Krispy Kreme Case Study

Krispy Kreme Doughnuts, Inc.

The stock price of Krispy Kreme Doughnuts, Inc. fell exponentially from $40.63, which was the price the next day after its IPO, in 2000 to less than $10 in 2005, but it was not only because of the illegal accounting practices – it was more than that. The majority of the fall in stock price was due to the accounting revelations, but the stock price was already decreasing before the world caught wind of the accounting practices.

In 2001, 80% of financial analysts following Krispy Kreme were recommending investors to buy stock in this company. Even at this time, some knowledgeable people did not think that Krispy Kreme was a good investment. In addition, Krispy Kreme announced adverse results on May 7, 2004, which was the first time it did so since its initial public offering in April 2000. Krispy Kreme told its investors to expect earnings to be 10% less than they had anticipated. At this point, the share price was down to $22.51. This announcement was about two and a half weeks before the Wall Street Journal published the article about Krispy Kreme’s accounting mishap. Another reason that the stock prices fell is because Krispy Kreme grew too quickly. Since the beginning, the company continued to grow and grow up until that day in May 2004. The number of shops nearly tripled since early 2000 with 427 stores in 45 states and four abroad. It was also selling its doughnuts in over 20,000 supermarkets, convenience stores, and truck stops that the doughnuts were not as special anymore. People may have started to grow tired of its glazed doughnut, its signature item.

However, it could be argued that the accounting revelations were the one and only cause of the drop in stock price. The Wall Street Journal reported that Krispy Kreme had begun negotiating to purchase a 7-store Michigan franchise because the franchisee owed the company several million dollars. Krispy Kreme asked the franchisee to close the two most underperforming stores and...