Krispy Kreme Doughnuts, Inc.

1. What can the historical income statement (Exhibit 1) and balance sheets (Exhibit 2) tell you about the financial health and current condition of KK?

The income statement shows a drastic triple in revenue from years 2000-2004 and consistent increase in net income. However, on February 1, 2004 the net income is recorded at $57,087. Looking at the next three month, on May 2, 2004 ($24,438) is recorded and then on August 1, 2004 only $5,764 is recorded. We can see the change occurring at the end of year 2004 with net income dropping.

We can see a strong balance sheet from 2000-2004 with a huge contribution from common stock. We can see the gradual increase in common stock from 2000-2004. There is also a decline in current assets after February 1, 2004 to August 1, 2004. Also, the shareholders’ equity decreased after February 1, 2004 to August 1, 2004. The shift in the company at the end of 2004 is apparent in both financial statements.

2. How can the financial ratios extend your understanding of financial statements? What questions do the time series of ratios in Exhibit 7 raise? What questions on peer firms in Exhibits 8 and 9 raise?

The financial ratios help to display how Krispy Kreme measured financially with its competitor Starbucks. In Exhibit 7 we can see the increase of long-term debt throughout the years. The question arises as to what is changing and why is this happening? There is also a lower increase in the ratio for net profit margin. The ratio nearly doubled from 2000-2001, but we see it grow fairly less toward 2004. The question arises as to why is the net income barely growing?

In Exhibit 8 we see the drastic difference in sales between Krispy Kreme and Starbucks, the world’s #1 specialty coffee retailer. In 2003, the sales for Krispy Kreme were only $666 million compared to Starbucks’ $4,076 million. Krispy Kreme also has a lower return on assets, return on equity, and net profit margin than Starbucks. Exhibit 9 raises the...