Krispy Kreme Case

Introduction

This case considers the sudden and very large drop in the market value of equity for Krispy Kreme Doughnuts, Inc., associated with a series of announcements made in 2004. Those announcements caused investors to revise their expectations about the future growth of Krispy Kreme, which had been one of the most rapidly growing American corporations in the new millennium. The task is to evaluate the implications of those announcements and to assess the financial health of the company. This case is intended to be introductory as it can provide a first exercise in financial statement analysis and lay the foundation for two important financial themes: the concept of financial health, and the financial-economic definition of value and its determinants.

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.?

In the income statement, the total revenue of KKD increased 202.21% from 2000 to 2004 while the Operating expenses just increased 167.05% during the same time period. Thus, revenue outstripped expenses over that 4-year period amounting to substantial gross profit. The operating income grew 841.93% from 2000 to 2004. The income before taxes also showed a significant increase and the net income increased 858.48% during the 4 years. The diluted earnings per share also increased from $0.15 to $0.92. However, from May 2, 2004 to Aug. 1, 2004, the total revenue of KKD decreased 3.75%, but the operating expenses increased 3%. Due to the divestiture of Montana Mills, the company got a large number in the provision for restructuring impairment charges and closing costs & discontinued operations, which led the net income in May 2, 2004 to be negative.

Taking a look at the balance sheet, accounts receivable constitute a large portion of current asset and increased over time. The total current assets increased 324.27% from...