Krispy Kreme Doughnuts Case Analysis

Krispy Kreme Doughnuts, Inc.

Abstract: 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.

Questions:

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.?

The historical income statements and balance sheets show that the total revenue was increasing from 2000 to 2004.

However, that growth did not last long. The most notable period is on May, 2004. The net income is negative for the first time since 2000. The company added about $34 million income through discontinued operations from divestiture of Montana Mills. That $34 million is not a real profit that would add value to the company. Rather, the move could be a way that Krispy Kreme wanted to use to cover up the poor performance and losses during that year.

Meanwhile, the company put the purchase cost of the franchise under the intangible asset account and that is the amount that does not need to be amortized. By doing so, it lowered expenses and therefore increased the net income figure.

More importantly, Krispy Kreme lost $24 million that quarter even with the additional $34 million from the sale. This is a really very bad signal.

Besides, there is also increasing operating expenses due to the extra expenditure associate with opening new stores. And as a result, the income is also affected

In a word, the Krispy Kreme may experience some difficulties in its operations.

2. How can financial ratios extend your understanding of financial statements? What questions do the time series of ratios in case Exhibit 7 raise? What questions do...