The Fall of Krispy Kreme Donuts

MBA 6154 - Dr. Plath
By:
Jon Plyler
Luke Sagur
Introduction

Since its IPO in April 2000, Krispy Kreme grew to be a top pick of Wall Street Analysts. The company’s growth seemed unstoppable and Krispy Kreme was able to beat Wall Street’s expectations. Krispy Kreme continued to outperform until 2004 when some accounting woes were brought to light and analysts starting noticing other anomalies that indicated that things were not quite as good as they seemed. The firm’s stock price quickly plummeted from its peak and lost more than 80 percent of its value in only 16 months.

This case study focuses on the use of financial statement analysis, and other factors that an equity analyst would use to gauge the health of a firm, to help identify symptoms that demonstrate things where not as good as they seemed at Krispy Kreme. The report starts by introducing Krispy Kreme, their history, structure and strategy. We will then discuss Krispy Kreme's financials and other tell tales that were available to predict the demise of the firm. To wrap up the report we will conclude by summarizing all the signs that demonstrated things were amiss and answer the question: "Can financial statement analysis predict the future?"

Krispy Kreme History

Krispy Kreme began as a small business in Winston Salem, North Carolina in 1937 shortly after the company’s founder, Vernon Rudolph, purchased a doughnut recipe from a French chef from New Orleans. Krispy Kreme was initially a doughnut wholesaler that sold its products directly to supermarkets. Krispy Kreme doughnuts were such a hit with consumers that Rudolph decided to make them available at the factory, an idea that led to what many people find so appealing about Krispy Kreme, the factory store concept. Rudolph franchised the business which helped Krispy Kreme to spread into 12 states