Krispy Kreme Doughnuts

Krispy Kreme Doughnuts

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Krispy Kreme Donuts, Inc.
Since Krispy Kreme was founded in 1937, it has grown into a leading branded
specialty retailer, producing more than 5 million doughnuts a day and over 1.8 billion a
year. In addition to Krispy Kreme stores, their premium quality doughnuts are sold in
supermarkets, convenience stores and other retail outlets throughout the country. Best
known for their fresh, glazed, yeast-raised doughnuts, known as "Hot Original Glazed”,
Krispy Kreme also make more than a dozen other varieties of yeast-raised and cake
doughnuts. But the company is currently going through financial turmoil along with
possible earnings management.
Krispy Kreme Doughnuts recently announced that they are slashing 125-130 jobs,
the vast majority in Winston-Salem. The company is eliminating one-fourth of their staff
in order to cut costs. Also, they recently sold their corporate jet to a Wilmington company
for $30.5 million. It is evident that the donut empire is suffering from liquidity and cash
flow problems. Some investor argue that they didn’t see this coming because the once
highly profitable, ever expanding company, seemed incapable of fiscal failure. The
layoff shows that they have experienced a major downturn in the past year. Less than two
years ago, Krispy Kreme’s shares sold for $50 and are currently selling for $7.21. The
bottom line is that Krispy Kreme must revamp sales in order to increase cash flow or they
will not make it.
Their board of directors said that the downsizing would create an annual pretax
savings of about $7.4 million; they will take a restructuring charge in their fiscal first
quarter to pay for the work force reduction. The company also stated that selling the jet
will result in annual pretax savings of $3 million; but it will have to take a $300,000
charge in its current fiscal first quarter because of the deal.
Also in January, Krispy Kreme's long-term debt lenders contracted to extend for
two months to March 25, 2005, the date on which the company would be in default on its
$150 million credit agreement. This agreement restricts the company from borrowing any
money until repaid.
Kripsy Kreme is witnessing the results of a low-carbohydrate phase combined
with expanding too fast; plunging profit, crumbling stock price, its accounting is under
investigation by the Securities and Exchange Commission (because they have yet to file
quarterly reports that were due February 1,2 005), and it is the subject of various

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shareholder lawsuits.
On the positive side, Krispy Kreme fired their chief executive officer in mid-
January, and replaced him with a turnaround specialist (Stephen F. Cooper). With
acquisition of a new CEO, the company has hopes that it will experience a positive
corporate restructuring. Stockholders responded to this in a favorable manner, shown by a
10 percent increase in share price preceding the announcing of a new CEO.
It is pertinent to perform a SWOT Analysis for Kripsy Kreme, Inc. Their
strengths are as follows:

In order to regenerate sales and investor confidence I would make the following

recommendations for Krispy Kreme: use retained earnings, instead of franchises, to grow; only

accelerate growth were demand is highest; diversify and test new products (possibly low-

carbohydrate donuts); investigate smaller markets; increase global expansion; stay within brand

boundaries; and conduct fiscal matters in an ethical and GAAP appropriate manner.


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