Annual Report
Krispy Kreme
Quintina R. Walker
ACG2021-080
Executive Summary
– Although I love eating hot
original glazed doughnuts as
an investor I would be
reluctant to purchase stock
with this company. From the
looks of their annual report the
company looks like it is
thriving in most areas, but they
are currently in the process of
restating its earnings for fiscal
2004. The company is being
scrutinized because of
allegations that they padded
sales figures in 2003 and 2004.
– www.krispykreme.com
Part A. Introduction
• CEO: Scott Livengood
• Home Office: Winston-Salem,
North Carolina
• Ending date of last fiscal year:
February 1, 2004
• Principal products: Over 20
varieties of doughnuts
(including Hot Original
Glazed), coffee, and collectibles
• Main Geographic Area: 45
states in the U.S., Canada,
Australia, Mexico, and the
United Kingdom
Part A. Audit Report
• Krispy Kreme’s independent auditors: Pricewaterhouse Coopers LLP
• The auditors say that the company presented their financial statements
in a fair manner and they are in accordance with generally accepted
accounting principles.
• Pricewaterhouse Coopers LLP jeopardized their own integrity because
they either ignored or agreed with unethical reports of the companies
earnings. Witnesses say the company sent double orders on the last
Friday or Saturday of the quarter and of the 2004 fiscal year to boost
sales in order to meet Wall Street projections.
Http://www.forbes.com/associatedpress/feeds/ap/2005/01/04/ap17367
58.html
Part A. Stock Market Information
• Most recent price of the company’s stock: $9.05
• 12 month trading range: $8.92-8.65
• Dividend per share: $0.00
• Date of information: January 21, 2005
• Krispy Kreme as an investment according to the information in
the annual report I would HOLD.
• Krispy Kreme as an investment according to recent
investigations of their accounting principles I would SELL.
• Additionally, three of the company’s top officers, including the
CEO, dumped 475,000 shares of KKD stock for $19.8 million
Part B. Industry Situation and Company Plans
• The industry is not looking so good for Krispy Kreme at the present time. The
company has had decreasing sales for the past 2 years, which coincidentally
fab low-carb diets have been on the rise. The company tried to hide for a year
this decline in sales by doubling the number of doughnuts delivered to
wholesale customers at the end of fiscal quarters and then having the
doughnuts shipped back after the quarter ended.
• Due to revised earnings reports Krispy Kreme reports that they are potentially
in default of a $150 million credit line. The company is also unable to borrow
additional money.
• The company plans to build additional retail factory stores, increase their
presence in off-premises locations, and do more fundraising. Krispy Kreme
reports that making their doughnuts available in off-premises locations such as
convenience stores and grocery stores is better for sales, but an article in
Forbes argues that this strategy only saturated its market.
Part C. Income Statement
02/01/04 02/02/03
Gross Profit 158.2 110.1
Operations Income 102.1 59.8
Net Income 57.1 33.5
The gross profit showed a healthy increase from 2003 to
2004. Income from operations nearly doubled during this
period. Net income also increased substantially.
Part C. Balance Sheet
Assets = Liabilities + Owner’s Equity
2003 410.5 = 137.1 + 273.4
2004 660.6 = 208.5 + 452.2
Generally, all of the accounts increased from 2003
to 2004. Assets, Liabilities, and Owner’s equity
all averaged about a 60 percent increase.
Part C. Statement of Cash Flows
• Cash flows from operations
were more than net income for
the past two years.
• The company has a negative
balance in their cash account
from investing activities.
• Krispy Kreme’s most important
source of financing is the
issuance of debt.
• Overall cash has decreased over
the past 2 years.
Part D. Accounting Policies
• Cash and Cash Equivalents- company considers cash on hand, deposits
in banks and all highly liquid debt instruments with a maturity of three
months or less at date of acquisition to be cash and cash equivalents.
• Inventories are recorded at the lower of average cost (first-in, first-out)
or net realizable value.
• Investments consist of United States Treasury notes, mortgage-backed
government securities, corporate debt securities, municipal securities
and c.o.d.s
• Property and equipment are stated at cost less accumulated
depreciation.
Part D. Accounting Policies
• Revenue Recognition
• Company Store Operations- revenue is recognized at the time of sale for on-
premises sales. For off-premises sales, revenue is recognized at the time of
delivery.
• Franchise Operations Revenue- development and franchise fees are charged
for certain new stores and are deferred until the store is opened and the
Company has performed all of the initial services it is required to provide.
• KKM&D revenue is derived from the sale of doughnut-making equipment,
mix, coffee, etc, and is recognized at the time the title and the risk of loss pass
to the customer, generally upon delivery.
• Montana Mills revenue is derived from the sale of bread and other baked
goods and is recognized the same as company store operations revenue.
Part E. Financial Analysis
Liquidity Ratios
2004 2003
• Working capital increased from Working 85,151 81,441
Capital
2003-2004
Current 2.59 2.36
• Krispy Kreme appears to be using Ratio
its assets more effectively in 2004 Receivable 10.83 11.56
than 03. Turnover
Avg. days’ 33.7 31.6
• It took the company longer to sales
collect on accounts receivable in uncollected
2004. Inventory 19 18.8
turnover
• Over the past couple of years the
Avg. days 19 days 19 days
company has been able to sell it’s inventory on
inventory on hand in about 19 days. hand
Part E. Financial Analysis
Profitability Ratios
• Krispy Kreme’s profit
2004 2003
margin increased by 2%.
• Asset turnover decreased Profit .09 .07
from 1.4 to 1.2 times. Margin
• The company’s earning Asset 1.2 1.5
Turnover
power stayed around 10%.
Return on 10% 10%
• The profitability of Assets
stockholder’s equity
Return on 16% 15%
investments increased Equity
from 15% to 16%.
Part E. Financial Analysis
Solvency Ratio
• Debt to equity decreased slightly from .50
in 2003 to .46 in 2004.
• About one-third of the companies assets are
financed by creditors.
Part E. Financial Analysis
Market Strength Ratios
• According to hoover.com the earnings per
share was $0.56 in 2003 and $0.92 in 2004.
• Krispy Kreme had no dividend yield
because they have not paid dividends in the
past 3 years.
The End