TO: Shareholders and potential investors of Krispy Kreme Doughnuts Inc. DATE: Tuesday, January 19 2010
SUBJECT: Krispy Kreme Doughnuts Inc. Analysis
1) Identification of issues:
* Is Krispy Kreme’s a healthy company?
* What had happened to the company?
* Why were so many investors fleeing the popular doughnut maker? * Were the revelations about the company’s franchise accounting practices sufficient to drive that much value out of the stock? * Were there deeper issues that deserved scrutiny?
3) Quantitative Analysis
As we begin to analyze Krispy Kreme Doughnuts from a quantitative perspective, we will address our first issue; Was the company healthy? When assessing liquidity and profitability ratio performance compared to their competition, KKD seems to be doing well. The company showed a current ratio of 3.25, as opposed to their industry average of 1.17 at END of FY2003. (See Appendix attached) They show a net profit margin of 8.58%, being above the average by 2.38%. Although these ratios may seem strong, we believe them to have been calculated based on inflated figures. When reviewing the Krispy Kreme Doughnut Company’s financial statements, we can see that the statements are overstated. Firstly, as the article in the Journal pointed out, interest paid by their franchise agreements was recorded as interest income, translating into pure profit rather than having it shown as interest owed. Secondly, Krispy Kreme decided to not follow the industry standard of amortizing their costs of reacquiring franchises. This lead to an inflated net income, seeing that their cost of reacquiring franchises account was valued at $175,957 in 2004 (in thousands of dollars), implying their franchisees were worth $10,997.3125 in the respective year. This figure seems highly unlikely. To be conservative, we will value their franchisees at $5,498.65. If this is to be the case, the new reacquired...