Krispy Kreme Case Study

EXECUTIVE SUMMARY

Krispy Kreme had flourished through the 90s and in April of 2000, had one of the most successful initial public offerings of the time. After the IPO, they launched an overly aggressive expansion plan. They earned revenues from on-premise sales, off-premise sales, manufacturing and distribution, and franchise royalties and fees. Krispy Kreme’s stock was trading for 62 times earning and it was dubbed the “hottest brand in America”.

However, good times quickly came to an end. They could no longer meet the growth expectations set by Wall Street and several accounting revelations caused the stock price to plummet. Krispy Kreme was a very healthy company in the beginning of the decade, but quickly deteriorated by the mid 2000s.

ANALYSIS

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.?

Krispy Kreme has experienced dramatic growth over the past 5 years based on their income statement. Every line on the income statement has grown rather impressively. Revenues have grown from $220M to $666M and net income has grown from $6M to $57M. Based on the income statement, Krispy Kreme is doing very well.

The balance sheet of Krispy Kreme looks very similar to the income statement. The majority of line items have experienced great growth. On the asset side of the balance sheet Krispy Kreme has eliminated their long-term investments and its tangible assets have increased from $0 to $176M. The increase of intangible assets was due to their aggressive accounting treatment for franchise acquisitions.

On the liabilities and equities side, the most noticeable aspect is the revolving line of credit spike in 2004. Revolving lines of credit are typically used to provide liquidity for a company’s day-to-day operations so this is very concerning.

2. How can financial ratios extend your understanding of...