Finace

For exclusive use at Singapore Management University, 2015

UV1369

Rev. Apr. 9, 2014

KRISPY KREME DOUGHNUTS, INC.

As the millennium began, the future for Krispy Kreme Doughnuts, Inc. (Krispy Kreme),

smelled sweet. Not only could the company boast iconic status and a nearly cult-like following,

it had quickly become a darling of Wall Street. Less than a year after its initial public offering, in

April 2000, Krispy Kreme shares were selling for 62 times earnings and, by 2003, Fortune

magazine had dubbed the company “the hottest brand in America.” With ambitious plans to open

500 doughnut shops over the first half of the decade, the company’s distinctive green-and-red

vintage logo and unmistakable “Hot Doughnuts Now” neon sign had become ubiquitous.

At the end of 2004, however, the sweet story had begun to sour as the company made

several accounting revelations, after which its stock price sank. From its peak in August 2003,

Krispy Kreme’s stock price plummeted more than 80% over the next 16 months. Investors and

analysts began asking probing questions about the company’s fundamentals, but even by the

beginning of 2005, many of those questions remained unanswered. Exhibits 1 and 2 provide

Krispy Kreme’s financial statements for fiscal years 2000 through 2004. Was this a healthy

company? What had happened to the company that some had thought would become the next

Starbucks? If almost everyone loved the doughnuts, why were so many investors fleeing the

popular doughnut maker?

Company Background

Krispy Kreme began as a single doughnut shop in Winston-Salem, North Carolina, in

1937, when Vernon Rudolph, who had acquired the company’s special doughnut recipe from a

French chef in New Orleans, started making and selling doughnuts wholesale to supermarkets.

Within a short time, Rudolph’s products became so popular that he cut a hole in his factory’s

wall to sell directly to customers—thus was born the central Krispy Kreme retail concept: the...