Krispy Kreme Doughnuts, Inc. Financial Statement Analysis

After reviewing Krispy Kreme’s Financial Statements, and studying the history of the firm, we have come to several conclusions regarding the financial health of the firm, and why investors are fleeing from the company.

Firstly, we believe that the rapid increase in net income over the 2000-2004 time period is due largely to the rapid increase of store openings, which required high profit-margin purchases from KKD, from the franchisee. These incomes represent 29% of the firm’s total income, and thus the rapid expansion clearly played a large role in increased revenues.

When examining the Balance Sheet, we found that beginning in 2002, the “reacquired franchise rights, goodwill, and other intangibles” account began to increase- significantly. This is indicative of the firm’s attempt to buy back underperforming franchises, which isn’t necessarily good for the firm. As one analyst points out in the case, “goodwill that will likely need to be written down,” we believe this account is going to lead to trouble in the future. In order to be more successful, KKD must eliminate some of this account.

When examining the Financial Statements and ratios, we believe some questions arise. Firstly, the inventory turnover ratio is extremely low when compared to competitors. On the other hand, the quick and current ratios are extremely high compared to other competitors, which suggests that the company is flush with money, however isn’t effectively managing or investing it. In addition, it has a significantly lower LT Debt/Equity ratio than competitors, which suggests the company isn’t leveraged very well.

We do not believe KKD is financially healthy in year-end 2008, as its cash balance took a hit, which indicates there is trouble in the company. Additionally, the goodwill account is artificially high- while KKD maintains it is following GAAP for it’s accounting, investors are running, and raising significant questions, which is indicative of problems that must be...