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Krispy Kreme Case Memo

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Submitted By rhodessa
Words 303
Pages 2
TO: John Ivankoe
FROM: Gussie Rhodes DATE: January 5, 2005
SUBJECT: Krispy Kreme Doughnuts Financial Analysis and Stock Recommendation

Krispy Kreme Doughnuts, Inc. recently announced a restatement of last year’s financial statements. Since its peak in August 2003, KKD stock has declined more than 80% in price as the result of the restatement announcement and allegations of accounting misrepresentations. It seems that this would be a good opportunity to buy KKD stock while the price is below $10 for such a fast-growing company. However, careful examination of the company’s financial data and its business strength reveal that this stock is not superior enough to other investments or in a position to continue to grow at a rate to make it an attractive investment for J.P. Morgan.
Krispy Kreme’s financial statements report extremely strong growth from 2000 to 2004; revenue grew 31.8% annually, and net income grew 71.6% annually. Although overall sales increased from 2003 to 2004, this growth was largely from new stores. The income from operations in quarters ending May 2, 2004 and August 1, 2004 indicate a $79.6 million run rate, which is a 22% decline from $102.1 million for year ending February 2004. Income from existing stores continues to decline, as new growth comes from new store openings. The number of new store openings cannot remain high forever; Krispy Kreme’s strategy does not provide for sustainable growth. The balance sheet shows an increase of long-term debt from $3.9 million in 2002 to $49.9 million in 2003. Although the TIE of 23.15 indicates that Krispy Kreme should be able to handle this debt, it is important to consider why the company took it on. As management was under notable pressure to meet earnings guidance and investor expectations, they were driven

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