Vernon Rudolph established Krispy Kreme Dougnuts (KKD) in 1937 in North Carolina as a single doughnut shop. By the turn of the millennium, KKD had grown in leaps and bounds. As of April 2000, the company shares were trading at 62 times earnings. As of April 2000, KKD had charmed Wall Street analysts with 80% of them recommending a buy. However, as of 2004, the glamour story of KKD started to fall apart.
Historical Financial performance
Exhibit 1 shows that KKD top line grew by 202.2% from $220,243,000 in 2000 to $665,592,000 in 2004. Net income grew by 858.48% from $5,956,000 in 2000 to $57,087,000 indicating that KKD was able to grow its revenue faster than its costs grew. The tremendous growth in revenue is mainly attributable to a rapid increase in stores. According to Exhibit 3, company stores increased from 58 stores to 141 stores representing a 143% growth over the period. Franchised stores increased from 86 stores in 2000 to 216 stores in 2004 representing a 151% increase.
Ratios analysis
Ratio analysis is important in helping to shed more light on the financial performance of the company in comparison to past performance (trend analysis) or in comparison t o peers (peer analysis).
Trend Analysis
Exhibit 7 indicates improving liquidity ratios, leverage ratios, and profitability ratios. However, KKD activity ratios seem to have deteriorated. The quick ratio and the current ratio improved from 1.05:1 and 1.39:1 in 2000, to 2.72:1 and 3.25:1 in 2004 indicating an improved ability of the company to meet its obligations as they fall due. The Debt-to-equity ratio declined for 42.96% in 2000, to 11.26% while the times interest earned increased from 7.11 times to 23.15 times indicating improved long-term solvency. The return on assets improved from 5.67% in 2000, to 8.64% in 2004. The Net profit improved significantly from 2.70% in 2000 to 8.58% in 2004. The return on equity improved marginally from 12.47% in 2000 to 12.62% in 2004.
However, the activity ratios deteriorated. Receivables turnover declined from 10.81 times in 2000 to 9.70 times in 2004 indicating that the company is taking longer to collect cash from its customers. Inventory turnover declined from 19.04 times in 2000 to 17.76 times in 2004 indicating that the company is holding increased inventory. The asset turnover fell from 2.10 times in 2000, to 1.01 times in 2004 indicating that the company is generating lower sales for every dollar in assets.
Peer Analysis
Exhibit 8 analysis KKD performance against peers, specifically, this analysis compares KKD to Starbucks, Papa John’s, and Sonic. KKD liquidity, leverage, and profitability ratios compare favorably with those of peers, however, KKD is lagging behind peers in the activity ratios. KKD has the lowest receivable turnover of 9.70 as compared to Papa John’s, Sonic, and Starbucks that have receivables turnover of 50.29, 27.49, and 38.44 respectively. KKD has an inventory turnover of 17.7s as compared to Papa John’s, Sonic, and Starbucks that have inventory turnover of 44.87, 111.24, and 10.58 respectively. KKD has an asset turnover of 1.01 as compared to that of Papa John, Sonic, and Starbucks of 2.57, 1.00, and 1.62 respectively.
Summary and conclusion
KKD aggressive accounting policies brings into doubt the truthfulness and fairness of its financial reporting. Consequently, the lost credibility is reflected in declining share prices. However, except for the decline in activity ratios, the other ratios indicate that KKD has strong fundamentals.
Recommendations
Increase the receivables turnover by faster collection of cash from customers
Increase the inventory turnover by better management of inventory such as the use of EOQ models or Just In time techniques
Increase the asset turnover either by increasing the sales or selling unnecessary assets
