Annual Report

Krispy KremeQuintina R. Walker

ACG2021-080

Executive Summary– Although I love eating hot

original glazed doughnuts as an investor I would be reluctant to purchase stock with this company. From the looks of their annual report the company looks like it is thriving in most areas, but they are currently in the process of restating its earnings for fiscal 2004. The company is being scrutinized because of allegations that they padded sales figures in 2003 and 2004.

– www.krispykreme.com

Part A. Introduction

• CEO: Scott Livengood

• Home Office: Winston-Salem, North Carolina

• Ending date of last fiscal year: February 1, 2004

• Principal products: Over 20 varieties of doughnuts (including Hot Original Glazed), coffee, and collectibles

• Main Geographic Area: 45 states in the U.S., Canada, Australia, Mexico, and the United Kingdom

Part A. Audit Report

• Krispy Kreme’s independent auditors: Pricewaterhouse Coopers LLP

• The auditors say that the company presented their financial statements in a fair manner and they are in accordance with generally accepted accounting principles.

• Pricewaterhouse Coopers LLP jeopardized their own integrity because they either ignored or agreed with unethical reports of the companies earnings. Witnesses say the company sent double orders on the last Friday or Saturday of the quarter and of the 2004 fiscal year to boost sales in order to meet Wall Street projections. Http://www.forbes.com/associatedpress/feeds/ap/2005/01/04/ap1736758.html

Part A. Stock Market Information

• Most recent price of the company’s stock: $9.05

• 12 month trading range: $8.92-8.65

• Dividend per share: $0.00

• Date of information: January 21, 2005

• Krispy Kreme as an investment according to the information in the annual report I would HOLD.

• Krispy Kreme as an investment according to recent investigations of their accounting principles I would SELL.

• Additionally, three of the company’s top officers, including the CEO, dumped 475,000 shares of KKD stock for $19.8 million

Part B. Industry Situation and Company Plans

• The industry is not looking so good for Krispy Kreme at the present time. The company has had decreasing sales for the past 2 years, which coincidentally fab low-carb diets have been on the rise. The company tried to hide for a year this decline in sales by doubling the number of doughnuts delivered to wholesale customers at the end of fiscal quarters and then having the doughnuts shipped back after the quarter ended.

• Due to revised earnings reports Krispy Kreme reports that they are potentially in default of a $150 million credit line. The company is also unable to borrow additional money.

• The company plans to build additional retail factory stores, increase their presence in off-premises locations, and do more fundraising. Krispy Kreme reports that making their doughnuts available in off-premises locations such as convenience stores and grocery stores is better for sales, but an article in Forbes argues that this strategy only saturated its market.

Part C. Income Statement

The gross profit showed a healthy increase from 2003 to 2004. Income from operations nearly doubled during this period. Net income also increased substantially.

02/01/04 02/02/03Gross Profit 158.2 110.1Operations Income 102.1 59.8

Net Income 57.1 33.5

Part C. Balance Sheet

Assets = Liabilities + Owner’s Equity

2003 410.5 = 137.1 + 273.4

2004 660.6 = 208.5 + 452.2

Generally, all of the accounts increased from 2003 to 2004. Assets, Liabilities, and Owner’s equity all averaged about a 60 percent increase.

Part C. Statement of Cash Flows

• Cash flows from operations were more than net income for the past two years.

• The company has a negative balance in their cash account from investing activities.

• Krispy Kreme’s most important source of financing is the issuance of debt.

• Overall cash has decreased over the past 2 years.

Part D. Accounting Policies

• Cash and Cash Equivalents- company considers cash on hand, deposits in banks and all highly liquid debt instruments with a maturity of three months or less at date of acquisition to be cash and cash equivalents.

• Inventories are recorded at the lower of average cost (first-in, first-out) or net realizable value.

• Investments consist of United States Treasury notes, mortgage-backed government securities, corporate debt securities, municipal securities and c.o.d.s

• Property and equipment are stated at cost less accumulated depreciation.

Part D. Accounting Policies

• Revenue Recognition• Company Store Operations- revenue is recognized at the time of sale for on-

premises sales. For off-premises sales, revenue is recognized at the time of delivery.

• Franchise Operations Revenue- development and franchise fees are charged for certain new stores and are deferred until the store is opened and the Company has performed all of the initial services it is required to provide.

• KKM&D revenue is derived from the sale of doughnut-making equipment, mix, coffee, etc, and is recognized at the time the title and the risk of loss pass to the customer, generally upon delivery.

• Montana Mills revenue is derived from the sale of bread and other baked goods and is recognized the same as company store operations revenue.

Part E. Financial Analysis Liquidity Ratios

• Working capital increased from 2003-2004

• Krispy Kreme appears to be using its assets more effectively in 2004 than 03.

• It took the company longer to collect on accounts receivable in 2004.

• Over the past couple of years the company has been able to sell it’s inventory on hand in about 19 days.

2004 2003

WorkingCapital

85,151 81,441

CurrentRatio

2.59 2.36

ReceivableTurnover

10.83 11.56

Avg. days’salesuncollected

33.7 31.6

Inventoryturnover

19 18.8

Avg. daysinventory onhand

19 days 19 days

Part E. Financial Analysis Profitability Ratios

• Krispy Kreme’s profit margin increased by 2%.

• Asset turnover decreased from 1.4 to 1.2 times.

• The company’s earning power stayed around 10%.

• The profitability of stockholder’s equity investments increased from 15% to 16%.

2004 2003

ProfitMargin

.09 .07

AssetTurnover

1.2 1.5

Return onAssets

10% 10%

Return onEquity

16% 15%

Part E. Financial Analysis Solvency Ratio

• Debt to equity decreased slightly from .50 in 2003 to .46 in 2004.

• About one-third of the companies assets are financed by creditors.

Part E. Financial Analysis Market Strength Ratios

• According to hoover.com the earnings per share was $0.56 in 2003 and $0.92 in 2004.

• Krispy Kreme had no dividend yield because they have not paid dividends in the past 3 years.

The End