Financial Health General Financial Health

Financial Health

General Financial Health of Krispy Kreme Doughnuts

Krispy Kreme Doughnuts is a chain of doughnut stores founded in 1937 and based in Winston-Salem, North Carolina. The company has been met with both success as well as shortages, but along the years has managed to stay on top and became an international brand. "Krispy Kreme's greatest asset is their image and brand name. These are essential for attracting new customers and retaining old ones. Krispy Kreme's competition is limited to non-existent because they have been successful at differentiating themselves from all other doughnut retailers" (Diab, 2002). The company's annual reports present a strong company with strong financial highlights.

A significant way to approach a company from a financial stand point is that of looking at the corporation's depreciation costs. In this particular instance, Krispy Kreme's depreciation costs are following an ascendant trend, increasing from a value of $3,586,000 in February 1998 to a value of $7,959,000 by February 2002; this implies a growth over 120% in four years. However this increase is rather high, to get an objective view one must correlate it with the growth rate of corporate sales. As such, the company's sales have increased from $203,439,000 in February 1998 to $621,665,000 in February 2002 - a growth rate of 205% (Krispy Kreme 2002 Form 10-K). This means that the depreciations do not pose a threat for Krispy Kreme and from this point-of-view, the company remains a strong one.

The stock analysis is also an important tool to measure the corporate strength. The value of the stock can be analyzed from three different angles, using an earnings multiplier, the Book Value or a multi-stage growth model. "Using an earnings multiplier Krispy Kreme's stock would be worth: P0 = Industry average P/E 25.55 x $.45 in diluted earnings = $11.50, which is incorrect because of the future growth potential of Krispy Kreme relative to the restaurant industry and their higher than average profit margins. This price is too low. Using Book Value:

2.32 per share, which is a false measurement of the true value of Krispy Kreme's business whose most valuable assets are its brand name and relationship with its customers. Using a Multi-Stage Growth Model: P0 = 5-yr growth at 27.33% ke = 11.06% Long-Term Growth Rate = 8.00% =(26.4*1.2733)/1.1106^1 + (33.616*1.2733)/1.1106^2 + (42.80*1.2733)/1.1106^3 + (54.50*1.2733)/1.1106^4 + (69.40*1.2733)/1.1106^5 + P2007 which is (95.44/(.1106 -.08))/1.1106^6 = 1185.43/54.1 million shares = $21.91 a share" (Diab, 2002).

The consolidated statements of income present once again a strong company. To prove this, take the 342% increase in net income from 2000 up to 2003. (Krispy Kreme 2002 Form 10-K) the continuously ascendant trend in both cash flow as well as income reveals that the company conducts successful business and has increase possibility of retrieving financial results form their operations. Also, Krispy Kreme is capable of paying up their debts.

The management at Kripsy Kreme is formed of highly skilled executives who are extremely committed to supporting the organization reach its overall financial as well as non-financial goals.

All the above mentioned analyzes, including the high quality of the managerial act at Krispy Kreme Doughnuts reveal a strong company which is following a continuously ascendant trend and implementing a balanced financial model (Krispy Kreme 2002 Form 10-K). The basic changes felt by the international company refer to a sustained growth which allows the organization to fulfill their five step growth strategy, composed from their desire to: expand the store base, improve the on-premise sales within the existing stores, increase off-premise sales, expand internationally, expand the beverage offerings and enlarge and apply the concept of doughnut and coffee shops (Krispy Kreme 2002 Form 10-K).

But these changes, materialized in increased sales and consequently revenues, improved quality of the products and services offered as well as the technologies used in the manufacturing process have supported the development of the corporation. From a financial point-of-view, they created the image of a strong and reliable company. The reasons why this change has financial implications is a simple one: a stronger company is better perceived by the market and by the stakeholders, increasing as such the company's sales and easing their penetration of new territories. Then, it generates increased interest from investors, easing as such Krispy Kreme's access to funding possibilities.

Even though Krispy Kreme is a strong company and represents an international brand, they are still subjected to numerous risks deriving from both the inside as well as the outside of the company. These risks, as presented by the Management's Discussion and Analysis of Financial Condition and Results of Operations, are determined by:

the company's ability to continue and manage growth delays in store openings the quality of franchise store operations the price and availability of raw materials needed to produce doughnut mixes and other ingredients changes in customer preferences and perceptions risks associated with competition risks associated with fluctuations in operating and quarterly results compliance with government regulations other factors" (Krispy Kreme 2002 Form 10-K).

An important risk facing Krispy Kreme shareholders is the management's determination to commit to long-term success. This strategy is generally to be preferred in the detriment of short-term success, but it can generate dissatisfaction from the stockholders as it limits their benefits. Otherwise put, since the company executives are determined to invest for the long-term benefit of the organization, they could easily decide to cut down or reduce the payment of shareholders' dividends. And the stockholders are generally interested in short-term success and strong financial highlights which entitle them to a part of the firm's profits. However, even if on the short run the shareholders might be financially disadvantaged by the company's decisions, the long-term success is also in their best interest as it offers them a stable source of income.