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Krispy Kreme Doughnuts,Inc.
As the millennium began, the future for Krispy Kreme Doughnuts,Inc., smelled sweet.Not only could the company boast iconic statusand a nearly cultlike following. it had quickly become a darling of Wali Street.Less than a year after its initial public offering, in April 2000, Krispy Kreme shareswere selling for 62 times earnings and, by 2003, Fortune magazinehad dubbed the company "the hottestbrand in America." With ambitiousplans to open 500 doughnutshopsover the frrst half of the decade,the company'sdistinctivegreen-and-red "Hot vintage logo and unmistakable Dor.rghnr-rts Now" neon sign had becomeubiquitous. At the end of 2004, however,the sweet story had begun to sour as the company made severalaccountingrevelations,after which its stock price sank. Frcm its peal. in August 2003, Krispy Kreme's stock price plummeted more than 807c in the next l6 months.Investorsand analystsbegan asking probing questions aboLitthe con-ipany's fundamentals, even by the beginningof 2005, many of those questions but remainedunanswered. Exhibits 1 and 2 provide Krispy Kreme'sfinancialstatements for fiscal-years 2000 throLrgh 2004. Was this a healthy company?What had happened to the companythat some had thought woLrldbecomethe next Starbucks? almost If everyone loved the doughnuts.why were so many investorsfleeing the popLrlar doughnutmaker?
Krispy Kreme beganas a single doughnutshop in Winston-Salem, North Carolina, rn 1937, when Vernon Rudolph, who had acquired the company'sspecialdoughnut recipe from a French chef in New Orleans, started making anciselling doughnuts wholesaleto supermarkets. Within a short time, Rudolph's productsbecame so popular that he cut a hole in his factory's wall to sell directly to customersthus was born the central Krispy Kreme retail concept: the factory store. By the late 1950s,Krispy Kreme had 29 shopsin 12 states,many of which were operated by franchisees. This casewas preparedby SeanCarr (MBA '03,1. under the direction of Robert F. Bruner of the Darden GraduateSchool of Business Administration.It was written as a basisfor classdiscussion ratherthan to illustrate effective ineffective or handlingof an administrative situation. CopyrightCI 2005 by the University Virginia of Darden School Foundation,Charlottesviiie, VA. All rights reserved.To order copies,sencl e-ntail to an firstname.lastname@example.org. No part o.,f publication ntay be reprociucec!, this storedina retrieval system,usec!itt a spreac[slteet, transnitted irt antJbnn or b| any means-electrottic, ntechctnical, or photocopt,ittg,recording,or othemvise-withottt the pennission of the DarclenScltool Fotutdation. f,
FinanciaiAnnlysis and Forecasting
After Rudolph'sdeath,in 1973, BeatriceFoods bought the companyand quickly expandedit to more than 100 locations.Beatrice introducedother products,such as of soups ancl sandwiches. and cllt costs by changing the appearance the Storesand mixture. The businesslanguished' in substitutingcheaperin-gredients the dou-9hnut however,and by the early 1980s.Beatrice put the company up for sale. led A group of franchisees by JosephMcAleer, who had beenthe frrst Krispy Kreme tranchisee,completeda leveragedbuyout of the company for $24 million in 1982' formula and the company'straditionallogo' McAleer broLrght back the original dou-9hnut It was also around this time that the company introducedthe "Hot DottghnutsNow'' were coming off the line' Tht' when fresh dor-rghnuts neon sign, which told cr-rstomers company still stmggled for a while, bLrtby 1989, Ktitpy Kreme had becornedebtfree and had slowly begr-rn expand.The company focusedon its signaturedoughto nuts and addedbrandedcoffee in 1996. Scott Livengood, who becameCEO in 1998 and chair the following year. took the companypublic in April 2000 in what was one of the largesrinitial p.iUti. offerings (IPO) in...