Krispy Kreme Doughnuts, Inc.

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Krispy Kreme Doughnuts, Inc. (hereinafter, “Krispy Kreme”) seemed poised to become an industry leader and Wall Street chart topper in 2000, however, by 2004 the company’s stock price had plummeted. Krispy Kreme’s stock price one day after the initial public offering in April of 2000, was $40.63, giving the company a market capitalization of nearly $500 million. Investors believed Krispy Kreme was the next big money maker to enter the market. By 2005, Krispy Kreme shares were trading at less than $10 a share, the company was in the midst of an SEC investigation into their accounting treatment for franchise acquisitions, and they found themselves on the verge of potentially defaulting on their credit facility.

Following the successful IPO, Krispy Kreme announced their aggressive plan to add approximately 350 more stores to their 144 store domestic arsenal and an additional 32 international locations. On May 7, 2004, Krispy Kreme announced adverse financial results for the first time since it became a publicly traded entity. Krispy Kreme told investors to expect earnings to be 10% lower than anticipated for the following three reasons: 1. the low-carbohydrate diet trend in the US had hurt sales 2. the company would take a $35 to $40 million charge because it was divesting a chain of 28 bakery cafes it had acquired for $40 million in stock the year before and 3. the company had plans to shut down three new doughnut shops at a charge of $7 million to $8 million because they were underperforming. Following the announcement about the company’s financial standing, shares closed down 30% at $22.51 a share. On May 25, 2004, the Wall Street Journal published an article which described Krispy Kreme’s questionable accounting practices surrounding the treatment of franchise acquisitions. In July of 2004, when Krispy Kreme announced that the SEC had launched an informal investigation the company’s shares dropped another 15% to $15.71 a share. Krispy Kreme’s stock fell to less than $10 a share when the company announced in January of 2005 that it would restate its’ previously issued financial statements for FY2004 and that it would delay the filing of its financial reports until the SEC completed its investigation.

Krispy Kreme was generating revenues through four primary sources: on-premises retail sales at company owned stores (27% of revenues), off premises sales to grocery and convenience stores (40%), manufacturing and distribution of product mix and machinery (29%) and franchisee royalties and fees (4%). For the period of 2000 to 2004 the mix of company owned stores to franchises was relatively consistent at a 40% to 60% split respectively. One day after the company’s IPO, Krispy Kreme announced an aggressive plan to open approximately 350 new stores in the United States over a five year period. Because franchisee royalties and fees were generating such a nominal portion of Krispy Kreme’s overall revenues, it does not seem that it was as profitable for the company to continue to open a higher percentage of franchises compared to company factory stores.

Krispy Kreme’s hard line goal to rapidly expand the number of stores was unsuccessful. In 2001, 80% of investors were recommending that people invest in Krispy Kreme. In an efficient market the share price should adjust instantly to new and relevant information as soon as it becomes available to market participants. In the example of Krispy Kreme, it seems that investor speculation and hype drove the stock price up initially, and the company The company’s stock price

Krispy Kreme appears to be financially healthy from 2000 to 2004 based on their financial statements and the ratios presented. The company’s net income increased significantly in percentage each year, with the largest increase not surprisingly occurring the year of the much anticipated and publicized IPO (from 2000 to 2001 the percentage change in net income was approximately 147% compared...
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