Krispy Kreme Doughnuts, Inc.

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Krispy Kreme Doughnuts was a company started in 1937 by Vernon Rudolph. The USP of Rudolph’s venture was the unique doughnut recipe he acquired from a French chef. As the popularity of the taste of his doughnuts rose, the company started selling doughnuts through a hole in their factory wall. This gave rise to their other USP, the factory store. This provided the customers with an ‘experience’, allowing them to see the doughnut factory and it’s specialized machines, and not just the usual taste.

A turnaround was effected when the ailing enterprise was bought out in a leveraged buyout by a group of franchisers lead by Joseph McAleer. He brought back the unique doughnut recipe and the company’s traditional logo. Slowly the company improved and was eventually debt-free. In 1998, the company went public in a hugely successful IPO and had a market cap of almost $500 million.

In May 2004, first signs of trouble were seen when the company announced a probable 10% reduced earnings than anticipated. They also announced the divestiture and closure of some underperforming stores. They attributed these measures to a low-carbohydrate diet trend in the US. But financial analysts thought otherwise.

On January 4, 2005, the board announced a restatement in the previous year’s results due to “correct certain errors” relating to the treatment of expenses made for the acquisitions. This restatement reduced it’s pretax income, and as such, its overall profit. This revision and the SEC’s investigation caused delays in reporting to the creditors, which could have dire consequences where the banks could cancel Kripy Kremes $150 million credit facility and demand immediate repayment. This would also cause the stock being delisted from the NYSE.

At the end of this, the stock was trading lower than $10 per share and Krispy Kreme’s market capitalization was eroded by nearly $2.5 billion

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