Financial Statement Analysis
The Krispy Kreme Doughnuts case study solution solves the case on financial statement analysis. The structure of the solution is outlined below and answers the questions included in the outline Krispy Kreme Doughnuts, Inc. Background
Supply Chain Business Segment
What is the Problem?
How do you know it is a Problem?
Common Case Study Questions
#1 Who is the decision maker, and what are their responsibilities? #2 What is the issue and its significance?
#3 Why has this issue risen and why is the decision maker involved? Analysis of the Case
#1 Identify the issues
#2 Analyze the case data
#3 Generate Alternative Solutions
#4 Select Decision Criteria
#5 Apply Decision Criteria and Analyze Alternatives #6 Select and Implement Plan
Analysis of Case Data in Exhibits
Exhibit 1 – Income Statements
Exhibit 2 – Balance Sheets
Exhibit 3 – Store Growth
Exhibit 4 – Analysts’ Recommendations
Exhibit 5 – Consensus EPS Estimates
Exhibit 6 – Stock Price Patterns Relative to the S&P 500 Exhibit 7 – Analytical Financial Ratios for Krispy Kreme Exhibit 8 – Analytical Financial Ratios for Quick Service Restaurants Exhibit 9 – Common Sized Financial Statements
Case Specific 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.? (Briefly consider the structure and relationship of the financial statements. Does management have any discretion over how the accounts are estimated?) 2. How can financial ratios extend your understanding of the financial statements? What questions do the time series (trend) of ratios in case Exhibit 7 raise? What questions do the ratios on peer firms (comparables) in case Exhibits 8 and 9 raise? Which of the comparable firms is truly a peer? 3. Based on both the financial statements and the ratios, evaluate the financial health of KKD as of the year-end 2004. Be sure to address the firm's liquidity, leverage, activity, and profitability. 4. In light of your answer to question 3, what accounts for the firm's recent share price decline in 2004? To quote from the concluding paragraph in the case: "Were the revelations about the company's franchise accounting practices sufficient to drive that much value out of the stock? Were there deeper issues at Krispy Kreme that deserved scrutiny?" 5. What is the source of intrinsic investment value in this company? Does this source appear on the financial statements? (Hint: Compare the perspectives of finance and accounting.) 6. Prepare a brief epilogue for this case.
What have been the developments since 2004?
Change in Leadership
Krispy Kreme had flourished through the 90s and in April of 2000, had one of the most successful initial public offerings of the time. After the IPO, they launched an overly aggressive expansion plan. They earned revenues from on-premise sales, off-premise sales, manufacturing and distribution, and franchise royalties and fees. Krispy Kreme’s stock was trading for 62 times earnings and it was dubbed the “hottest brand in America”. However, good times quickly came to an end. They could no longer meet the growth expectations set by Wall Street and several accounting revelations caused the stock price to plummet. Krispy Kreme was a very healthy company in the beginning of the decade, but quickly deteriorated by the mid 2000s. ANALYSIS