Case Analysis

Instructor: Dr Odejar


Presented by: Raja Saqib
Abdul Awwal
Muhammed Zaidi
Zakriya Abubaker
Summary
Introduction to Krispy Kreme
Krispy Kreme Downturn
Krispy Kreme Finances
S.W.O.T.
What is the Problem?
Critical Issues
Alternatives
Our Recommendation
Introduction to Krispy Kreme
Founded by Vernon Carver Rudolph
in 1933

First donut shop (partnered) was in
Paducah, KY

Operations were moved to
Nashville, TN

Focused on selling to grocery stores

Rudolph opened his own shop in
Winton-Salem,NC in 1937 with $25
dollars and a 1936 Pontiac
Introduction to Krispy Kreme
Out the door
Around the corner
Down the block


Introduction to Krispy Kreme
Automatic doughnut cutting
machine
Air-pressure doughnut pourer
Donut hole does not exist
Entire process is automated
Hot Original Glazed
The Red Light
Krispy Kreme U.S.
Krispy Kreme Worldwide
Krispy Kreme Stock
Opened on the NASDAQ on April 5, 2000 (KREM)
Bought Digital Java Coffee Company in April 2001
Moved up to the NYSE on May 17, 2001 (KKD)


Krispy Kreme Downturn
Low-carb, low-sugar
doughnuts
Increase cost in ingredients
Too many stores in too little
time
Lack of advertising has
caught up with KK



Krispy Kreme Finance
Iss 4/6/2000: $9.60
12/28/2001: $45.75
1/31/2003: $30.41
8/18/2003: $49.37
11/5/2003: $44.31
5/5/2004: $32.37
5/10/2004: $20.30
10/27/2005: $4.05
1/16/2007: $11.42
1/16/2008: $2.23

4/18/2008: $3.11
Krispy Kreme FinanceIncome Statement

2007 2006 2005 2004 2003
Revenue 461.2 543.36 707.77 649.35 490.73
Total Revenue 461.2 543.36 707.77 649.35 490.73
Cost of Revenue, Total 389.38 474.59 598.28 493.65 380.64
Gross Profit 71.82 68.77 109.49 155.7 110.08
Selling/General/Administrative Expenses, Total 48.86 67.73 55.3 45.23 30.07
Depreciation/Amortization 21.05 28.92 31.93 22.31 14.68
Unusual Expense (Income) 28.49 90.9 161.85 -0.53 9.08
Operating Income -26.58 -118.77 -139.6 88.68 56.26
Interest Income (Expense), Net Non-Operating -19.55 -23.44 -7.72 -5.85 -2.01
Other, Net 5.11 5.67 -0.06 0.16 -3.47
Income Before Tax -41.03 -136.54 -147.38 82.99 50.78
Income Tax - Total 1.21 -0.78 9.67 33.15 19.72
Income After Tax -42.24 -135.76 -157.05 49.85 31.06
Total Extraordinary Items 0 0 -41.29 -1.28 0
Accounting Change 0 0 -1.23 0 0
Discontinued Operations 0 0 -40.05 -1.28 0
Net Income -42.24 -135.76 -198.34 48.56 31.06
KK FinanceBalance Sheet (Asset)
2007 2006 2005 2004 2003
Assets
Cash and Short Term Investments 36.24 16.98 27.69 21.03 55.18
Cash & Equivalents 36.24 16.98 27.69 21.03 32.2
Short Term Investments 0 0 0 0 22.98
Total Receivables, Net 62.57 73.8 45.71 71.82 48.28
Accounts Receivable - Trade, Net 27.6 37.68 44.77 63.09 45.44
Accounts Receivable - Trade, Gross 29.51 39.18 40.64 46.09 35.83
Provision for Doubtful Accounts -2.75 -13.66 -11.38 -1.27 -1.45
Notes Receivable - Short Term 0 1.15 0.94 0.75 0
Receivables - Other 34.97 34.97 0 7.97 2.85
Total Inventory 21.01 23.76 28.59 29.82 24.37
Prepaid Expenses 0 0 0 0 3.48
Other Current Assets, Total 12 32.49 17.38 14.83 9.82
Total Current Assets 131.82 147.03 119.36 137.5 141.13
Property/Plant/Equipment, Total - Net 168.65 205.58 309.21 287.49 202.56
Goodwill, Net 28.09 29.18 32.69 197.16 0.2
Intangibles, Net 0.84 1.11 1.69 0 49.15
Long Term Investments 3.22 8.6 5.97 14.58 11.22
Note Receivable - Long Term 0 0.04 2.12 6.56 1
Other Long Term Assets, Total 16.86 19.32 9.23 13.31 5.23
Other Assets, Total 0 0 0 0 0
Total Assets 349.49 410.86 480.28 656.6 410.49
KK Finance Balance Sheet (L+S)
2007 2006 2005 2004 2003
Liabilities and Shareholders' Equity
Accounts Payable 7.87 8.9 17.44 19.11 14.06
Accrued Expenses 125.25 140.48 43.62 23.3 20.98
Notes Payable/Short Term Debt 0 0.11 8.48 8.12 12.28
Current Port. of LT Debt/Capital Leases 1.73 4.43 48.1 8.14 3.3
Other Current Liabilities, Total 0.02 0 0 0 9.08
Total Current Liabilities 134.87 153.92 117.64 58.67 59.69
Total Long Term Debt 105.97 118.24 90.95 137.11 57.19
Long Term Debt 105.97 118.24 90.95 137.11 57.19
Deferred Income Tax 0 0.85 3.91 0 9.85
Minority Interest 0 0 0.39 2.15 5.19
Other Liabilities, Total 29.69 29.18 26.45 22.26 5.22
Total Liabilities 270.53 302.18 239.34 220.19 137.14
Redeemable Preferred Stock 0 0 0 0 0
Preferred Stock - Non Redeemable, Net 0 0 0 0 0
Common Stock 310.94 298.26 295.61 294.48 173.11
Additional Paid-In Capital 0 0 -0.2 -0.38 -0.56
Retained Earnings (Accumulated Deficit) -233.25 -191.01 -55.25 143.09 102.4
Other Equity, Total 1.27 1.43 0.78 -0.77 -1.61
Total Equity 78.96 108.67 240.94 436.41 273.35
Total Liabilities & Shareholders Equity 349.49 410.86 480.28 656.6 410.49
KK Finance Cash Flow

2007 2006 2005 2004 2003












Net Income/Starting Line -42.24 -135.76 -198.34 48.56 31.06
Depreciation/Depletion 21.05 28.92 31.98 22.81 14.68
Deferred Taxes -0.01 -1.89 10.12 -3.49 0.06
Non-Cash Items 39.65 102.87 213.2 40.32 21.03
Accounting Change 0 0 1.23 0 0
Unusual Items 28.52 87.76 198.54 0.94 0.93
Equity in Net Earnings (Loss) -6.47 4.34 1.62 2.24 2.09
Other Non-Cash Items 17.6 10.77 11.8 37.14 18.01
Changes in Working Capital 3.66 7.73 27.97 -25.53 -14.92
Accounts Receivable 0.5 3.86 10.98 -18.73 -6.98
Inventories 2.56 4.12 2.14 -4.07 -8.52
Other Assets 6.85 -2.97 -4.06 -0.97 -0.33
Payable/Accrued -9.05 0.44 8.28 -7.12 0.74
Taxes Payable 0 0 7.97 1.03 0.57
Other Liabilities 2.8 2.28 2.65 4.32 -0.41
Cash from Operating Activities 22.11 1.87 84.92 82.67 51.91
Krispy Kreme Finance Cash Flow
2007 2006 2005 2004 2003
Capital Expenditures -4.01 -10.38 -74.31 -78.32 -81.7
Purchase of Fixed Assets -4.01 -10.38 -74.31 -78.32 -81.7
Other Investing Cash Flow Items, Total 16.64 -2.32 29.92 -91.63 -9.94
Acquisition of Business -2.9 0.43 -3.62 -108.4 -4.97
Sale of Business 2.5 2.54 0 0 0
Sale of Fixed Assets 9.66 7.33 28.66 0.46 2.14
Sale/Maturity of Investment 9.59 0 0 33.14 33.1
Purchase of Investments -0.82 -12.22 -3.47 -13.96 -41.14
Other Investing Cash Flow -1.4 -0.4 8.35 -2.87 0.93
Cash from Investing Activities 12.63 -12.7 -44.39 -169.95 -91.64
Financing Cash Flow Items -0.43 -1.57 -0.18 -1.96 1.4
Other Financing Cash Flow -0.43 -1.57 -0.18 -1.96 1.4
Total Cash Dividends Paid 0 0 0 0 0
Issuance (Retirement) of Stock, Net 0 0.15 1.18 19.52 7.14
Issuance (Retirement) of Debt, Net -15.05 1.55 -35.21 58.55 41.5
Cash from Financing Activities -15.48 0.14 -34.21 76.11 50.03
Foreign Exchange Effects 0 -0.01 0.34 0 0
Net Change in Cash 19.26 -10.71 6.66 -11.17 10.3
Net Cash - Beginning Balance 16.98 27.69 21.03 32.2 21.9
Net Cash - Ending Balance 36.24 16.98 27.69 21.03 32.2
Krispy Kreme Finance
Krispy
Kreme
Doughnuts
Starbucks
Tim
Hortons
Caribou
Restaurants
Industry
Specialty
Eateries
Industry
Market Cap: 201.84M 12.81B 6.29B 53.85M 204.46M 1.29B
Employees: 3,875 172,000 525 1,603 4.70K 759
Qtrly Rev Growth (yoy): -11.70% 17.50% 10.50% 5.20% 7.10% 20.90%
Revenue (ttm): 430.56M 9.82B 1.86B 256.83M 402.90M 1.07B
Gross Margin (ttm): 11.21% 57.24% 26.82% 16.13% 28.56% 32.41%
EBITDA (ttm): 19.00M 1.47B 461.55M 25.57M 41.75M 147.18M
Oper Margins (ttm): 0.10% 9.72% 20.42% -3.47% 5.72% 1.14%
Net Income (ttm): -59.65M 675.74M 264.34M -30.66M 8.81M -22.36K
EPS (ttm): -0.944 0.888 1.400 -1.586 0.59 N/A
P/E (ttm): N/A 19.89 24.22 N/A 19.92 23.91
PEG (5 yr expected): N/A 1 1.47 N/A 1.10 1.21
P/S (ttm): 0.47 1.31 3.45 0.20 0.54 1.21
Strengths of Krispy Kreme
Signature hot Original Glazed doughnut
People know Krispy Kreme
Hot light
January 28,2007, 395 Store worldwide, of
which 113 were owned, 282 were owned by
franchisees

Weaknesses of Krispy Kreme
Not flexible difficulties
reordering when non-Hot
light stores are sold out
Franchisees close stores
No other standout
products (weak menu)
Bad relations with
franchisees (cost of
equipment, packaging,
ingredients, etc)
Corporate Structure
(CEO retired)
Opportunities for Krispy Kreme
Reputation Fundraising program has helped
non-profit organizations raise millions of dollars
in needed funds
Worldwide sales
May steal back customers
Untouched domestic locations
Threats to Krispy Kreme
Dunkin Donuts, Tim Hortons, Starbucks, and
other National Chains/Specialty Eateries
KK stores went up too fast
Store locations too scattered
Increasing cost of ingredients
Increasing utility and fuel costs
What is the Problem?
How will Krispy Kreme return to profitability?

- Competitiveness
- Efficiency
- Franchisee relations
Critical Issues
Banks saved KK in 4/08 extending life of
loan agreement (interest rate higher)
New CEO in fiscal 2008
Highly competitive w/ Dunkin Donuts, Tim
Hortons and Starbucks
Focus on marketing
Closing of Franchises
Globalizing Krispy Kreme
Alternative 1
Close unprofitable stores, and focus on
other domestic areas and global market

A1 Advantages and Disadvantages
Advantages
Increase capital from
sold locations and
properties
Decrease loss
Develop new market


Disadvantages
Lose domestic locations
Lose foothold in certain
regions
Risk for international
locations
Increase cost for new
locations


Alternative 2
Diversify and expand product mix
Develop culturally oriented products
Redesign current product names and
descriptions
Redesign packaging (cups, wrappers,
bags, etc.)

A2 Advantages and Disadvantages
Advantages
Attracts new customers
Attractive to the
international market
More Competitive with
the market
May keep existing
customers
May increase items sold
per purchase
More efficient
More cost effective in the
long run

Disadvantages
New development and
packaging costs
New ideas may
discomfort old customers
Risk of not selling
Alternative 3
Themed doughnuts
Holiday doughnuts
Special order birthday doughnuts
Special event catering (wedding, etc.)
Krispy Kreme Club w/ emails, games,
coupons, events
A3 Advantages and Disadvantages
Advantages
Attractive young ages
Increase the holidays'
sale
Loyal customers will
increase
Increase the
customers' database
Disadvantages
Remodel the
production line
Increase the website
setup cost
Need to find more
workforce to support
new activities

Alternative 4
Develop Krispy Kreme Mascot
Formulate marketing strategy for mascot
and 2008 Beijing Olympics
Begin advertisements on TV and Radio
A4 Advantages and Disadvantages
Advantages
Increase the visibility on
market
Increase sales
Increase celebrity/icon
marketing possibilities
More helpful on
increasing the
international market

Disadvantages
A huge cost of
advertising expense
KK visibility is too low,
it may not have big
help
May be too late to plan
for Olympics
Olympic sponsors and
partners were chosen
years ago

Our Recommendation
Alternative 1

Unprofitability must be realized
Back to the basics
Avoid being greedy again
Grow slowly
Other alternatives may be implemented in
the future
Krispy Kreme Doughnuts, Inc



Marketing Case Analysis


Course: MBA 524
Instructor: Mary A. Higby



Date: April 22, 2008

Presented by: Jack Szczepaniuk
Chun-Chiang Chan



Sources

Krispy Kreme website www.krispykreme.com

The Triangle Business Journal www.bizjournals.com

Investopedia www.investopedia.com