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Krispy Kreme Group Inc. Financial Analysis

The US Restaurant Industry

The restaurant industry is among the most important sectors in the US economy. As stated by the National Restaurant Association, the restaurant industry is the largest private employer. The National Restaurant Association projected that in the year 2012, the industry’s sales will increase to $600 billion. The $600 billion is an equivalent of 4% of the United State’s GDP. According to various analysts in the restaurant industry, it has been proved that about a quarter of Americans had their first careers in the restaurant profession. Currently, the industry employs about 13 million people, which is approximately 10% of the US workforce.

The US market is characterized by several competitive restaurants that earn high profits as compared to many firms in other industries. The top performers in this industry include White PLC, Greene King PLC, Mitchells & Butlers PLC, McDonald’s Corporation, as well as Domino Pizza UK & Ireland PLC. Other competitive firms in the restaurant industry include Dunkin Brands Group, Einstein Noah Restaurant Group, and Starbucks Corporation. Krispy Kreme competes with the above-mentioned firms in diverse markets located within the boundaries of the US.

McDonald’s Corporation, which operates at the global level, is the largest restaurant since its market capitalization is currently measured at 99.88 billion. The share price of McDonald’s is valued at $98.03, which is far much less as compared to that of Greene King PLC and Whitbread PLC. Whitbread PLC is the second largest firm in this industry given that it has a market capitalization of 3.27 billion. Its share price has also the highest value in the market given that its current value stands at $1,844 per share. Greene King PLC and Mitchells & Butter PLC follow in the third position with a market capitalization of 1.1 billion each.

Greene King PLC’s market capitalization is $513 while that of Mitchells & Buttlers PLC is $270.2. Among the top five companies in the restaurant industry, Domino Pizza UK & Ireland PLC has the lowest market capitalization. The company’s share price is $442.86 while its market capitalization is valued at 715.21 million. Behind Domino Pizza UK & Ireland PLC is Krispy Kreme Doughnuts with a market capitalization of 508.34. The company’s shares trade at the lowest value of $7.33.The restaurant industry is very promising considering that in the year 2011 all companies had quarterly revenue growth of more than 8%. Dunkin Brand Group experienced a quarterly growth rate of 12.5%. In the year 2011, Dunkin Brand Group closed the financial period with a net income of 34.4 million

KKD DNKN BAGL SBUX Industry
Market Cap: 508.34M 3.60B 252.74M 42.20B 601.82M
Employees: N/A 1,199 6,506 149,000 8.25K
Qtrly Rev Growth 11.20% 12.50% 8.60% 16.40% 8.90%
Revenue 403.22M 628.20M 423.60M 12.19B 487.11M
Gross Margin 14.08% 80.23% 21.51% 56.89% 28.48%
EBITDA 34.60M 263.37M 44.36M 2.14B 79.54M
Operating Margin 6.54% 33.56% 5.93% 12.98% 7.78%
Net Income 166.27M 34.44M 13.20M 1.28B N/A
EPS 2.33 0.35 0.78 1.67 0.43
P/E 3.14 84.76 19.23 33.54 21.08
PEG (5 yr. expected): 1.04 1.64 0.81 1.60 1.22
P/S 1.27 5.76 0.60 3.45 1.05

Where,

  • DNKN = Dunkin’ Brands Group, Inc.
  • BAGL = Einstein Noah Restaurant Group, Inc.
  • SBUX = Starbucks Corporation
Top Restaurants Companies by Market Cap
Company Symbol Price Market Cap P/E
Whitbread PLC WTB.L 1,844.00 3.27B 1,220.38
Greene King PLC GNK.L 513.00 1.10B 1,073.22
Mitchells & Butlers PLC MAB.L 270.20 1.10B 885.90
McDonald’s Corp. MCD 98.03 99.88B 18.60
Domino’s Pizza UK & Ireland PLC DOM.L 442.86 715.21M 2,700.37
Krispy Kreme Doughnuts, Inc. KKD 7.33 508.34M 3.15

Krispy Kreme

Krispy Kreme is an international chain of doughnut stores that is based in Winston, North Carolina. The company started its operations in 1937 in a building that is today known as the Old Salem district. Vernom Rudolf, the founder of this organization, began the operations of the restaurant in Wenston Salem, a region found in North Carolina. Currently, the company trades its shares in the New York Stock Exchange using the ticker symbol KKD. Since its inception, Krispy Kreme is known for its quality doughnut. In the US, Krispy Kreme sells its products in-store locations, gas stations, grocery stores, supermarkets, and Wal-Mart, among other places.

Before Krispy Kreme went public, the company recorded a high growth that was attributed to strongholds in South Carolina. However, after the company began trading its shares in NASDAQ and later in NYSE, its shares were progressively indicating signs of decline. Although the company operated within the borders of the US, the company today claims a substantial part of the international market. Krispy Kreme has business segments in several countries including the Philippines, Japan, England, and Canada. Although the restaurant industry has become very competitive in the contemporary world, Krispy Kreme managed to record a profit amounting to $7.6 million at the end of the year 2011. With 3,700 employees, the company’s revenue stood at $362 million at the end of the financial period 2011. The company continues to specialize in doughnuts, soft drinks, hot drinks, and sausage.

Competitors

Direct Competitor Comparison

Initial Public Offering and the accounting Scandals

The company began trading its shares in the NASDAQ stock exchange using the ticker symbol KREM. However, in mid-2001, the company enlisted its shares in the NYSE using the ticker symbol KKD. The shift from the NASDAQ to New York Exchange led to miserable events that surrounded its operations. The company lost almost 80% of its share value by the end of the year 2005. The loss of stock value was associated with the company’s decline in earnings. The loss of the equity value was also attributed to the SEC investigation, which was conducted to confirm allegations concerning the accounting malpractices.

Given that the company went public in the year 2000, it is no doubt that this was the first time the company lost its stock value as a public company. Although the Chief Executive Officer of Krispy Kreme claimed that the company suffered the loss because of the low carbohydrate diet craze, a good number of analysts dismissed the statement since other similar companies in the industry did not suffer the low carbohydrate tendency within the same duration. An example of a doughnut chain that did not suffer the same trend includes Dunkin Donuts.

According to the CEO, the company had expanded hastily following the IPO. This encouraged the chain to concentrate on coming up with various stores in the market. The Chairman stated that the rapid expansion initially contributed to substantial profit. However, there was stiff competition between franchisees that were primarily competing for profitability. Although the company grew at the parent level due to the royalty payments made to the parent company by franchisees, the new franchisees continued to record declines in sales. Notably, in 2004, the parent company experienced an increase of 15% in revenues while the franchisees only witnessed a 10% increase.

Other companies in the restaurant industry focused on increasing profitability at the franchise level. Such restaurants in the industry included McDonald’s. Various analysts claim that supermarkets and gas stations contributed to the Krispy Kreme saturation in the market. This is because the stiff competition was created amongst the new franchisees. As a result, Krispy Kreme’s strong brand image lost its popularity.

Apart from the royalty payments made by the new franchisees, the parent company realized substantial revenues through instructing the stores to buy the doughnut-making apparatus from the headquarters where the parent company is located. The franchisees were required to acquire pieces of equipment that could be used in production from the parent company. These pieces of equipment were to be purchased from the Krispy Kreme division commonly known as the Manufacturing and Distribution division. In total, the Manufacturing and Distribution segment earned Krispy Kreme an amount worth $152.7 million.

The annual report indicated that the Manufacturing and Distribution segment contributed to 31% of the total sales made by the company. However, the sizeable revenue was gained at the expense of the franchisees. In contrast, other chains in the industry such as Mcdonald’s avoided selling materials to their franchisees. Several concerns regarding the rights of franchisees were aired in various media. The media alleged that the interest of both the parent company and the franchisees should be aligned to ensure openness. Krispy Kreme was accused of questionable business deals and transactions.

Further Analysis of Krispy Kreme Accounting Scandals

Krispy Kreme had become an attractive company for the majority of the shareholders after it went public in the year 2000. In November 2001, the company’s shares had hit a value of $108.5. However, the management considered splitting the stock into two. This meant that every share was valued at a new price of $54.25. During the investigation that was carried out by the US Securities and Exchange Commission, the company’s financial strength began to weaken. It was in March when the Securities and Exchange Commission ordered three executives to pay a total amount of $783,000 for displaying accounting misconduct. The three top executives included Mr. Scott Livengood, who managed the affairs of the company as a CEO, chairperson, and president. The two other executives were Randy Casstevens, the CFO, and John Tate, the chief operating officer (COO).

The inflated sales

The company was accused on several occasions of issuing false financial statements that misguided the public. Both the former chief operating officer and the chief financial officer were alleged to have participated in the delivery of over 470,000 shares of the company’s equities for a figure amounting to $19.8 million. In contrast, the public was aware that the company’s sales were declining at a high rate as at the end of the year 2004.

One of the employees of Krispy Kreme provided the SEC with some information regarding orders that were shipped to various customers and retail premises. According to the employee, the company had double-shipped orders to customers on five occasions. During the fiscal year of 2004, one of the Krispy Kreme managers was witnessed instructing employees to deliver double orders to retail customers. However, the doughnuts were to be returned for credit early the following year. These transactions were made at the end of the year to meet the estimates outlined by Wall Street.

Several analysts in the industry argue that the auditing company, Price Water House-Coopers, should have known that there was a connection between the high volume of sales at the end of the year and a similar amount of credit in the following year. Large monthly variations should also have given PWC a clue of accounting malpractices displayed by the management.

Accounting irregularities

There were some suspicions over the inflation of profit after Krispy Kreme purchased back a Michigan franchise for $32 million at the end of the year 2004. The Price Water House-Coopers had rejected signing off the quarterly based results. The US Security and Exchange Commission accused the PWC of failing to identify malpractices concerning the inflated sales. If the PWC had signed off the accounting methods then it would have appeared that PWC signed off the financial statements based on immateriality. However, according to the act provided by the Sarbanes-Oxley, PWC had the profession and expertise to detect any accounting misconduct as was displayed by Krispy Kreme. Some speculators claimed that Krispy Kreme would select another auditor at the market to calm down its investors. However, it would only look for a new auditor after issues concerning the mismanagement and accounting malpractices had been settled.

Management accountability

At the age of 52 years, the former CEO Scott Livengood announced that he was retiring as the company’s chairperson, president, and CEO. His announcement regarding the retirement came in amid allegations concerning the disguised volume of sales on the financial statements issued by the company. A famous turnaround specialist Mr. Stephene Cooper replaced Scott. Cooper had helped in the Enron reorganization after the corporation was declared bankrupt.

The retirement of Scott left him with an option to purchase about 330,125 shares. According to Sarbanes-Oxley Act, the executives were eligible for punishment due to signing off the financial statements. The senior management had full information regarding the actual financial results. Various individuals in the senior management office in the accounting department were to quit office to pave way for smooth and transparent investigations given that the department should have been questioned about the over-shipments and high levels of credits.

The 2005 turnaround strategy

Following the declines witnessed in its shares, the company decided to reshuffle the management. The old management was perceived by the public as the type of management that was characterized by fraud and misconduct. At the beginning of the year 2005, the company chose Stephen from the financial consulting group known as Kroll Cooper, as the new acting CEO. Stephen replaced Scott Livengood who retired as both the chairperson and CEO. The managing director of Kroll Zolfo, Mr. Steven Panagos was named the COO of the company. This plan was carried out to close down the loss-making stores. This would entirely lead to the avoidance of insolvency in the future.

The Company’s Financial Performance

In the year 2009, the company was suffering from several financial difficulties. The company made a loss amounting to $4.061 at the end of the financial period 2009. The firm started to regain its financial strength in the year 2010 after its losses reduced to $0.15 million. The net income of 7.599 million at the end of the financial period 2011 indicated that the company had fully recovered from the financial turmoil that was surrounding its operations.

For the last two years, Krispy Kreme did not suffer from the costs arising from revenues. The company had huge losses relating to the revenue costs. While there was no loss associated with the revenue costs in the years 2009 and 2010, the company incurred a total revenue cost of $345.007 million. These revenue costs led to the poor performance of the firm. The company also faced heavy costs in selling as regards general and administrative expenses, which totaled $371.504 million (Wittner 32).

However, the company indicated a unique performance for the last three years. While the company indicated high losses in the year 2009, the management startled the public by the amount of cash and cash equivalents it had at the end of the same period. Krispy Kreme management afforded to realize a change in cash and cash equivalents amounting to $10.803 million. In the year 2010, the company’s change in cash and cash equivalents was valued at a negative of $15.323 million. However, the company indicated a positive increase in 2010 after it recorded a change of cash and cash equivalents worth $1,755. The firm’s cash flow from operating activities indicated a progressive improvement. The company’s cash flows from operating activities improved from 16 million in the year 2009 to 19 million in the year 2010. The cash flow from the operating activities improved to 20 million in the year 2011.

With its current market capitalization of $513.91 million, Krispy Kreme has managed to attain a quarterly revenue growth rate of 11.20%. The company’s enterprise value per revenue was measured at 1.25, while enterprise value per EBITDA was valued at 14.51. Although the price per sale indicated a figure of 1.29, its price per book indicated a higher value of 2.08. The firm continues to struggle in the market to ensure that the value of its shares gains public confidence. This indicated a progressive price per earnings ratio. The current P/E is valued at 3.17. The company’s effort is also indicated by the improvement in the entity’s returns on both assets and equity.

Return on assets indicated a promising figure of 6.53% while return on equity was valued at 102.15%. This financial performance indicates that the company is recovering from the financial recessions that hit the industry for a good part of the last 5 years. Analysts and experts in the restaurant industry state that most firms are expected to grow at the pace required by the industry. Investors gain more confidence due to this. Krispy Kreme expects its revenue to double in the next three years. This will attract more investors given that the new management is pursuing the best approaches in the industry to ensure that the company attains a competitive edge.

Income Statement

Period Ending Jan 30, 2011 Jan 31, 2010 Feb 1, 2009
Total Revenue 361,955 346,520 385,522
Cost of Revenue 345,007
Gross Profit 361,955 346,520 385,522
Operating Expenses
Research Development
Selling General and Administrative 335,345 320,652 371,504
Non Recurring 4,066 5,903 548
Others 7,389 8,191 8,709
Total Operating Expenses
Operating Income or Loss 15,155 11,774 4,761
Income from Continuing Operations
Total Other Income/Expenses Net (486) (183) 3,146
Earnings Before Interest And Taxes 15,216 11,103 7,121
Interest Expense 6,359 10,685 10,679
Income Before Tax 8,857 418 (3,558)
Income Tax Expense 1,258 575 503
Minority Interest
Net Income From Continuing Ops 7,124 (645) (4,847)
Non-recurring Events
Discontinued Operations
Extraordinary Items
Effect Of Accounting Changes
Other Items
Net Income 7,599 (157) (4,061)
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares 7,599 (157) (4,061)

Balance Sheet

Period Ending Jan 30, 2011 Jan 31, 2010 Feb 1, 2009
Assets
Current Assets
Cash And Cash Equivalents 21,970 20,215 35,538
Short Term Investments
Net Receivables 20,847 18,363 20,354
Inventory 14,635 14,321 15,587
Other Current Assets 5,970 6,324 4,327
Total Current Assets 63,422 59,223 75,806
Long Term Investments 1,663 781 1,187
Property Plant and Equipment 71,163 72,986 85,075
Goodwill 23,776 23,816 23,496
Intangible Assets 23,856
Accumulated Amortization
Other Assets 9,902 8,470 9,002
Deferred Long Term Asset Charges 2,004
Total Assets 169,926 165,276 194,926
Liabilities
Current Liabilities
Accounts Payable 38,333 36,911 38,203
Short/Current Long Term Debt 2,513 762 1,413
Other Current Liabilities 8,039
Total Current Liabilities 40,846 37,673 39,616
Long Term Debt 32,874 42,685 73,454
Other Liabilities 19,778 22,151 23,995
Deferred Long Term Liability Charges 106
Minority Interest
Negative Goodwill
Total Liabilities 93,498 102,509 137,171
Stockholders’ Equity
Misc Stocks Options Warrants
Redeemable Preferred Stock
Preferred Stock
Common Stock 370,808 366,237 361,801
Retained Earnings (294,346) (303,290) (303,133)
Treasury Stock
Capital Surplus
Other Stockholder Equity (34) (180) (913)
Total Stockholder Equity 76,428 62,767 57,755
Net Tangible Assets 52,652 38,951 33,899

Cash Flow

Period Ending Jan 30, 2011 Jan 31, 2010 Feb 1, 2009
Net Income 7,599 (157) (4,061)
Operating Activities, Cash Flows Provided by or Used In
Depreciation 8,950 9,050 9,541
Adjustments To Net Income 8,055 8,630 7,185
Changes In Accounts Receivables (2,604) 2,151 4,222
Changes In Liabilities 1,328 (1,657) (5,083)
Changes In Inventories (314) 1,216 4,263
Changes In Other Operating Activities (2,506) 594 526
Total Cash Flow from Operating Activities 20,508 19,827 16,593
Investing Activities, Cash Flows Provided by or Used In
Capital Expenditures (9,694) (7,967) (4,694)
Investments (50) (325) (113)
Other Cash flows from Investing Activities 1,172 6,117 511
Total Cash Flows from Investing Activities (8,572) (2,175) (4,296)
Financing Activities, Cash Flows Provided by or Used In
Dividends Paid
Sale Purchase of Stock (576) (343) 1,034
Net Borrowings (8,257) (31,678) (1,989)
Other Cash Flows from Financing Activities
Total Cash Flows from Financing Activities (10,181) (32,975) (1,422)
Effect Of Exchange Rate Changes (72)
Change In Cash and Cash Equivalents 1,755 (15,323) 10,803
Financial Analysis and Ratios
Market Cap (intraday)
513.91M
Trailing P/E (intraday) 3.17
PEG Ratio 1.04
Price/Sales 1.29
Price/Book 2.08
Enterprise Value/Revenue 1.25
Enterprise Value/EBITDA 14.51

Return on Assets 6.53%

Return on Equity 102.15%

Income Statement
Revenue 403.22M
Revenue Per Share 5.83
Quarterly Revenue Growth 11.20%
Gross Profit 361.96M
EBITDA 34.60M
Diluted EPS 2.33
Balance Sheet
Total Cash 44.32M
Total Cash Per Share 0.64
Total Debt 27.59M
Total Debt/Equity 11.08
Current Ratio 2.34
Book Value Per Share 3.58
Cash Flow Statement
Operating Cash Flow 33.86M
Levered Free Cash Flow 8.40M
KKD vs. Industry Leaders
Statistic Industry Leader KKD KKD Rank
Market Capitalization WTB.L 3.27B 508.34M 42 / 98
P/E Ratio DOM.L 2,700.37 3.15 35 / 98
PEG Ratio (5 yr expected) LUB 4.13 1.04 53 / 98
Revenue Growth (Quarterly) DFRH.OB 27.70% 11.20% 27 / 98
EPS Growth (Quarterly) NATH N/A N/A 6 / 98
Long-Term Growth Rate (5 yr) ALSEA.MX 46.73% 26.50% 3 / 98
Return on Equity DFRH.OB 1785.29% 102.15% 26 / 98
Long-Term Debt/Equity 11.076 N/A
Dividend Yield (annual) ARKR 6.20% N/A N/A
Krispy Kreme Doughnuts Inc,
Initial Pro-former Income Statement
For the year 2013, 2014 and 2015
($ ‘000’
2013 2014 2015
Revenues 430,000 450,000 480,000
Cost of Goods Sold
Gross Profit
Operating Expenses
Selling and Adm. -340,000 -345,000 -350,000
Non Recurring -4,000 -3,500 -3,300
Others -56,000 -48,000 -46,000
Total Gen. and Adm.
Depreciation Exp. -10,000 -10,000 -10,000
Total Earnings 20,000 43,500 70,700
Cash Flows 30,000 53,500 80,700

Analysis for Beta, Market Required Rate of Return, Return on the Risk-free Asset, and Return on Krispy Kreme Assets

Adjusted Historical Share Prices of Krispy Kreme

Date Open High Low Close Avg Vol Adj Close* Annual return
1-Sep-11 9.1 9.18 6.8 6.82 1,030,500 6.82 -1.57
1-Aug-11 8.49 9.47 6.98 9.09 1,506,400 9.09 -1.066
1-Jul-11 9.5 9.97 7.92 8.18 1,187,900 8.18 -1.38
1-Jun-11 8.35 10.08 7.85 9.51 1,825,000 9.51 -0.904
2-May-11 5.63 8.99 5.27 8.4 2,468,900 8.4 -0.428
1-Apr-11 6.13 6.25 5.1 5.61 1,224,400 5.61 0.4525
1-Mar-11 6.29 7.04 5.81 7.04 805,700 7.04 -0.112
1-Feb-11 6.64 7.45 6.09 6.27 751,400 6.27 -0.68
3-Jan-11 7.07 7.19 6.06 6.55 977,000 6.55 -0.596
1-Dec-10 6.12 8.14 5.95 6.98 1,266,400 6.98 0.6348
1-Nov-10 5.64 6.22 5.18 5.99 800,700 5.99 1.5437
1-Oct-10 4.58 6 4.55 5.6 583,100 5.6 1.8507
1-Sep-10 3.95 4.72 3.95 4.58 521,800 4.58 1.0027
2-Aug-10 4 4.14 3.55 3.96 277,800 3.96 -1.387
1-Jul-10 3.33 4.01 3.28 3.94 325,000 3.94 3.2032
1-Jun-10 3.65 4.15 3.35 3.37 503,900 3.37 -1.685
3-May-10 3.74 4.09 3.25 3.7 435,000 3.7 -1.194
1-Apr-10 4.04 5.15 3.7 3.7 682,900 3.7 0.4313
1-Mar-10 3.53 4.25 3.48 4.02 364,100 4.02 0.852
1-Feb-10 2.83 3.79 2.76 3.51 608,200 3.51 0.9889
4-Jan-10 2.95 3.09 2.56 2.82 458,300 2.82 1.012
1-Dec-09 3.24 3.46 2.74 2.95 510,200 2.95 1.4898
2-Nov-09 3.42 3.94 3.08 3.22 755,100 3.22 3.2539
1-Oct-09 3.56 4.75 3.31 3.39 536,000 3.39 -0.351
1-Sep-09 3.06 3.76 3.05 3.57 397,300 3.57 -0.618
3-Aug-09 3.09 3.21 2.71 3.07 325,300 3.07 -0.602
1-Jul-09 3.02 3.1 2.51 3.06 306,500 3.06 3.8083
1-Jun-09 3.53 4.23 2.7 3 489,100 3 0.6702
1-May-09 4 4.15 3.06 3.47 428,900 3.47 -0.463
1-Apr-09 1.64 4.38 1.6 3.94 592,500 3.94 15.298
2-Mar-09 1.23 1.96 1.08 1.6 253,000 1.6 3.799
2-Feb-09 1.38 1.5 1.01 1.29 370,300 1.29 0.8387
2-Jan-09 1.65 1.93 1.35 1.39 361,400 1.39 -2.211
Analysis
Title:
Adjusted 20-Year Treasury Constant Maturity Rate
Series ID: GS20
Source: Board of Governors of the Federal Reserve System
Release: H.15 Selected Interest Rates
Seasonal Adjustment: Not Applicable
Frequency: Monthly
Units: Percent
Date Range: 2006 01-04 to 2012-02-01
Last Updated: 2012-03-12 12:16 PM CDT
DATE VALUE
2011-12-01 0.0267
2011-11-01 0.0272
2011-10-01 0.0287
2011-09-01 0.0283
2011-08-01 0.0324
2011-07-01 0.0395
2011-06-01 0.0391
2011-05-01 0.0401
2011-04-01 0.0428
2011-03-01 0.0427
2011-02-01 0.0442
2011-01-01 0.0428
2010-12-01 0.0417
2010-11-01 0.0382
2010-10-01 0.0352
2010-09-01 0.0374
2010-08-01 0.0352
2010-07-01 0.038
2010-06-01 0.0395
2010-05-01 0.0411
2010-04-01 0.0453
2010-03-01 0.0449
2010-02-01 0.0448
2010-01-01 0.045
2009-12-01 0.044
2009-11-01 0.0424
2009-10-01 0.0416
2009-09-01 0.0414
2009-08-01 0.0433
2009-07-01 0.0438
2009-06-01 0.0451
2009-05-01 0.0422
2009-04-01 0.0384
2009-03-01 0.0378
2009-02-01 0.0383
2009-01-01 0.0346
2008-12-01 0.0318
2008-11-01 0.0427
2008-10-01 0.0445
2008-09-01 0.0432
2008-08-01 0.0453
2008-07-01 0.0462
2008-06-01 0.0474
2008-05-01 0.046
2008-04-01 0.0444
2008-03-01 0.0436
2008-02-01 0.049
2008-01-01 0.0435
2007-12-01 0.0457
2007-11-01 0.0456
2007-10-01 0.0483
2007-09-01 0.0484
2007-08-01 0.05
2007-07-01 0.0519
2007-06-01 0.0529
2007-05-01 0.0498
2007-04-01 0.0495
2007-03-01 0.0481
2007-02-01 0.0493
2007-01-01 0.0495
2006-12-01 0.0478
2006-11-01 0.0478
2006-10-01 0.0494
2006-09-01 0.0493
2006-08-01 0.0508
2006-07-01 0.0525
2006-06-01 0.0529
2006-05-01 0.0535
2006-04-01 0.0522
2006-03-01 0.0491
2006-02-01 0.0473
2006-01-01 0.0465

Adjusted Return on the Market Stock

Open High Low Close Avg Vol Close*
1-Sep-11 1,219.12 1,229.29 1,114.22 1,131.42 5,104,933,800 1,131.42 -0.86114
1-Aug-11 1,292.59 1,307.38 1,101.54 1,218.89 4,942,913,400 1,218.89 -0.68149
1-Jul-11 1,320.64 1,356.48 1,282.86 1,292.28 4,308,168,000 1,292.28 -0.25769
1-Jun-11 1,345.20 1,345.20 1,258.07 1,320.64 4,105,601,300 1,320.64 -0.21909
2-May-11 1,365.21 1,370.58 1,311.80 1,345.20 4,114,534,200 1,345.20 -0.16201
1-Apr-11 1,329.48 1,364.56 1,294.70 1,363.61 4,042,194,000 1,363.61 0.341944
1-Mar-11 1,328.64 1,332.28 1,249.05 1,325.83 4,046,691,700 1,325.83 -0.01257
1-Feb-11 1,289.14 1,344.07 1,289.14 1,327.22 3,225,297,300 1,327.22 0.383479
3-Jan-11 1,257.62 1,302.67 1,257.62 1,286.12 4,816,605,000 1,286.12 0.271747
1-Dec-10 1,186.60 1,262.60 1,186.60 1,257.64 3,762,922,700 1,257.64 0.783601
1-Nov-10 1,185.71 1,227.08 1,173.00 1,180.55 4,354,084,200 1,180.55 0
1-Oct-10 1,143.49 1,196.14 1,131.87 1,183.26 4,432,102,300 1,183.26 0.442271
1-Sep-10 1,049.72 1,157.16 1,049.72 1,141.20 3,993,981,400 1,141.20 1.050613
2-Aug-10 1,107.53 1,129.24 1,039.70 1,049.33 4,044,967,700 1,049.33 -0.56939
1-Jul-10 1,031.10 1,120.95 1,010.91 1,101.60 4,704,026,600 1,101.60 0.825334
1-Jun-10 1,087.30 1,131.23 1,028.33 1,030.71 5,235,174,000 1,030.71 -0.64659
3-May-10 1,188.58 1,205.13 1,040.78 1,089.41 6,626,699,400 1,089.41 -0.98371
1-Apr-10 1,171.23 1,219.80 1,170.69 1,186.69 5,847,150,900 1,186.69 0.177112
1-Mar-10 1,105.36 1,180.69 1,105.36 1,169.43 4,702,951,700 1,169.43 0.705556
1-Feb-10 1,073.89 1,112.42 1,044.50 1,104.49 4,658,238,400 1,104.49 0.342164
4-Jan-10 1,116.56 1,150.45 1,071.59 1,073.87 5,071,601,500 1,073.87 -0.44369
1-Dec-09 1,098.89 1,130.38 1,085.89 1,115.10 4,163,287,200 1,115.10 0.213247
2-Nov-09 1,036.18 1,113.69 1,029.38 1,095.63 4,443,852,500 1,095.63 0.688368
1-Oct-09 1,054.91 1,101.36 1,019.95 1,036.19 5,451,064,000 1,036.19 -0.23714
1-Sep-09 1,019.52 1,080.15 991.97 1,057.08 5,633,064,200 1,057.08 0.428681
3-Aug-09 990.22 1,039.47 978.51 1,020.62 5,764,944,200 1,020.62 0.402722
1-Jul-09 920.82 996.68 869.32 987.48 5,080,675,400 987.48 0.889701
1-Jun-09 923.26 956.23 888.86 919.32 5,330,941,800 919.32 0.00235
1-May-09 872.74 930.17 866.1 919.14 6,883,268,000 919.14 0.636977
1-Apr-09 793.59 888.7 783.32 872.81 6,938,945,600 872.81 1.127101
2-Mar-09 729.57 832.98 666.79 797.87 7,633,306,300 797.87 1.024854
2-Feb-09 823.09 875.01 734.52 735.09 7,022,036,200 735.09 -1.31917
2-Jan-09 902.99 943.85 804.3 825.88 5,844,561,500 825.88 -1.02789
K Krispy KRF KM Risk Premium
1-Sep-11 -1.5704 0.0283 -0.86114 -0.89
1-Aug-11 -1.06579 0.0324 -0.68149 -0.71389
1-Jul-11 -1.37991 0.0395 -0.25769 -0.29719
1-Jun-11 -0.90444 0.0391 -0.21909 -0.25819
2-May-11 -0.42829 0.0401 -0.16201 -0.20211
1-Apr-11 0.452525 0.0428 0.341944 0.299144
1-Mar-11 -0.11207 0.0427 -0.01257 -0.05527
1-Feb-11 -0.67967 0.0442 0.383479 0.339279
3-Jan-11 -0.59569 0.0428 0.271747 0.228947
1-Dec-10 0.634761 0.0417 0.783601 0.741901
1-Nov-10 1.54371 0.0382 0 -0.0382
1-Oct-10 1.850697 0.0352 0.442271 0.407071
1-Sep-10 1.002667 0.0374 1.050613 1.013213
2-Aug-10 -1.38679 0.0352 -0.56939 -0.60459
1-Jul-10 3.203187 0.038 0.825334 0.787334
1-Jun-10 -1.68493 0.0395 -0.64659 -0.68609
3-May-10 -1.19352 0.0411 -0.98371 -1.02481
1-Apr-10 0.43131 0.0453 0.177112 0.131812
1-Mar-10 0.85201 0.0449 0.705556 0.660656
1-Feb-10 0.988889 0.0448 0.342164 0.297364
4-Jan-10 1.012048 0.045 -0.44369 -0.48869
1-Dec-09 1.489842 0.044 0.213247 0.169247
2-Nov-09 3.253945 0.0424 0.688368 0.645968
1-Oct-09 -0.35097 0.0416 -0.23714 -0.27874
1-Sep-09 -0.61823 0.0414 0.428681 0.387281
3-Aug-09 -0.60226 0.0433 0.402722 0.359422
1-Jul-09 3.808264 0.0438 0.889701 0.845901
1-Jun-09 0.670157 0.0451 0.00235 -0.04275
1-May-09 -0.46309 0.0422 0.636977 0.594777
1-Apr-09 15.29771 0.0384 1.127101 1.088701
2-Mar-09 3.798995 0.0378 1.024854 0.987054
2-Feb-09 0.83871 0.0383 -1.31917 -1.35747
2-Jan-09 -2.21053 0.0346 -1.02789 -1.06249

Where:

  • KM: market return
  • KRF: Return on risk-free asset
  • K Krispy: Return on Krispy Kreme’s stock/assets

Beta Graph

Risk premium

Y-axis: Stock return

X-axis: Risk premium

Beta = 2.06

Return on Krispy’s assets = 6.1%

Return on risk free asset = 3.12%

Krispy Kreme
Final Pro-former Income Statement
For the year 2013, 2014 and 2015 ($ ‘000’)
2013 2014 2015
Revenues 425,000 445,000 470,000
Cost of Goods Sold
Gross Profit
Operating Expenses
Selling and Adm. -338,000 -342,000 -346,000
Non-Recurring -4,000 -3,500 -3,300
Others -56,000 -48,000 -46,000
Total Gen. and Adm.
Depreciation Exp. -10,000 -10,000 -10,000
Total Earnings 17,000 41,500 64,700
Cash Flows 30,000 53,500 80,700

Future Values and Present Values of Cash Flows

($ ‘000’)

Present Value = Future Value/ (1+ rate of return) ^n where n is the number of years.

Required Rate of Return = 6.1%

Year 2013 2014 2015
Future value 30,000 53,500 80,700
Present value 28,275 47,525 67,757

Total present value of projected cash flows = $143,557

Krispy Kreme
Capital Structure
As at April 1, 2012 ($)
12% Bonds 40,846,000
Common Equities 370,808,000
Internal Capital(Retained Earnings) 294,346,000
Total 706,000,000
Earnings Before Interest and Tax (EBIT)
Interest on Bonds 4,901,520
Income Before Tax -4,901,520
Income Tax (Marginal rate 20%) -980,304
Net Income -3,921,216
Preferred Stock Dividends 0
Total Income Available for Common Stocks 25,345,900
Common Stocks Outstanding 17,546,127
Earnings per common stock share 1.22

Cost of capital

Cost of debt

The cost of debt is calculated is normally calculated on loans, debentures, and bonds by multiplying the interest rate with the total debt. The cost of debt is also denoted as Kd.

Cost of Debt (Kd) = Interest amount/ (Amount of debenture + Amount of premium) X 100

Cost of Debt (Kd) = Interest Amount/ (Amount of Debenture – Amount of Discount) X 100

The first formula implies that the bond is issued at a premium while the formula means that the bond is issued at a discount.

However, in situation where there is cost of equity, incorporation of tax rate is necessary.

Cost of Debt = Amount of Interest (1 – Tax Rate) / Amount of Loan X 100

Kd = 1,666,000(1-0.2)/25,369,000* 100

Kd = 5.25%

20% is the marginal tax rate.

The amount of interest is found on the income statement while the amount of the loan is found on a balance sheet.

Cost of Equity

Cost of Equity, Ks= Rf + (Rm – Rf) Beta

Where Ks= cost of equity

Rf = risk-free rate. In this case interest rate on the US treasury bills is used.

Rm= Market rate of return

Beta= risk of company’s stock in comparison to that of the market

Ks = 2.991 + (4.12-2.991)2.06

Ks = 5.37%

Weighted Average Cost of Capital

The firm chose to distribute its capital based on 10% on bonds and 90% on equity. Therefore, work would be:

WACC= Ks*Ws + Kd*Wd

WACC= 5.37*0.9 + 5.25*0.1

WACC=5.36%

Dividends Policy

The company has a special dividends policy that distinguishes it from other companies. Unlike other companies, which consider paying dividends in form of stocks, Krispy Kreme has resolved to stick to cash. Krispy Kreme understands that paying stocks, as dividends will most likely dilute the shares of the company. The dividends of the company are expected to increase from $7.3 to $14.5 in the year 2012, and finally reach $21 in the year 2013.

This improvement is expected in the next 5 years. The expected increase is attributed to the projected increase in the share value of the firm soon. The firm pays its dividends quarterly. The last ex-date was on 02/9/12 and will subsequently be made after March. The dividends are normally paid from the profits made by the company. Krispy Kreme realized that delaying dividends payment would negatively affect the image of the company. This may lead to a fall in its share value. In this regard, the company always pays dividends in time.

Conclusion

Krsipy Kreme Group Inc faced financial difficulties after it went public in the year 2000. The company enlisted its shares in the NASDAQ stock market before moving to New York Stock Exchange in 2001. The company indicated substantial value on its share that attracted various investors. In the year 2001, the New York Stock Exchange valued the company’s share at $108.5. However, the company split the share hoping that the company will be able to avail more stocks at the market. It is expected that it would easily raise adequate capital using many shares in the marketplace. It also aimed at reducing influence on management by a small number of people.

The US Security and Exchange Commission managed to carry out an extensive and impartial investigation that led to several convincing results. The SEC indicated that the senior management was liable for a fine or any form of punishment given that they signed off knowingly on wrong financial statements. The SEC also accused Price Water House-Cooper of failing to identify the monthly variation of sales. With the profession and expertise that Price Water House-Cooper has, the SEC expected that PWC would be in a position to identify huge sales at the end of the year and corresponding high levels of credit early the following year. In the end, the SEC ordered the three top executives to pay $783,000 for allowing accounting malpractices in the company.

It was in March 2005 when the Securities and Exchange Commission ordered three executives to pay a total amount of $783,000 for displaying accounting misconduct. The reshuffling of the company’s management was the only solution for the mismanagement of the company’s accounting. The new CEO and chairperson is a popular turnaround strategist who assured Krispy Kreme of better performance shortly. The practices of cosmetic accounting are done with different intentions including fraud and increasing investors’ confidence. The various financial analyses done on this paper indicate that Krispy Kreme is one of the promising companies in the restaurant industry.

Although Krispy Kreme can be perceived as a weak company when compared to the top performers in the industry, an individual who does an extensive analysis will realize that Krispy Kreme will grow at a fast pace. Many analysts in the market state that Krispy Kreme is expected to grow at a faster pace relative to that of the industry. Regardless of being ranked number 42 in the market in terms of market capitalization, the company emerged third in the entire industry in terms of long-term growth rate. The company was also ranked sixth in the industry after indicating a high growth rate on its quarterly earnings per share. Out of the 98 companies in the restaurant industry, Krispy Kreme was ranked 26th after indicating a return on equity of 102.15%. The company has also shown strong performance on quarterly revenue growth rates. The company’s quarterly revenue grows at the rate of 11.20%.

Works Cited

Wittner, Peter. The European Generics Outlook: A Country-by-Country Analysis of Developing Market Opportunities and Revenue Defense Strategies. London: Datamonitor, 2003. Print.

Appendices

Comparison of Competitors

KKD DNKN BAGL SBUX Industry
Market Cap: 508.34M 3.60B 252.74M 42.20B 601.82M
Employees: N/A 1,199 6,506 149,000 8.25K
Qtrly Rev Growth 11.20% 12.50% 8.60% 16.40% 8.90%
Revenue 403.22M 628.20M 423.60M 12.19B 487.11M
Gross Margin 14.08% 80.23% 21.51% 56.89% 28.48%
EBITDA 34.60M 263.37M 44.36M 2.14B 79.54M
Operating Margin 6.54% 33.56% 5.93% 12.98% 7.78%
Net Income 166.27M 34.44M 13.20M 1.28B N/A
EPS 2.33 0.35 0.78 1.67 0.43
P/E 3.14 84.76 19.23 33.54 21.08
PEG (5 yr expected): 1.04 1.64 0.81 1.60 1.22
P/S 1.27 5.76 0.60 3.45 1.05

Krispy Kreme. Final Pro-former Income Statement

For the year 2013, 2014 and 2015 ($ ‘000’).

Krispy Kreme. Final Pro-former Income Statement

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