How will the Krispy Kreme Doughnuts Inc. fix the large drop in the market value?

(A Case Study regarding Managing Maturation)

by Rebecca Marian L. Aguilar

I. Time Context

This case considers the sudden and very large drop in the market value of equity
for Krispy Kreme Doughnuts, Inc., associated with a series of announcements made
in 2004. Those announcements caused investors to revise their expectations about
the future growth of Krispy Kreme, which had been one of the most rapidly growing
American corporations in the new millennium.

II. Point of View

The company has stated that it has done nothing wrong. A spokeswoman said
executives could not speak with BusinessWeek because of the SEC probe. But in a
July 29 press release, Scott A. Livengood, chairman, chief executive, and president,
said: "Krispy Kreme has no higher priority than the confidence of our shareholders,
customers, and employees. We are confident in our practices."

III. Short Background of the Company

1937. We opened our doors on July 13, 1937.

Vernon Rudolph bought a secret yeast-raised doughnut recipe from a New
Orleans French chef, rented a building in what is now historic Old Salem in Winston-
Salem, North Carolina and began selling Krispy Kreme doughnuts on July 13, 1937 to
local grocery stores. The delicious scent of cooking doughnuts drifted into the
streets, and passers-by stopped to ask if they could buy hot doughnuts. So, he cut
the hole in an outside wall and started selling hot Original Glazed doughnuts directly
to customers on the sidewalk.

40s & 50s. Improving the doughnut making process through innovations.
By now there was a small chain of stores, mostly family-owned. They all used the
Krispy Kreme recipe, but each store made its doughnuts from scratch. For Rudolph
and Krispy Kreme, the results were always good but not consistent enough. So
Krispy Kreme built a mix plant and developed a distribution system that delivered
the perfect dry doughnut mix to each Krispy Kreme store. Then Rudolph and his
equipment engineers invented and built.
Krispy Kreme’s own doughnut-making equipment. From the 1950s on, they
focused on improving and automating the doughnut-making process.
 60s & 70s. Our stores are familiar gathering places for friends.
During the 1960s, Krispy Kreme enjoyed steady growth throughout the
Southeast and began expanding outside its traditional roots. The design of Krispy
Kreme stores became consistent including the hallmark green tile roofs and heritage
road signs. Veron Rudolph, our founder, died in 1973, and growth slowed as the
company was reorganized for sale to Beatrice Foods Company in 1976.

80s & 90s. The hot doughnut experience…everyone was talking about us!
In 1982, a small group of our early franchisees bought KRISPY Kreme back from
Beatrice Foods. A renewed focus on the hot doughnut experience became a priority
for the company. Krispy Kreme began to expand outside the Southeast and opened
its first store in New York City in 1996. Soon afterward, in 1999, the first store in
California opened and national expansion was well underway. When Krispy Kreme
turned 60 years old in 1997, it was officially recognized as a 29th century American
icon with the donation of company artifacts to the Smithsonian Institution’s National
Museum of American History.

Today. Expansion, Innovation, extending the Krispy Kreme experience.

In April 2000, Krispy Kreme held an initial public offering of common stock. It
opened the first international store in Canada just outside of Toronto in December
2001. The first stores outside North America opened in Sydney Australia and in
London, England in 2003. Since then, Krispy Kreme stores have opened in Asia,
Mexico, the Middle East, Puerto Rico and Turkey. Our international expansion is
continuing and in addition, we are working on new tasty products. We are very
excited about our future. Stay tuned for more innovative things to come!

IV. Statement of the Problem

Krispy Kreme Doughnuts Inc. (KKD) investors have plenty to chew on these days,
and it's giving them indigestion rather than a pleasant sugar surge. Since the
company warned in May of disappointing profits and then announced in July that
the Securities & Exchange Commission was conducting an informal inquiry into its
accounting, the once-hot stock has been in the doldrums. It trades at around $15 a
share, down from nearly $50 last August.

More nasty surprises could be in store for shareholders in the Winston-Salem

(N.C.) chain as the SEC probe gets going. Consider the way Krispy Kreme accounts for
the franchises it buys back, on which it has spent nearly $150 million over the past
year. Because much of the outlay pays for property, plant, and equipment, most
food chains amortize this cost over several years. Krispy Kreme doesn't. Company
documents show it has been booking most of the spending as so-called intangible
assets, which don't have to be amortized. The result: Krispy Kreme's reported
earnings are higher than they would have been had it written them off. "Krispy
Kreme's accounting for franchise acquisitions is the most aggressive we've found,"
says Robert Miceli, analyst at Scottsdale (Ariz.) Camelback Research Alliance.

The company has stated that it has done nothing wrong. A spokeswoman said
executives could not speak with BusinessWeek because of the SEC probe. But in a
July 29 press release, Scott A. Livengood, chairman, chief executive, and president,
said: "Krispy Kreme has no higher priority than the confidence of our shareholders,
customers, and employees. We are confident in our practices."

The accounting treatment isn't the only potential problem with the acquisitions.
Krispy Kreme didn't disclose that one of the owners of a Northern California
franchise it bought earlier this year was Livengood's ex-wife. Nor did it identify two
of the owners of the Dallas and Shreveport, La., franchises acquired last year as the
brother and cousin of a senior executive. Krispy Kreme has said it believes it wasn't
required to under SEC rules. But, says Sanjai Bhajat, a professor of finance and
corporate governance at the University of Colorado: "These kinds of relationships
should be disclosed."

The prices paid for some of the company's acquisitions have also raised
eyebrows. Krispy Kreme shelled out $67 million in cash for the Dallas and Shreveport
franchises, a total of six stores. That's more than $11 million a store. Just months
before, Krispy Kreme was paying an average of $6.5 million a store.

Questions about accounting started to hit Krispy Kreme as its growth appeared
to stall. Sales for stores open more than a year grew just 4% in the first quarter
ended May 2, a fraction of the 20% growth rate of three years ago. When the
company gave its first-ever profits warning in May, it blamed the low-carb craze for
hurting sales. The explanation doesn't ring true to all observers, who note that other
doughnut chains haven't been hit.

Krispy Kreme has been fighting back. In a July 14 presentation to investors, Chief
Financial Officer Michael C. Phalen said the chain still had tremendous potential for
growth. It has just $3.28 a year in revenue for each U.S. resident, half to a third of
the per-capita revenue at Dunkin' Donuts (AED) and International Dairy Queen Inc.
(BRK) Chief Operating Officer John Tate outlined a string of new products to be
introduced over the next year such as frozen beverages, coffee beans, and mini- and
sugar-free doughnuts. Tate said Krispy Kreme also plans to expand to Europe, Japan,
South Korea, and China.

Largely because of all the franchise acquisitions, Krispy Kreme's debt has shot up
from $22 million to $135 million in the past four years. Fixing its business back home
-- and not borrowing to expand -- may be the wisest move if Krispy Kreme wants to
reassure its nervous investors.
V. Areas of Consideration (SWOT Analysis)

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STRENGTHS
1. Well-known brand
2. Signature hot donuts
3. Nationwide expansion
4. Reduced labor costs
5. Experienced management
6. Domestic market is large
7. Government provides monetary assistance
8. High profits
9. Skilled workforce

WEAKNESS
1. Unhealthy

2. Falling sales

3. Expanded too fast

4. Market shares are low

5. Low profitability

6. Too many taxes

7. Small business
8. Health conscious market

OPPORTUNITIES
1. Build a healthier menu
2. Expand to new markets
3. Improve franchises
4. Growing demand
5. Income level is at a constant increase
6. New markets
7. New acquisitions
8. Global reach of business
 THREATS
1. Competition from other chains

2. Rising gasoline prices

3. Low cash flow

4. Increase in labor costs

5. Limited financial capital

6. Increasing rates of interest

7. Tax changes

8. Rising cost of raw materials

9. Price changes

10. High competition

11. Health conscious market

VI. Alternative Courses of Action

Krispy Kreme Doughnuts is one of the leading companies when it comes to

doughnuts and coffee. Other companies consider them as one of the big threats and
competition, that’s why they must be very careful in every step they’ll do because
one small mistake can make the company down.

1. Competition - Krispy Kreme, as a brand, is so strong that could help them

maintain their position in the market.
2. System Development - They should develop their system in order to monitor
what’s happening inside the company.
3. Sales Promotion - In order to cover the loss, Krispy Kreme should make an
extra effort in selling their products.

VII. Conclusion and Recommendation

Issues with their financial management systems which have resulted in unclear
and unauditable financial reports, have dealt a major blow to investor confidence,
which only compounds the financial problems with which the company is dealing.
Lack of investment in and innovative approaches to their marketing strategies have
left the company without good, solid marketing plans for their recovery and future
development. Assumptions have continued to be made about customer desires,
without appropriate data to back up those assumptions. Assumptions also continue
to be made about supply chain and other company operating methods.

Of all the action plans suggested, I mostly recommend the competition because
it’s the best way to be on top. They just need to work hard for it and keep their
name on top.

Krispy Kreme Doughnuts is one of the leading companies when it comes to doughnuts
and coffee. Other companies consider them as one of the big threats and competition,
that’s why they must be very careful in every step they’ll do because one small mistake can
make the company down.

When it comes to doughnuts and coffee, Krispy Kreme Doughnuts is one of the leading
companies. KKD is one of the biggest threats and competition among in the industry. Thus,
competitors are highly cautious with their competitive strategies. In this case, the group
recommends that Krispy Kreme Doughnuts continue with its aggressive expansions to the
global market by investing in equity-financed capital to fund it. Some Krispy Kreme stores
experience net loss making it difficult for the company to pool investors as confidence and
trust deteriorated. Yet, there would still be investors who will take the risk of investing,
especially when

Although issuing new shares may affect the influence of the present shareholders, it
may reduce the risk of default by avoiding heavy reliance on debt financing since the
company is struggling to manage cash flows from operations. This decision is in congruence
with the company’s goal to continue its market dominance, and it would be feasible by
continuing the.

By pursuing these plans, the company may be able to expand its market reach while
sustaining operational efficiency in the long run