Krispy Kreme Donuts is a very successful doughnut retailer. It was founded by Vernon Rudolph in 1937 in Winston-Salem, North Carolina. Vernon Rudolph bought the secret recipe of the donut, yeast roll donuts. His doughnuts are very popular with customers in the local area. By the end of the 1950s, there were 29 store franchise stores in 12 states. They reduce competition among peers by controlling the uniqueness of their products. In 1973, Beatrice Foods purchased Krispy Kreme after the death of Rudolf and quickly expanded to more than 100 locations.
However, Krispy Kreme, sold by Beatrice Foods, is no longer special. In 1982, the original franchise owner acquired the company for $24 million. In 1998, Scott Livengood became CEO. The company was listed in April 2000. Following the initial public offering, Krispy Kreme announced a new strategy to actively increase the number of stores. In the next five years, 144 to 500, including international.
Krispy Kreme Donuts Inc. is very competitive in the industry. New brands entering the industry have brought threats to Krispy Kreme Donuts such as DunkinDoughnuts, Starbucks, and more.
They have a timely sales strategy to attract younger generations of customers. At the same time, Krispy Kreme Donuts needs to invest more money to expand its stores and competitive methods. However, Krispy Kreme is currently facing a difficult period, the ongoing investigation by the US Securities and Exchange Commission and the current loss of trust among shareholders and analysts, and the stock price crash. Their cash reserves are not enough to satisfy their expansion of the commodity network.
They face high costs, low capital, large investment, and credit crisis. Because they are too focused on market competition, they cannot effectively control costs.
During the review of the income statement, Krispy Kreme’s growth slowed from 2002 to 2003, so net income had a direct impact. They dropped by 68% and 52% respectively. Operating expenses are Krispy Kreme’s largest single fee. From 2000 to 2004, this cost fell from 86% of sales to 76% of sales. This helps increase the number of stores that are franchised. Interest income and expenses are the next two prominent items. From 2000 to 2001, interest income increased significantly to nearly 700%, as interest expenses decreased by nearly 60% during the same period. However, the situation in 2003 and 2004 was significantly different, from $1.78 million to $4.41 million.
In the analysis of the balance sheet, the increase in interest expenses is directly related to the revolving credit line and the increasing level of debt in long-term debt. Since 2000, although the dollar value of accounts receivable has increased every year, the number of days of sales of accounts receivable has fallen from 30 days in 2000 to 25 days in 2004. The steady increase in inventory levels is disturbing.
In Exhibit 7, we see a series of ratios that evaluate Krispy Kreme’s performance from 2000 to 2004 based on liquidity, leverage, activity, and profitability. The liquidity ratio is growing steadily, indicating that the company is generally performing well. Current liabilities have been reduced. Long-term liabilities increase by an average of 150% per year. Equity increased only 80% year on year. Current assets grew by an average of 44% year-on-year. Krispy Kreme’s liquidity ratio is significantly higher than other companies in the fast service industry (see Figure 8). As a result, Krispy Kreme has better liquid assets or is using more long-term debt and equity in the same industry.
As of the end of 2004, Krispy Kreme’s financial situation was not healthy. At the end of 2004, the US Securities and Exchange Commission targeted Krispy Kreme and began investigations. The CEO resigned in August 2004 and the company’s share price plummeted, causing the market value to fall. Reasons for the stock price decline were: lower-than-expected earnings; new stores did not meet expectations; and imminent SEC investigations and other management issues.