Forecasted Item in the Income

statement

Explanation

Franchisee Income

Franchisee profit grew by 60% in 2001

Area developers are expected to grow
sales more than the company owned
stores

Support sales

This is proportionate to the increase in

number of franchisee stores, as the new
stores will need to buy the doughnut
mixes & doughnut-making machines
Margins for KKM&D is increasing at
100bp per year (Current margin is
16.6%)
A new distribution facility will decrease
shipping cost & increase margin

System-wide sales

Through existing stores & new

stores: Increase the sale of
complimentary products (Eg:
coffee Coffee sales is expected to
grow proportional to overall sales.
Though currently only 5% of sales)
Increase the sales of Existing
products

Forecasted Item in the Income

statement
Earnings improvement

Explanation

Advantages of Equity stakes

Original goal of 10%

Expecting to Increase to 12%
Shift toward higher margin KKM & D
(margins are increasing at 100bp per
year)
Margin expansion in each category

Expected to open 62 stores ( most

of which is franchised)
As franchisees become profitable &
as the number of franchisees grow,
the Equity stakes will be better
contributors

Business sustainabilty - Analysis

PROS

CONS

Rapidly growing business

High margins
Industry leaders
Through the franchisee
model, Krispy Kreme doesnt
bear all risks related to the
Franchise store

Open more stores to counter

the Honeymoon effect
But, opening more stores will
cannibalize existing sales
Increasing capital costs this
will be reflected in the new
store openings
Uncertainty in the market
acceptance of Small format
units - might reduce the
growth potential

Optimistic - BUY