QUESTION 6: GIVEN YOUR ASSESSMENT OF KRISPY KREME'S HEALTH, WHY DID IT'S STOCK PRICE DROP BY 80% BETWEEN 2003 AND 2004?
The question is what they do wrong for the business that is nearly more than 70 years, what makes them fall so quickly especially in year 2003 and 2004, there are at least 2,300 franchised businesses in Unites States, many that are successful, but there are difficulties in the franchise model, and Krispy Kreme with the combination of ambitions, greed, and inexperience in managed to stumble into most of them.
As Krispy Kreme pursued its ambitious growth strategy, it was making mistakes in its finance department as well, except for the company's plan to finance a $35 million mixing plant in Illinois with an off-balance sheet synthetic lease a plan the company scuttled in February 2002, in the face of post-Enron suspicions Krispy Kreme's accounting seemed unremarkable until October 2003. That's when the company reacquired a seven-store franchise in Michigan, called Dough-Re-Mi Co, for $32.1 million. The company booked most of the purchase price as an intangible asset called "reacquired franchise rights," which it did not amortize, contrary to common industry practice. Krispy Kreme had also agreed to boost its price for Dough-Re-Mi so that the struggling franchise could pay interest owed to the doughnut maker for past-due loans. The company then recorded the subsequent interest payment as income.
On their accounting and their lack of expose, Krispy Kreme may have paid overstated prices for some of the franchises it bought back. In 2003, the company spent almost $67 million to repurchase six stores in Dallas and rights to stores in Shreveport, Louisiana, that were owned in part by former Krispy Kreme board member and chairman and CEO Joseph A. McAleer Jr. Another longtime director, Steven D. Smith, was also part owner. Compared with the $32.1 million paid for the Michigan stores that same year, the number sounds high $11.2...
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