The Krispy Kreme, Inc. case investigates the contributing factors that caused this particular darling of Wall Street’s stock to suddenly plummet more than 80% in 2004. In the year 2000, Krispy Kreme went to public and boasts iconic status by became the hottest brand in America. Less than a year after its initial public offering, the company’s shares were selling for 62 times earnings. However, in 2004 the market was shocked by the company’s stocks that plummeted more than 80% over the following 16 months.
For the first time in its history, Krispy Kreme made three major adverse results. First announcement is the company told investors to expect earnings to be 10% lower than anticipated, claiming that the recent low-carbohydrate diet trend in the United States had hurt the sales. Next, the company announced that they planned to divest Montana Mills and would take a charge of 35 million to 40 million in the first quarter. The third announcement is the company planned to close three of its new Hot Doughnut and Coffee Shops. These negative announcements have caused its shares closed down by 30%.
In this paper, we will investigate the key determinants that caused the dramatic decline in Krispy Kreme’s shares prices. This paper will be divided into 5 segments. The first segment, we will investigate on how the historical data of financial performance and financial position revealed the current financial health of Krispy Kreme Doughnuts, Inc. Next, the second segment offers the information on how the numerical benchmark or financial ratios extend our understanding on the interpretation of financial statements. In addition, this segment also provides some explanations of several questions that may arise from the given information in case Exhibits 7, 8 and 9.
Third segment will look at the financial health of Krispy Kreme by analysing the exhibit 7 and 8. We will analyse several financial ratios including liquidity ratios, leverage ratios, activity ratios and profitability ratios. DuPont analysis ratio also will be included as one of the variables in analysing the Krispy Kreme’s financial health. In forth segment, we will look to what extent the share price of Krispy Kreme plummeted and we will draw a conclusion on why the Krispy Kreme’s stock prices dropped so drastically. Finally yet importantly, the fifth segment will discuss some of the lessons that we have learned about using financial statement in analyzing a company.
According to www.krispykreme.com.au, Krispy Kreme’s story began in the 1930’s when the Sydney Harbour Bridge had only just opened. Legend has it that a young Vernon Rudolph, the man destined to be the ‘King of Krispy Kreme’ won the secret yeast raised doughnut recipe in a poker game with a French Chef in New Orleans. As Vernon’s new business grew he expanded to Winston-Salem in North Carolina where he opened the first official Krispy Kreme store.
As stated in Yahoo Finance website, Krispy Kreme Doughnuts, Inc. operates as a branded retailer and wholesaler of doughnuts, beverages, and treats and packaged sweets worldwide. This company also operates franchise stores and manufactures and sells doughnut mixes, other ingredients and supplies, and doughnut-making equipment. The company sells its products through owned and franchised factory and satellite stores, as well as through wholesale sales channels, including convenience stores, grocery stores/mass merchants, and other food service and institutional accounts. Krispy Kreme Doughnuts, Inc. was founded in 1937 and is headquartered in Winston-Salem, North Carolina.
Is Krispy Kreme financially healthy at year-end 2004? Please include the DuPont Analysis Ratio as one of your points in the analysis.
i) Liquidity Ratios
Liquidity Ratios for Krispy Kreme
As shown in the...