Krispy Kreme Doughnuts - Case Chapter 6

JULIO PASACHE: Z3361270

KRISPY KREME DOUGHNUTS - CASE CHAPTER 6

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1. The analysts have projected earnings growth of 42% and 33% for the years 2003 and 2004 respectively. I disagree with these projections for considering them fairly optimistic. Based on the analysis of ratios for the forecasted years, the figures show that sales increase in 26% for 2003 and 23% for 2004 whereas operating expenses increase at a lower rate (23% and 21% for each year). Furthermore, when sales are disaggregated, we can see that analysts expect that franchised stores raise sales in 50% and 46% for each year and Support Sales also increase in 49% and 43% respectively.

2. They separated sales in three main streams: Company Stores, Franchise Operations and Support Sales. Embedded in each of these three lines, there are four factors that worked as drivers of the current base business: Hot Doughnut Shop, which is the developed prototype of small doughnut machine; Coffee sales, they consider that it is likely to grow; Equity stakes in franchises, where the profit of franchise contribute the earnings of the company; and finally International presence in places such as the U.K., Japan and European countries. Regarding to new stores, the company has focused most of its growth in franchised markets rather than its own stores. Nevertheless, sales and profits are driven principally by store sales as a combination of retail and wholesale business. For instance, there were 5 and 25 new stores for the company and franchise respectively for the year 2001 and the sales increased by 27% and 13% for each line. It is assumed that the owned stores represent about 60% of the profits and the franchise income will become more profitable as developers continue to grow sales faster than the company-owned units. Personally, I disagree with these forecasts because other important factors such as competition might not been taking in consideration. Increasing demand may lead an increase in future competitors in any profitable industry.

3. CIBC analysts forecast that Net Income will increase in 42% and 33% for the years 2003 and 2004 respectively and such amounts represent 7.58% and 8.22% of the sales. Regarding to G&A, analysts assume that it will increase by 23.2% and 20.5% for each year. D&A represents 2% of the sales and it is forecasted that remains steady through the next two years. Finally, the income tax is 38% of the earnings before taxes. As a result of the increase in sales by 42% and 33%, it is assumed that Income Taxes go up by the same percentage. In my opinion, I disagree with the forecasts because Net income is increasing highly and the operating expenses increase at a lower rate for year. Overall, the assumption is that sales increase, operating