Krispy Kreme Doughnuts Case Study

Krispy Kreme Doughnuts, Inc. - study case

1. Financial statements

In Exhibits 1 and 2 are presented the Krispy Kreme's financial statements from 2000 to 2004. Their purpose is to provide us with financial data for the company. Exhibit 1, the Income Statement, present the revenues, costs and profits, and Exhibit 2, the Balance Sheet, shows a quantitative summary of a company's financial condition at specific points in time.

In order to obtain a complete financial analysis, these two should be use simultaneously.

At a first glance, one can see looking at the KKD's balance sheet that, in 2003 comparing with 2002, the value of Reacquired franchise rights, goodwill and other intangibles increased 3 times (by 296%), and from 2003 to 2004 increased again, by 356%. This continuous expansion was managed poorly by the executives of KKD, therefore it went straight to collapse, because all those small business units were not capable to "cruise" at the same speed and have the same high goals as the entire company.

2. Financial "health"

In order to determine the "health" status of Krispy Kreme, we have to analyze the income statement and balance sheet, and calculate some financial ratios (See Exhibit 7). After that, these financial ratios should be compared with the average industry ratios, and/or the ratios of competitors.

The liquidity ratios increased in the last few years, mainly because of the increase in the level of assets. These increased liquidity ratios are much higher than those of the competitors. The asset turnover ratio went from 2.10 in 2000 to 1.01 by 2004. This can also be explained by the increase in assets. To be more precise, as I mentioned above, this increase in assets can be explained by the increase in Reacquired franchise rights, goodwill and other intangibles.

KKD has increased constantly their net profit margin during the past 5 years, from 2.7% to 8.6% Compared to their competitors, Krispy Kreme relies less on short-term debt. Comparing the leverage ratios of KKD with of their competitors, we observe that KK has less long-term debt obligations than other companies.

Some negative aspects are revealed when comparing KKD's ROA and ROE. These are rather low in comparison with competition, meaning that Krispy Kreme managers are not spending shareholder's wealth as they should.

If we look at the company's income, we see a sharp increase in their income. This could be a sign that the company is "healthy", but unfortunately this is not the case. All the growth is because of the increase in both tangible and intangible assets, especially because of the dramatic increase in the Reacquired franchise and goodwill. The managers of Krispy Kreme are not