Krispy Kreme, Inc.

Krispy Kreme Doughnuts, Inc.

Krispy Kreme Doughnuts, Inc. is a retailer and wholesaler of doughnuts. Its principal business is owning and franchising Krispy Kreme doughnut stores where over 20 varieties of doughnuts, including its Hot Original Glazed, are made, sold and distributed and where an array of coffees and other beverages are offered. Krispy Kreme began a single doughnut shop in Winston-Salem, North Carolina on July 13, 1937, where Vermon Rudolph bought a secret yeast-raised doughnut recipe from a French chef from New Orleans, rented a building in and began selling Krispy Kreme doughnuts. Within a short time, Rudolph's products became so popular that he cut a hole in his factory's wall to sell directly to customers, thus was born the central Krispy Kreme retail concept: the factory store. By the 1940s and 1950s there were a small chain of stores that were mostly family-owned, 29 shops in 12 states. During the 1960s Krispy Kreme had a steady growth throughout the Southeast and began expanding.

After Rudolph's death, in 1973, Beatrice Foods bought the company and quickly expanded it to more than 100 locations. Beatrice introduced other products, such as soups and sandwiches, and cut costs by changing the appearance of the stores and substituting cheaper ingredients in the doughnut mixture. By 1980 the company was starting to fail, so Beatrice put it up for sale. A group of franchisees who had been the first Krispy Kreme franchisees, completed a leveraged buyout of the company in 1982, and they also bought back the original doughnut formula and the company's traditional logo. The company struggled for awhile, but by 1989, Krispy Kreme had become debt-free and had slowly begun to expand. A store was opened in New York in 1986, in 1999 one was opened in California, and in December of 2001 there was a store opening in Toronto Canada.

On April 5, 2000, the corporation went public on the NASDAQ using the ticker symbol KREM in what was one of the largest initial public offerings in recent years; one day after the offering, Krispy Kreme's share price was $40.63, giving the firm a market capitalization of nearly $500 million. On May 17, 2001, Krispy Kreme switched to the New York Stock Exchange, with the ticker symbol KKD, which is its current symbol. PricewaterhouseCoopers LLP served as Krispy Kreme's independent registered public accounting firm for fiscal 2005, 2006, and 2007. The primary industry of Krispy Kreme is fast food or restaurant and their ranking is 54 out of 54.

Krispy Kreme Doughnuts has had a rough go of it in the last few years. They have showed an annual loss for the last three years beginning in their 2005 annual filing. This is widely regarded to be a direct effect of their rapid expansion in the previous years. As of October 2007 Krispy Kreme had Approximately 449 store locations (including satellite stores) in 41 U.S. states and 11 foreign countries. However, things do look a little better for them this year as compared to the two previous years. Krispy Kreme reported a net loss for the third quarter of fiscal year 2008 of $798,000 as compared to a net loss of 7.2 million in the comparable previous year quarter.

However when you split the income generated into the categories of operating, financing, and investing you get a better understanding of the health and well being of the company. At the end of the third quarter of 2007, they showed 22.11 million in operating income. This number does however include 21.05 million in depreciation and depletion. 12.63 million was reported in the investing section. This is mainly due to the sale of property, equipment, and the buying back of their franchises due to their rapid expansion. This period of attrition is likely to continue until the companies size is at a sustainable level. Also Krispy Kreme showed a net loss of 15.48 million in the financing activities section. This is mainly due to the retirement of long-term debt held by the company.

Some of the significant internal events that the statement of cash flows shows are a little troubling since they are not in what I would call the "good" category. The Company recorded a net credit to impairment charges and lease termination costs of $268,000 in the third quarter of 2007. This is compared to a charge of $5.4 million in the third quarter of fiscal 2006. Most of the prior year charge relates to underperforming stores, including stores closed and likely to be closed.

As of October 28, 2007, the Company's balance sheet shows the amount of cash and debt of approximately $23 million and $88 million respectively. The maximum amount of additional debt permitted by the Company's creditors and the amount of additional debt available to the Company under those facilities is approximately $11 million at that date. During the first months of 2008, the Company prepaid $21.9 million against the Company's $110 million term loan taken out in February 2007. A large portion of these payments was made to reduce the likelihood of violation of the financial covenants contained in the Company's credit facilities.

In 2007 Krispy Kreme also settled some litigation held against them. Several class action suits were filed against Krispy Kreme on behalf of the people that purchase the companies publicly traded securities between August 21, 2003 and May 7, 2004. This action stated that he company violated sections 10(b) (Manipulative and Deceptive Devices) and 20(a) (Liability to Contemporaneous Traders for Insider Trading) of the exchange act in connection to various public statement made by the company. These different suits were eventually consolidated into one class action suit. The litigation was settled in the amount of 14.4 million.

Using the ratios provided below we see that Krispy Kreme as a company is in considerable financial trouble due to the earning per share and debt ratios. The company is almost leveraged 1 to 1 with the asset that they have and their earning per share or EPS is -5.45. At this current level it is very hard to attract new investors due to the probable loss on the investment. Also if the company does default, there will be nothing left to divide among shareholders after the creditors are finished.

Ratios Company Industry

Current 1.72 .85

Return on Sales .39 2.07

Earnings per Share -5.45 -2.77

Debt .98 .93

Also the Return on Sales ratio is .39 which shows sales are defiantly not on par with the amount of operating expenses that the company holds. The current ratio is the only one that does not look bad at 1.71. This does show a possible recovery from the last few dismal years of