Krispy Kreme Final Project: Analyzing

Krispy Kreme

Final Project: Analyzing a Company's Financial Health

Depreciation analysis

Krispy Kreme's state of corporate health looks bleak. True, the costs incurred from the depreciation of company assets has remained relatively steady at Krispy Kreme, for the past three years. Depreciation of assets means the amount of wear and tear upon company equipment, and what the company will need to spend to replace those assets has remained virtually the same since it went public in 2001. Depreciated asset expenditures are usually deductible on a company's tax returns, but overall, rehabilitating the depreciated assets does not lend extra value to the company, unlike expanding or improving its operations and creating a measurable change in its standard operations.

Company stock analysis

However, the news about depreciation is virtually the only good news to come from the doughnut company's most recent annual report. The company began to issue stock and became a publicly traded firm in 2001, however, because of its poor financial showing it intends to retain its total earnings in 2007 to finance the expansion of its business and does not anticipate paying cash dividends in the foreseeable future (Management Discussion and Analysis (MD&a) of 10-K for 2007: 22). According to its report, to remain competitive, the company believes that it needs to substantially reform its current corporate configuration and generate more revenue. Going public did raise crucial revenue in 2002 for the company (Management Discussion and Analysis (MD&a) of 10-K for 2007: 35).

But Krispy Kreme's current stock value has substantially declined in since the initial public offering in less competitive and carbohydrate-conscious times, and the flush of enthusiasm over its then-novel, sticky sweet product has since dimmed. Sales and stock value have not kept pace with initial shareholder and analyst expectations

Cash flow statement analysis

In terms of its cash flow statement, which records the amounts of cash and cash equivalents entering and leaving the company, the company has no derivative financial interests or derivative commodity instruments in its cash or cash equivalents on any business day. When it has excess cash available, it uses the cash to pay down its revolving line of credit. Given the prohibitively high rate of interest for borrowers, this leaves the financial health of the core operations, investing and financing of the company in doubt. It notes that investing activities in fiscal 2002 primarily consisted of capital expenditures for property, plants and equipment. (Management Discussion and Analysis (MD&a) of 10-K for 2007: 35). Upon going public, the company substantially expanded its investments in new resources hence net cash used for investing activities was $10.0 million in fiscal 2000, $67.3 million in fiscal 2001 and $52.3 million in fiscal 2002. (Management Discussion and Analysis (MD&a) of 10-K for 2007: 34)

Income statement trend analysis

Prior to fiscal 2001, Krispy Kreme's income primarily relied on cash flow generated from operations and its line of credit to fund its capital needs. It does project that cash flow generated from operations and borrowing capacity under its lines of credit will be sufficient to meet its capital needs for at least the next 24 months, and if additional capital is needed, it will try to raise capital through public or private equity or debt financing or other financing arrangements. However, given that it has been unable to pay cash dividends to investors, raising money through private equity may prove difficult. If financing the company is in jeopardy, this would mean slowing its plans to remodel and relocate older company-owned stores, reducing the number and amount of joint venture investments in area, developer stores, and slowing the building of its infrastructure in both personnel and facilities, all of which it deems integral to future profits and long-term company health (Management Discussion and Analysis (MD&a) of 10-K for 2007: 37-38).

There has been increase in the number of franchise stores that are operating, which generate critically needed income for the company. Currently, the company is also involved in a credit agreement that contains provisions that, among other requirements, restrict the payment of dividends and requires the company to maintain compliance with certain covenants, including the maintenance of certain financial ratios (Management Discussion and Analysis (MD&a) of 10-K for 2007: 36). This may make it less attractive to shareholders although it may mitigate the lending institution's risk.

Management analysis

Through investment, joint ventures, and expanding its operations management hopes to improve the company's long-term health. But overall, market trend analysis is dim from a managerial perspective. The company is exposed to market risk from changes in interest rates on its outstanding bank debt. This makes it more difficult to substantially innovate in the company's product line or marketing approach. The company is striving expand its market share to do so by opening up more franchises, entering into joint ventures and altering its product line.

Discuss any significant changes observed in the results of your year to year financial analyses. What are some possible causes for those changes? What are the financial implications of these changes for the company?

With going public, the company generated an initial flow of revenue, which it channeled back into expansion of its operations, which has yet to show a profit. The company seems unable to find a recipe for success as a large, publicly traded entity, although it is trying to find its niche. It grew overconfident given the initially high stock price and buzz about the company that has failed to pay off.

What risks do Krispy Kreme's shareholders face as management and employees work to position the company for long-term success?