The issue Krispy Kreme faces in regards to franchisees starts with their equipment and ingredients distribution.

Corporate requires all franchisees to purchase all equipment and ingredients through them, which is not an uncommon practice. However, the price that Corporate charges the franchisees for equipment and ingredients is at a large premium. Since the prices are at a premium, the long run success is jeopardized of each franchisee, in turn jeopardizing the entire corporation. Krispy Kreme is different from most other companies in the fact that, most successful organizations build their business around the royalty payment and not the equipment and ingredients charges. Growth rates for Krispy Kreme were exponential for the past few years. Despite their successful products, the company arguably grew too fast. This was a result that was not based solely on new franchisees, but rather the new franchisees combined with their already existing distribution channels. By allowing grocery stores to sell the doughnuts without an actual store in place, Krispy Kreme cuts potential costs but also cannot provide customers with the unique experience they built the company on. Furthermore, the presence of gas stations and kiosks selling Krispy Kreme doughnuts makes the product easily attainable by customers. While this may be a good thing, the original ways of Krispy Kreme was to make the product difficult to obtain, by default, which worked phenomenally. A constant progression of selective places to find their product toward more easily available would be work well, but the corporation introduced easier ways to get their product rapidly. The view of management had changed from a selective, quality driven product had changed to anywhere that customers could be found, you could find the product. 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. Unfortunately, Krispy Kreme has undergone heavy scrutiny for their choice of accounting preferences. With the reacquisition of a seven-store franchise in Michigan, the company booked the transaction as an intangible asset titled, “Reacquired franchise rights.” That in itself is not the main issue though. The issue that makes Krispy Kreme not a safe investment is the fact that the reacquired franchise rights do not get amortized. In the industry, this is unheard of, but not necessarily in violation of Generally Accepted Accounting Principles. So instead of having these intangible assets write-down throughout the year, they are arguably falsely boosting profits. Similarly, Krispy Kreme made a “shady” transaction when they offered a higher price to the seven store franchise in Michigan. By offering a higher price, the interest income they would receive would also increase; another false sense of the company’s status. More likely however, was that the interest income would be used to pay off past-due loans and put the rest towards income. Neither of the above two instances are true, in the sense that most investors could look at financial statements and get a correct idea of the company’s status. This shady business leads me to believe that Krispy Kreme is not a safe investment and no further stock should be purchased. In fact, the current

stock held in Krispy Kreme should be sold as soon as . 2002 Total revenue* Net Income* Total long-term debt* Number of stores $394.6 $57. I believe the numbers would be much. much less. but has since announced that its results for 2001-2005 are not reliable. wouldn’t they have a comparatively higher asset turnover ratio? Unfortunately. The number seems quite low.6 $33.” However. This troubles me due to the accounting preferences of Krispy Kreme. A second adjustment of some $500. Any company with financial stability and potential future gains in sight would not take the risk of using these accounting methods.krispykreme. Total asset turnover is a representation of “how many times inventory is created and sold during the period.4 $3. Krispy Kreme also rolled into the price the costs of closing stores and compensating the operating manager and principal owner of the Michigan franchise to stay on as a consultant.2 357 Note: Figures for fiscal years ended in February *in $ millions Source: www. rather than costs that would have reduced the company's reported earnings.5 $62. but they are definitely rope walking. the numbers are composed using current assets in each. bother the quick ratio and current ratio look very favorable for Krispy Kreme.8 million to properly record the compensation as an expense.” While most numbers for Krispy Kreme seem to be much better than the other restaurants I feel that they are skewed. For example. Both of these expenses became part of the intangible "reacquired franchise rights" asset on the company's balance sheet. However. If we were able to deduct the intangible assets they added in for the Michigan franchise. This comparison may be able to give us a better understanding of the true status of Krispy Kreme. Similarly.9 218 2003 $491.4 million and $4. being second to last. if they were as stable as most the other numbers suggest they are. Right now the accounting preferences Krispy Kreme uses are not violating GAAp.1 $146.4 276 2004 $665. I believe the numbers in most of these ratios are skewed in attempts to stabilize an already shaky company. Exhibit 8 in the case is a summary of financial ratios for “Quick-Service Restaurants. they do not.000 will reverse the improper recording of interest income.4 $26. Half-Baked Krispy Kreme first reported solid growth. Krispy Kreme announced in a December 2004 8-K filing that it will need to make a pretax adjustment of between $3. the total asset turnover comparison to other restaurants is fairly low.



are their Net Sales figures (in millions). On a more simplified platform.To get the full view of Krispy Kreme’s financial status. the company does not have a strong focus on constant progression. Starbucks is arguably the most similar company. it is clear that they have taken a very aggressive route by financing their desired growth through debt. If we breakdown the financial ratios for Krispy Kreme alone. or lack thereof.47% increase. however. However. Interestingly. the long term debt to equity ratio for Krispy Kreme is 11. at the end of 2003. ROE. between 2001 and 2002 a 2. Examining debt to equity. we can look at the trends of analysts’ recommendations over the past four years. Krispy Kreme’s total for 2003 was $666. While there are no definitive trends. compared to Starbucks’ Net Sales of $4. The overall consensus has been declining since day one. they incur an additional interest expense which will cause earnings to be even more volatile than previously.076. Clearly. The time in between illustrates a gradual decline as well.3% still held that recommendation. and debt-to-capital. only 14. the figures that represent liquidity are drastically different between the two companies. specifically Starbucks. between 2000 and 2001 there is a 48% decline. . can be witnessed in other ratios like the Inventory turnover. there is reason to be skeptical. that is in fact the issue.26%. and 2003 and 2004 a 8% decline. The coffee specialty house uses grocery stores to sell it’s products just like Krispy Kreme does. 80% of analysts recommended to buy the stock.21%. For instance. the difference in is fairly significant. in January of 2005. many of the financials of both companies were extremely close. Because Krispy Kreme has such a high debt to equity ratio. In 2001. we would expect a financially strong company to show comparable results. Due to this. The most important comparison we need to consider between Krispy Kreme and the rest of the industry. we can do a comparison to similar companies in the industry. whereas Starbuck’s ratio is roughly . with the products and distribution channels uniquely similar. 2002 and 2003 a 17% increase. however. With a company so similar to the setup of Starbucks. Trends.

Inc. 2012 BUS 428A Seminar in Financial Management Group Presentation ID: Name_Trevor H. Trevor Giroux January 29.Krispy Kreme Doughnuts. Giroux__________ Signature__________________________ .