Krispy Kreme Doughnuts, Inc.
Thadavillil (Nathan) Jithendranathan
Professor of Finance
Opus College of Business
University of St. Thomas
St. Paul, Minnesota, U.S.A.
This case considers the sudden and very large
drop in the market value of equity for Krispy Kreme
Doughnuts, Inc., associated with a series of
announcements made in 2004. Those
announcements caused investors to revise their
expectations about the future growth of Krispy
Kreme, which had been one of the most rapidly
growing American corporations in the new
• To gradually gain back analysts’,
investors’ and lenders’ confidence in the
company in the succeeding ...view middle of the document...
company told investors to expect earnings to be 10% lower than
anticipated, claiming that the recent low-carbohydrate diet trend in
the United States had hurt wholesale and retail sales.
The company also said it planned to divest Montana Mills and would
take a charge of $35million to $40 million.
According to the Wall Street Journal, the company recorded the
interest paid by the franchisees as interest income and, thus, as
immediate profit; however, the company booked the purchase cost
of the franchise as an intangible asset which the company did not
Only 25% of the analysts were recommending the company as a
buy; 50% had downgraded to a hold.
• Rapid growth in revenues and earnings over the
past five years.
• Significant asset growth in the past five years.
• The bulk of this growth, however, has occurred
in accounts receivables from affiliates and from
reacquired franchise rights.
Liquidity, Leverage, and
• The firm’s liquidity ratios are strong and continued to
improve over the five-year period.
• The leverage ratios show that the firm has been
increasing its proportion of debt,...