'Krispy Kreme Doughnuts, Inc. Essay\r'

'Krispy Kreme Doughnuts, as discussed in Darden Business produce Case UVA-F-1479, appears to be at a crossroads. later on categorys of astronomical yield, the caller find its destiny price plummeting in the midst of discoveries about wrong(p) accounting practices. The following paper come acrosss several issues slowly the sudden adjust First, the historical in manage relations and equilibrium sheets ar examined to de bourneine the pecuniary health and sure chequer of the fellowship. This is followed by an analysis of key fiscal dimensions crosswise clip and versus industry standards. Next, the paper addresses if Krispy Kreme is pecuniaryly dandyly at course of instruction-end 2003 and, if so, what accounts for the quick’s novel shargon price decline. The paper concludes with a banter of the intrinsic investment set in the connection.\r\nIncome literary argument and Balance Sheets\r\nClose review of the income assignment leads to about noneworth y conclusions. The first quarterly column of the 2004 income statement attests that the company gained thirty-quartette billion dollars in cease ope balancens from the sale of the Montana move venture. In the same quarter the stiff lost almost twenty-four one meg million dollars. It is likely that this maneuver was collapse to deflect attention from or deal up for the company’s unequal performance and ascent in excepticees. Generally, this is not a sign of a sanguine company notwithstanding rather tapers an alarm since the loss in that quarter was closer to fifty-eight million dollars when not considering the sale. Krispy Kreme whitethorn fetch been struggling to make ends meet through its ope proportionalityns, and perhaps the company hoped to make up lost income through the sale of a venture.\r\nFurther much than, direct expenses were increasing while net income was decreasing. In whitethorn 2004, the company had seven million dollars in closing costs and still showed losses. An aggressive expansion strategy did not result in full income to cover these costs. Additionally, quarterly comps decreased dramatically. From May 2003 to May 2004, operating income dropped from $23,702 million to $18,636 million. This decrease is even more than pronounced when examining the quarters ending in August. Krispy Kreme’s oddment sheet is no less apocalyptical of poor fiscal health, disassembleicularly with a hard make up in year over year coarse-term li mogul figures. The two major contributors to this change magnitude in long-term liabilities include Krispy Kreme’s revolving lines of denotation and its long-term debt.\r\nFirst, the revolving lines of c carmineit greatly increased from zero in fiscal year 2002 to eighty-seven million dollars in fiscal year 2004, demonstrating a burgeoning dependance by Krispy Kreme on outside finance to have a bun in the oven ope balancens. Second, long-term debt increased from 3,912 mi llion in 2002 to 48,056 million in 2004. This anomalous and significant increase in long term debt could inculpatespirited that Krispy Kreme is having cark paying off its debt. After analyzing twain the income statement and balance sheet an initial assumption can me make that Krispy Kreme does not appear to be financially healthy. The near step of understanding this case is to determine how financial proportions extend our understanding of the abovel statements.\r\nFinancial Ratios\r\nThe following financial ratios were analyzed: quick ratio, genuine ratio, return on additions, return on equity, net gain ground margin, receiv equals overturn, neckcloth overturn, asset turnover, gold turnover, debt-to-equity, and times interest earned. These ratios ar included in a time series (Case Exhibit 7) raise and in a cross-section(a) chart of quick- work restaurants (Case Exhibit 8).\r\nTo begin, the time series ratios atomic number 18 detailed in Figure 1. Starting with the liquid state ratios we noticed some significance in the changes of the current ratio. The increases in the current ratio in 2003 and 2004 place that Krispy Kreme is borrowing over the long term, not the piteous term, resulting in an increase of cash affecting assets. The current liabilities would not be affected by this increase in cash or long term. This corroborates the balance sheet, as with the current ratio rise we recover a gain in cash and cash equivalents plus a gain in long term debt.\r\nFigure 1. Krispy Kreme Analytical Financial Ratios\r\nThe debt-to-equity ratio in 2003 and 2004 imply the company is similarly utilise more long-term debt from manageholder equity to untangle the company. In 2004, the balance sheet shows a chute in the number of share of common stock. The sell of more stock to pay for long term debt is not usually a good signal to investors. It may mean a corporation wants more cash to finance activities, which in conjunction with other figures could mean it is trying to offset some losses. A lower times interest earned ratio may besides mean fewer net income are avail fitted to meet interest payments and that the line of descent is more vulner commensurate to increases in interest rates. This ratio has declined dramatically since 2002. Negative findings of the company are patent when looking at the activity ratios.\r\nThe dues turnover ratio has been declining since 2001. This decline in receiv competents turnover implies that company is not being as efficient in the order of accounts owed as it should be. Not collecting the credit in a timely manner means that they are not gaining interest for the firm, but potentially gravid others a free loan for the time being. Furthermore, the asset turnover ratio for Krispy Kreme has been declining since the company went public in 2000. As seen in Figure 1, the ratio was at a high in 2000 at 2.10 and is not at 1.01 in 2004. This lower asset turnover ratio signals that the com pany is not doing well in development its assets to generate sales. The final subcategory in the time series ratio analysis are the favorableness ratios, which show some positive signs for Krispy Kreme. The return on assets ratio is relatively stable at 8.64% in 2004.\r\nKrispy Kreme is still doing relatively well by using current assets to generate income. Unfortunately, the return on assets has come down from a high of 10.33% in 2002, a signal to investors that Krispy Kreme is not ameliorating its use of assets to do income. However, the operating profit margin ratio displayed a steady increase for the company, resulting in more operating income for every(prenominal) dollar of sales. The increasing net profit margin overly shows Krispy Kreme is generating more profit for every dollar of sales. The change from 6.81% to 8.58% in 2004 shows that Krispy Kreme is now devising another 1.7 cents per dollar of sales. Examination of the financial ratios betwixt Krispy Kreme and its peers in the quick-service restaurant industry reveals a few key facts about the company’s financial state. Foremost is the relatively high liquidity indication of the corporation as measured by twain the quick and the current ratios.\r\nCompared to a respective mean of 0.80 and 1.17 for each aforementioned ratio, Krispy Kreme weighs in at 2.72 for the condition and 3.25 for the latter †approximately three times the average. As these figures measure a firm’s ability to pay bills in the short term without stress, it may not be farfetched to purport Krispy Kreme has liquefied many of its assets to gratify the doubts of short-term creditors. This band-aid solution may be short-lived, however, since current assets and liabilities are never a dependable tool for forecasting. Exorbitant liquidity also suggests an ineffective use of cash and other short-term assets and a lack of borrowing power. The other far-famed aspect of these industry ratios is the low level of turnover on both receivables and inventory.\r\nKrispy Kreme’s receivables turnover ratio of 9.70 is about four times smaller than the mean of 37.51 for most quick-service restaurants. This is possibly an indication of the firm’s inability to collect on its due bills. register turnover for the corporation is at a ratio of 17.76 versus the industry mean of 64.70, also about four times less than standard. Low inventory turnover can signify a poor focusing of said inventory. Combined with poor cash management, this spells trouble for investors. Nevertheless, there is a redeeming factor for the corporation, although given over the looming sale of several stores, it may not be one that lasts very long. The profitability ratios of Krispy Kreme are same to those within the industry, and a good set of such(prenominal) ratios is a reflection of how efficiently a firm uses its assets and how well it manages its operations.\r\nIn order for Krispy Kreme to make good on these numbers, it exit need to convince creditors of its long-term solvency and improve its turnover. At the end of fiscal year 2003, the financial health of Krispy Kreme is neither stellar nor abysmal. The company has several indications of future tribulations that it need to sort out, but from a financial stand occlusive it is relatively in good standing and could be said to continue the litmus test of profitability. Some symptoms it needs to examine include its acutely high short-term solvency. Does the firm find itself liquefying at an excessive rate to satisfy short-term creditors?\r\nIf so, the company needs to slew the outmatch of its operations and cut costs until longer-term loans are able to be secured. At that point, it may be able to grow again without the burden of investor and media hype. Furthermore, the firm needs to apply pressure to its debtors and try to improve its receivable turnover ratio. In this way, Krispy Kreme may be able to raise more capital and manage i ts assets more effectively. Finally, with the increased scrutiny and speculation concerning the company’s financial coverage, it should seriously address these concerns and restore investor self-assertion before stock prices continued to decline.\r\nStock wrong Evaluation\r\nGiven Krispy Kreme’s mixed financial health, what accounts for sharp decline in it’s share price? On May 27, 2004 Krispy Kreme announced poor results for the first time in its history as a public company. Earnings were down 10% due to the trend toward low carbohydrate diets, or at least as reported by the company . Krispy Kreme decided to divest Montana Mills for $40 million in stock and also planned to close three of its new caustic Doughnut and Coffee shops. The Wall Street journal published a negative story on the accounting principles that Krispy Kreme used for franchise acquisitions. The company also had to pay Michigan franchise’s blossom executive $5 million as part of a s everance package.\r\nOn July 29th, U.S. Securities and Exchange Commision (SEC) launched an cozy investigation on â€Å"franchise reacquisition’s and the company’s previously announced reduction in earnings guidance.” In September 2004, Krispy Kreme announced that it would reduce number of new stores from 120 to around 60. In the beginning of 2005, the company announced previously issued financial statements for fiscal year ended 2004 would be restated to emend certain errors.\r\nKrispy Kreme then delayed the filing of its financial reports until the SEC’s investigation had been resolved. Numerous problems, both salient and hidden, tarnished once-optimistic forecasts for Krispy Kreme, changing it from a solid company to a risk. Investors have now lost cartel and the share price has steadily dropped. Although the company’s actual financial health may have been more benign, public perception has been sullied nearly irreparably.\r\n intrinsical Inve stment Value\r\nBarring incisive and insightful financial analysis, there must be a source of intrinsic investment value in the company which can be gleaned from financial statements. The perceive quality and expectations of the investors hass a strong influence on this innate value. If the investors feel that a company bequeath be profitable the intrinsic value will likely increase and vice versa. Intrinsic value also has much to do with brand image, as in Krispy Kreme’s distinctive green and red vintage logo, it’s â€Å"Hot Doughnuts Now” northeast sign and the perceived quality of the doughnuts.\r\nThese accoutrements drive dealing and sales, two key indicators of a food service company’s health. Furthermore, the central Krispy Kreme retail concept, The milling machinery Store, is a prime contributor to intrinsic value. Krispy Kreme concept of â€Å"a doughnut theatre” illustrated by tailored machinery and doughnut viewing areas is a sign ificant point of distinction from its competitors by offering more than just a product but a fatten experience. These subtle differences add to the Krispy Kreme mystique, which adds a level of perceived quality.\r\nConclusion\r\nThe brief history of Krispy Kreme since its IPO in 2000, reveals a company that has already seen its ups and downs. These undulations characterize the growth of many such firms. Several conclusions on the state of Krispy Kreme Doughnuts can be drawn from the Darden School case. First, Krispy Kreme is a company that is moderately healthy, but seems to be turning for the worse. Second, a time series profitability ratios suggest good health, but peer-to-peer current and quick ratios show a startling scramble to meet short-term obligations. Third, in an era of high-profile accounting scandals, clandestine reporting practices scare off investors, leading to Krispy Kreme’s decline in share price. Finally, Krispy Kreme may be able to trade on its brand equ ity to leverage poor financial practices.\r\n'