the fiscal year ended February 3, 2002 (FY02) was $0.45, compared with $0.27 the prior year. Krispy Kreme's net profit margin for FY02 was 6.9 percent, compared with 4.9 percent in FY01 and 2.7 percent in FY00, while its operating margin increased in FY02 to 10.9 percent from 7.8 percent in FY01 and 4.9 percent in FY00. In the wake of this positive performance, Krispy Kreme management raised its targeted operating margin from 10 percent to 15 percent and forecast that FY03 EPS would increase to $0.62 per share. Investors rewarded Krispy Kreme with a stock price that valued the company at 67 times next year's earnings. Wall Street analysts expected "Krispy Kreme to remain a strong and growing company for many years to come" (Heaney and Urgiles 2002).

During the next three years, however, the Krispy Kreme success...