KRISPY KREME GENERAL FINANCIAL HEALTH

Krispy Kreme General Financial Health

Executive Summary

The purpose of this report is to evaluate the current situation of Krispy Kreme Doughnuts, Inc. and to discuss the reasons for such status. We will also look at current strategies the company is taking to better the situation, and finally, submit some of our own recommendations for ways to maximize potential at Krispy Kreme.

Currently, Krispy Kreme faces many obstacles in operations and capital structure. Recent SEC filing discrepancies have added to the existing lack of optimism among stockholders. In addition, it appears that the money from loans made by the company to franchises has not been repaid at any type of acceptable rate. One major reason for the decline in franchise sales is that Krispy Kreme has oversaturated the market. This is made evident by nearly a 20% decrease in same store sales for the last quarter of fiscal 2004. Also, the company has doubled its number of stores to nearly 150 from the 70 of three years ago. They have also made large investments in off premise sales in convenient stores, supermarkets, etc.

Introduction

Krispy Kreme Doughnuts began on July 13, 1937, in Winston-Salem, North Carolina, when founder Vernon Rudolph started selling his unique doughnuts to local grocery stores. Rudolph acquired the secret recipe from a French chef in New Orleans and after half a century, Krispy Kreme had developed its own doughnut mixing, making, and delivery systems; thus effectively standardizing Krispy Kreme's signature doughnuts for mass production.

When Vernon Rudolph died in 1973, the company fell on hard times and was bought out by Beatrice Foods Company in 1976. In 1982, the Krispy Kreme name was repurchased by a small group of franchisees who revived the company's goal of making a “hot doughnut experience”. By the turn of the century, Krispy Kreme was experiencing rapid growth. The company was incorporated after its IPO in April of 2000, and opened their first international store a year later.

Unfortunately, Krispy Kreme has fallen on hard times again. Languishing sales and legal fees stemming from accounting troubles and a subsequent federal probe have eaten away the company's profits. Early this year, Scott A. Livengood, the CEO who turned the company into a powerhouse in its industry, was forced out by the board of directors and Stephen F. Cooper, a restructuring specialist from Kroll Zolfo Cooper LLC., was brought in as the replacement. Investors and fans of Krispy Kreme doughnuts are anxious to see if Mr. Cooper can revive the ailing company.

Financial Health

After years of healthy growth and steady expansion, Krispy Kreme embarked on an aggressive expansion in 2002. After raising capital through large issues of debt, Krispy Kreme began the process of opening new markets, building new stores, and converting franchises to company stores. As an example, Krispy Kreme bought out the rest of Golden Gate Doughnuts to secure 100% of the market developing rights for northern California. Throughout the following three years, Krispy Kreme doubled the number of new stores ...