Krispy Kreme

Krispy Kreme’s Financial Health

Krispy Kreme’s Financial Health: Year Ending February 3, 2002

Ronald D. Provinge

AXIA College

Abstract

In the following essay, discussion of Krispy Kreme’s Financial Statements for the year ending February 3, 2002 will include an analysis of their company stock, depreciation, cash flow statement, income statement trend, and management.

A BRIEF HISTORY

Starting somewhere in the middle of the decade of 1930, a gentleman named Vernon Rudolph purchased a recipe from a chef in New Orleans. Shortly after, Vernon moved to Winston-Salem, N.C. and opened a business to cater to grocery stores. Not long after, people started requesting hot doughnuts and this is what started as Krispy Kreme. Vernon Rudolf passed away in 1973 with the company being sold to Beatrice in 1976. Disagreements between Scott Livengood (current CEO, President, and Chairman) and Beatrice arose leading to the purchase of Krispy Kreme for $24 million by franchisers.

Andy Serwer, Fortune editor thinks, “There’s 66 years of history here. It’s a product that people not only love, but understand” (Serwer, 2003)

Krispy Kreme’s Financial Health: Year Ending February 3, 2002

DEPRECIATION ANALYSIS

Depreciation is an expense that shows the reduction of the value of an asset due to usage or time. This particular expense normally will bring down the amount of reported earnings by the company, but may make free cash flow go up.

Taking into account what Krispy Kreme originally paid for the company’s property, plant, and equipment, and dividing what is still owed on said items, the depreciation expense in percentage was 80.1% in 2002, and 71.9% in 2003. Some reasoning for the percentage to decrease might have been caused by an increase of these assets due to a purchase. According to the consolidated balance sheets, “Property and equipment, net” rose by $109,000 (number given in thousands) between the years of 2003 and 2002.

Figuring out what the depreciation expense is over a period of time is known as amortization. Identifying the intangible assets, the nonphysical assets that are used in operations as having an indefinite useful life like Krispy Kreme does, shows at fiscal year-end 2002, an expense of $100,000 to amortize intangible assets related to a purchase. Amortization and goodwill of intangible assets has been ruled by the Financial Accounting Standards Board Statement No. 142 as no longer needed. Instead, a test for impairment will be done annually and written down only when impaired.

In Note 5, an increase of $96,286 in property, plant, and equipment before depreciation at the end of the fiscal 2003 year was reported; however only $83,196 was shown as property, plant, and equipment in the cash flows statement. The possibility that an asset was purchased with stock or some other form of payment could be the cause of the difference.

COMPANY STOCK ANALYSIS

An overview of Krispy Kreme’s stock portfolio reveals that as of February 3, 2002, 54,271 shares of common stock were issued with 56,295 issued and outstanding as of February 2, 2003. These numbers are stated in thousands in the balance sheet. The stock is listed in the New York Stock Exchange under the heading KKD.

Even though profits were made between 2002 and 2003, dividends were not paid and according to the U.S. Securities and Exchange Commission Form 10-K, Part II, Item 5, “We intend to retain out earnings to finance the expansion of our business and do not anticipate paying cash dividends in the foreseeable future.”

The fourth quarter of 2002 showed the company’s highest stock market price of $46.90, probably due to its purchase of certain assets of KKS and Destin Doughnuts, Inc., and certain franchise rights. The stock price has risen, on average throughout the years of 2002 and 2003, making the company at the time appear to be highly profitable; however should one look at the overall picture of the company in the last 5 years, one would not feel prone to investing. Stock prices have fallen from a high of over $49 per share to a close on June 6, 2008 to $3.42 per share.

Mr. Robert Burgoyne of Burgoyne Investment Services had it right when he stated that “the stock is full of hot air”. (Shook, 2002) When looking at the years of 2003 and 2002, the company expanding up to 600 or more stores since 1998 would appear to be a great investment opportunity. The share outstand at year-end were higher than the average shares outstanding during the year.

Basic earnings per common share show $0.61 for 2003, $0.49 for 2002, and $0.30 for 2001. With constant growth over a three year period, no extraordinary gains or losses are reported for 2002 or 2003.

CASH FLOW STATEMENT

Krispy Kreme’s net income reported in the consolidated statement of cash flows for year ending February 2, 2002 is $26,378 compared to $33,478 (numbers in thousands) in 2003. Significant changes in assets