Kreamy Crisp Doghnuts

Krispy Kreme Doughnuts, Inc. is a well known corporation that sells doughnuts and coffee throughout America as well as other countries around the world. What started out as a financially successful business quickly became intrinsic for investors, making the company lose many of its investors as well as profit.

Based on the historical data of income statements and balance sheets, the company was healthy and stable. Using information from the income statements, sales were increasing every year in a stable manner from $220 million in 2000 to $666 million in 2004. The share price also increased steadily from $16.22 in 2001 to $35.64 in 2004. From the balance sheet however the company does not look very healthy because in 2003 the company was in the negatives with comprehensive income.

DuPont Ratio Analysis of Krispy Kreme’s Performance

The company was going into a troubled water in 2004 when they told investors that they expected 10% earnings lower then were anticipated because of a low-carbohydrate diet. After this announcement was made shares fell 30%. Later in that year, Krispy Kreme encountered more financial problems. As stated in the case:

Krispy Kreme has begun negotiating to purchase a struggling seven store Michigan franchise. the franchisee owed the company several million dollars... and franchise fees and, as part of the deal, Krispy Kreme asked the franchisee to close two underperforming stores and to pay Krispy Kreme the accrued interest on past due loan . (p 127).

Krispy Kreme has to amortize required franchise rights and book it at purchase cost as an intangible asset. However the company neglected to do that. Also, the interest paid by the franchisee was recorded as interest income. The company neglected to follow GAAP principles and therefore was dishonest about their financial statement. After an investigation was performed by SEC, the company shares decreased another 15%.

As a result of these announcements and the...