KrispyKremeCase

ThomasPrince:893679052
KevinCaire:898345017
KatelinStudrawa:892139668

1.AnalystsarepredictingthatKrispyKremewillbeabletoperformhighlyeffectivelyand
continuetogrowrapidlyinthecomingtwoyears.Doyouagreewiththeiranalysis?Ifso,why?If
not,whynot?

Theanalysispredictedwasinagreementwithourthoughtprocessbecausetheclaimis
lessaboutthespecificnumbersforecastedandmorefocusedonKrispyKreme'sabilityto
continuegrowingontheirgreatfoundation.Whiletherearealwaysuncertaintiesandrisks,
KrispyKreme'scontinuedsuccess,especiallysincetheirIPO,hasbeenbuiltuponsolid
methodsforcontinuedrevenuegrowth.First,companyownedretailstores,orheritagemarkets,
accountforabout60%ofKrispyKreme'sprofits.Whilethismarketsegmentisnottheirfocusfor
growth,thesecompanyownedretailstoresofferplentygrowthpotentialinunderpenetrated
locationsandintheirabilitytocreatenewwholesaleaccountswhiledevelopingmoreefficient
wholesaledistribution.Secondly,KrispyKreme'smainfocusforgrowthistheirfranchise
income.Comparedtotheiroriginalfranchises,calledAssociates,thesenewfranchiselocations,
termedareadevelopers,allowformoreprofitfromroyalties,4.5%versus3%fromnewandold
franchisesrespectively.ThesedeveloperagreementswilldriverevenuegrowthforKrispy
Kremeseeingasthesedevelopersarealsoabletogrowsalesfasterthancompanyowned
units.Inaddition,asfranchisesopeninmassesacrossnewmarkets,aninversematuration
curveatteststoenormoussaleslevelsininthefirstyearofopening.Third,KrispyKreme
ManufacturingandDistribution(KKM&D),whichproducesdoughnutmixthatfranchiseesmust
purchase,appearstobeKrispyKreme'shighermarginbusiness.Theopeningofasecond
distributionfacilityandplansforasecondmanufacturingfacility,thatwillreduceshippingcosts
(inandout)andraisemarginsevenfurther,supportKrispyKreme'sgrowthprojections.Lastly,
KrispyKremehasfourplanstoexpandontheircurrentbrand.Developmentofsmallformatunit
willallowfornewsmalllocationsthatcanallowKrispyKremetoenteravarietyoflocationstheir
stapleunithasnotbeenableto.Inaddition,KrispyKremehasplanstoexpandcoffeesalesand
focusmoreonbeveragesandothercomplimentaryproducts.Also,KrispyKremehasbegunto
takeequitystakesinfranchisethatareforecastedtobecomeprofitcontributorsasfranchises
becomemoreprofitable.Andlast,butnotleast,expansionintointernationalmarketssuchas
theU.K.andJapanwillfurtherrapidgrowthforKrispyKreme.

2.WhatfactorsdidtheCIBCanalystsexaminetoforecastsalesgrowthforKKDintheyears
endedJanuary2003and2004?Whatassumptionsdidtheyimplicitlymakeaboutthenumberof
newstoresandweeklysalesperstore(forbothcompanyandfranchisestores)?Whatarethe
implicitassumptionsaboutrevenuegrowthfromfranchiseoperationsandKKM&D?Doyou
agreewiththeseforecasts?

Therevenueforecastsforweremadeusingperstoreinformation.KrispyKremeplanned
toopen62newstores,mostlythroughareadevelopers,in2003andinvestedinplants,property
andequipment.Theyplannedtoupgradeandacquireequipmentmanufacturingfacilities,install
coffeeroastingmethods,andremodeloldcompanystores.KrispyKremehasahighinitial
successrevenueratepereachstore,andthenwithinoneyearbeginstoleveloff.KrispyKreme
sustainedanimpressiverevenuegrowthat4%,andhadhighfranchisestorerevenuegrowthas

aresult.Therevenueislikelytocontinueforthenextcoupleyearsbecauseofthecontinued
investmentstrategies,untilthecompanyandfranchisestoreshaverelatedrevenues.Royalty
revenueshavealsobeenincreasingbecauseoftheareadevelopersabilitytopayhigher
royaltyrates.Theroyaltiespaying4.5%comparedto3%forassociates.Thissourceofincome
wasfastergrowingwhentheareadevelopersquicklycontinuedtobuildandopennewstores.

3.WhataretheNOPATmarginsthattheCIBCanalysthaveforecastedforKKDfortheyears
endedinJanuary2003&2004?Whatassumptionsweremadeaboutspecificexpenseitems
(e.g.margins,D&A,taxes)?Doyouagreewiththoseforecast?

For2003&2004,KrispyKremesNOPATmarginsarerespectively7.58%and8.22%.
WiththatbeingsaidtheseconclusionscamefromtakingtheNetIncomefromeachyearand
dividingitbytheNetSales.For2003theanalystprojectedaNetIncomeof$37,512andNet
Salesof$494,818.For2004theirprojectionswere$49,807ofNetIncomeand$606,197ofNet
Sales.WithKrispyKremesaggressiveexpansionstrategy,wecanexpecttheiroperating
expenseandgeneraladministrativeexpensewillbehigherthanpreviouslyestimated.Alsothe
casestatedthatKrispyKremewoulduseequityanddebttofinancetheirexpansion.Inturnwe
wouldexpecttheirinterestexpensetoincreaseovertimeunliketheanalystestimates,which
stateadecreaseininteresttaxfrom2002.Also,theprojectedjointventureincomewas
aggressive.Thecasedidnotgiveusanyjustificationforthedecreasinglossfrom20012003.
Withthecompetitiveenvironmentandlowercomparablestoresalesresultsinlowerprofitability.
Inturnlengthenspaybackperiodsfortheinvestment.Withthoseassumptionsbeingsaidwe
feelmoreconservativeestimatesshouldbeused.Wedisagreewithassumptionsonspecific
expenseitems.

4.TheCIBCanalystsdonotforecastKKDsbalancesheetforthefollowingyear(ended
January2003.)Makeyourownbalancesheetforecasts.

Allofourforecastsarebasedona25%growthinsalesfrom2002.Forworkingcapital,
wedecidedona7%workingcapitaltosalesratio.From20002002,theaverageworkingcapital
tosalesratiowas6.03%.Thiscombinedwithanexpectationforfurtherincreasesinsalesand
capitalfromexpansionallowedustoassumethisoptimisticview.Forlongtermassets,the
relationtosalesgrewto20%in2001and25%in2002.Ourprojectionfor2003againroseto
30%basedonthiscontinuedgrowthandtheactualgrowthoflongtermassetsin2002.Lastly,
fordebt,weassumedKKDwillusemost,ifnotalloftheiravailablecashtointernallyfinance
theseexpansions.Withcapextotalling$78millionin2002,KKDplanstoopen62newstoresin
2003.Withabasecostof$1,425,000perstore,KKDcanexpectaneedof$88.35millionin
capexfor2003.Afterexhaustingtheirremainingcashfrom2002andtheirexpectednetincome
ofabout$37.5million,KKDwillstillneedtofinanceabout$29million.WeassumedKKDwill
externallyfinancethisthroughnewlongtermbankdebt.

February3,2002

February3,2003

OperatingAssets

$49,236

$54,396

BeginningLongTermAssets

$153,607

$233,124

TotalOperatingAssets

$202,843

$287,520

BeginningWorkingCapital

NetCapital

$15,176

$28,934

CommonEquity

$187,667

$258,586

TotalNetCapital

$202,843

$287,520

NetDebt

5.IngeneraldoyouexpectanalystsforecastsforacompanylikeKKDtobeoptimistic,
pessimisticorunbiased?Why?

Usinginvestmentbankingtoobtainclientsforthecompany,orcontributingtosellingto
newinvestors,theanalystswouldtendtobeoptimisticbecauseofthewanttoattractnew
prospectstothecompany.Iftheanalystsweretobenegativetowardsthecompany,theywould
losethechanceforthebusinesstoobtainnewequityopportunities.Anotherfactortheanalysts
considerwouldbebrokerageservices.Creatingmoreopportunitiestoproduceresearchand
tradingvolumegivesinvestorsthatalreadyownstockmotivationtopurchasemorestockor
trade.Withthecompanysprofitincreasingbyinvestingandtrading,thelikelihoodofthe
analystsrewardswouldcontinuetoincreaseaswell,givingtheanalystscertainincentivestobe
optimistic.