Krispy Kreme’s Dilemma

Preston Bass
David Braziel
Tyler Bullock
Adam Hefton
Ryan Tarrant

Corporate Finance 4360
Dr. Steve Rich

Table of Contents

Executive Summary 3
Introduction 4
Purpose, Scope and Limitations 4
Sources and Methods of Literary Search 5
Report Organization 5
Krispy Kreme’s Dilemma 6
Krispy Kreme’s Current Solutions 9
Recommendations 11
Appendix 1: Corporate Overview 14
Appendix 2: Graphs 17
Appendix 3: Income Statement 18
Appendix 4: Revenue Chart 19
Bibliography 20

EXECUTIVE SUMMARY

The purpose of this report is to evaluate the current situation of Krispy Kreme Doughnuts, Inc. and to discuss the reasons for such status. We will also look at current strategies the company is taking to better the situation, and finally, submit some of our own recommendations for ways to maximize potential at Krispy Kreme.

Currently, Krispy Kreme faces many obstacles in operations and capital structure. Recent SEC filing discrepancies have added to the existing lack of optimism among stockholders. In addition, it appears that the money from loans made by the company to franchises has not been repaid at any type of acceptable rate. One major reason for the decline in franchise sales is that Krispy Kreme has oversaturated the market. This is made evident by nearly a 20% decrease in same store sales for the last quarter of fiscal 2004. Also, the company has doubled its number of stores to nearly 150 from the 70 of three years ago. They have also made large investments in off premise sales in convenient stores, supermarkets, etc.

Krispy Kreme has begun to take positive action in recovering from recent hardships. Starting at the top, the company hired Stephen F. Cooper to take over as CEO in hopes of energizing recovery efforts. Specifically, Krispy Kreme has started to buy back franchises, slowed expansion significantly, and closed or relocated many unprofitable stores. Another successful effort so far has been Krispy Kreme’s expansion into foreign markets. In fact, the foreign markets have sustained growth in total revenue for the company in first quarter fiscal 2005 despite a considerable loss in total revenue from fourth quarter fiscal 2004.

After evaluating the current situation at Krispy Kreme and analyzing the steps management has taken thus far in improvement efforts, we have come up with a few suggestions we feel will increase brand equity and stimulate free cash flows. First of all, Krispy Kreme should halt expansion in developed and over-developed marketing channels. This includes pulling out of the truck stop and grocery store channels which will reduce costs, and close stores that are returning no profit. This will conceivably bring the company back to the physical status it had when it was performing its best. Conversely, we encourage Krispy Kreme to continue expansion in to new markets; especially foreign markets which have proved profitable thus far. Bankruptcy does not seem to be a viable option in this situation. Reorganization would be the only possible benefit. One last possible option, not the most recommended, would be for the company to sell all accounts receivable in order to increase cash and decrease the risk of not getting repaid by unaccountable franchise owners.

The possibility of recovery for Krispy Kreme is feasible. The key is to take small steps to get the company back on its feet. From there, ownership can start efforts to pay off debt, increase sales, and initiate other activities that will return Krispy Kreme to its once superior status.

KRISPY KREME’S DILEMMA

Introduction
Krispy Kreme Doughnuts began on July 13, 1937, in Winston-Salem, North Carolina, when founder Vernon Rudolph started selling his unique doughnuts to local grocery stores. Rudolph acquired the secret recipe from a French chef in New Orleans and after half a