KRISPY KREME DOUGHNUTS

FORECASTING

Group: Tammy Cheung , Shelly Khindri,

Parm Marway, Hari Stirbet

AGENDA

Background (Shelly)
Industry Analysis (Shelly)
Current Financials (Parm)
Forecasting (Hari)
Forecasting Verification (Tammy)
Reality Check (Tammy)

HISTORY
Vernon
Rudolph
purchased
secret recipe
from French
chef in New
Orleans

1937

Krispy Kreme
gained a
reputation in
U.S. for
making high
quality, tasty
donuts

1960

222 stores in
34 states,
produced 5
million donuts
a day, 2 billion
donuts a year

2002

INDUSTRY ANALYSIS
Threat of New Entrants
(MODERATE)
High startup costs
Franchise costs high
Strong Brand Identity
Bargaining Power of
Buyers (HIGH)
Quality & Price
Taste
Alternative products

Rivalry Among Existing

Firms (HIGH)
Highly fragmented
Largest donut retailer
Large competitors and
regional players

Threat of Substitutes (HIGH)

Geographical presence

Bargaining Power of
Suppliers (LOW)
Vertical Integration

INDUSTRY ANALYSIS
CONCLUSIONS:
Highly competitive environment with
exception of supply chain
To continue growth levels, high investments
in long-term assets and working capital would
be needed
Profitability outlook relies heavily on ability to
carry forth expansion plans (outside of U.S)

REVENUE SOURCE
(1) Owned and operated doughnut stores
(2) Royalties from franchise associates and
area developers
(3) Sale of doughnut mixes and doughnutmaking equipment to franchise
associates and area developers

GROWTH STRATEGY
Mid 1990s: grew geographically through
franchising
2003: 62 new stores (mostly franchise)
2003 to 2006: open 200 new stores
LONG TERM: Exploring growth in Japan,
South Korea, Australia, Spain and UK

PROBLEM IDENTIFICATION
CIBC World Markets has to forecast the
companys financial performance for the
next few years. Items to consider:
Ability to sustain revenue & earnings growth
Forecasting number of stores in the system
Ensure forecast is consistent with corporate
trends

CIBC ANALYST FORECAST

Reflective of corporate expansion;
January 2003 $0.64 Earnings per share
Projected earnings growth of 42%

January 2004 $0.83 Earnings per share

Projected earnings growth of 33%

CIBC ANALYST FORECAST

CONDENSED INCOMESTATEMENT

2003

2004

REVENUE (SALES)

494,818

606,197

COST OF GOODS SOLD

390,249

473,864

GROSS PROFIT

104,569

132,333

SELLING, GEN. AND ADM. EXPENSES

44,080

52,999

EARNINGS BEFORE INTR. AND TAXES

60,489

79,334

14

1,000

EARNINGS BEFORE TAXES

60,475

78,334

INCOME TAX

22,991

30,527

NET INCOME

37,512

49,807

NET INTEREST EXPENSE

THINGS TO CONSIDER
CIBC forecast
What elements did you consider in their
forecast?
What assumptions would you make regarding
store expansion & sales per store?

CONDENSED BALANCE SHEET

2000

2001

2002

3.18

7.03

21.90

NON CASH CURRENT ASSETS

37.86

60.58

79.87

LONG-TERM ASSETS

63.92

103.88

153.60

104.96

171.49

255.37

CURRENT LIABILITIES

29.60

38.17

52.53

LONG-TERM LIABILITIES

27.62

6.53

12.69

STOCKHOLDERS' EQUITY

47.74

126.79

190.15

104.96

171.49

255.37

ASSETS:
CASH

TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS'
EQUITY:

TOTAL LIB. AND STOCKHLDRS' EQUITY

CONDENSED INCOME STMT

2000

2001

2002

REVENUE (SALES)

220.24

300.72

394.35

COST OF GOODS SOLD

190.00

250.69

316.95

GROSS PROFIT

30.24

50.03

77.40

SELLING, GEN. AND ADM. EXPENSES

19.41

27.95

37.27

EARNINGS BEFORE INTR. AND TAXES

10.83

22.08

40.13

NET INTEREST EXPENSE

1.23

-1.70

-2.40

EARNINGS BEFORE TAXES

9.60

23.78

42.53

INCOME TAX

3.65

9.06

16.17

NET INCOME

5.95

14.72

26.36

RATIO ANALYSIS

2000
Sales growth

2001

2002

36.54%

31.14%

NOPAT Margin

2.97%

4.52%

6.65%

After-tax net interest rate on debt

11.32%

-7.71%

-5.78%

Net operating working capital/sales

3.73%

7.44%

6.95%

Net operating long-term assets/sales

29.05%

34.49%

38.98%

Net debt/net capital

33.84%

-0.63%

-5.14%

Shareholders' equity/net capital

66.14%

100.40%

105.09%

KEY FORECASTING TOOLS

Ratio Analysis
Publicly available information about:
Growth plans (new stores)
Profitability (per store)

Industry/environment assessment

FORECASTING KKDs REVENUES

What do we know about KKDs plans?
What is the Net Profit per Area Developer
store?
What is the average number of stores in
the system? Could you project this for the
next 2 years?

FORECASTING SALES EXERCISE

Are the Developer Store profitable?
2002
Revenues
Gross Profit
Royalties
Markup of KK purchases
Capital Costs
Net Income per store

KKDs EXPANSION PLANS?

200 new stores from 2003-2006
62 to open in 2003
Store opening forecast:

CompanyStoreOpenings
DeveloperAreaStore
Openings

2003

2004

2005

2006

62

# OF STORES IN SYSTEM

2001

2002

Actual
Company owned

2003

2004

Forecast

63

75

80

85

Franchised

111

143

200

262

System wide

174

218

280

347

Average# of company stores

69

77.5

82.5

Average# of franchise stores

127

171.5

233.5

PROFITABILTY: FRANCHISE
2002 weekly averages:
23K per old franchised
72K per area developer store and company store
Average per franchise?
2002

2003

Actual
Company weekly sales

72K

Growth
Franchise weekly sales
Growth

53K

2004
Forecast
75K

78K

4%

4%

63.8K

73.5K

20%

15%

SYSTEM SALES FORECAST

(Annual Sales = Average# of Stores * Weekly Sales per Store * 52)
2002
Actual

2003

2004
Forecast

Company Sales

258,336

302,250

330,330

Franchise Sales

350,012

535,080

739,230

TotalSystemSales

608,348

837,330

1,119,560

37.6%

33.7%

Growthrate

KKDs REVENUE GROWTH

INCOME STATEMENT FOR THE YEAR
Sales
Net operating profits after tax
Net interest <income> expense after tax
Netincome
BasicEarningsPerShare

2003

2004

504,768

615,817

40,381

49,265

464,386

566,551

39,917

48,698

0.75

0.91

FORECAST VERIFICATION
2001

2002

2003

Actual

2004
Forecast

D+A

0.02

0.02

0.02

0.0195

G+A

0.066

0.0698

0.068

0.067

Taxes

0.03

0.04

0.046

0.05

Margins

0.166

0.196

0.21

0.22

DUPONT: ACTUAL vs. FORECAST

2000 2001 2002 2003 2004 2005 2006 2007

Forecast

Actual
Net Income/ Sales

0.03

0.05

0.07

0.08

0.08

0.08

0.06

0.05

Sales/Assets

3.05

2.38

2.18

1.78

1.89

1.98

2.03

2.03

Assets/Stockholders'
Equity

1.51

1.00

0.95

1.05

1.05

1.05

1.05

1.05

ROE

0.12

0.12

0.14

0.15

0.16

0.16

0.13

0.10

CHANGE IN DUPONT RATIOS

Why do we see the change in Dupont
ratios?
Class Exercise: Discussion about
efficiency

ADDITIONAL DISCUSSION
What would impact sales other then
expanding stores?

Mini Plants
Product line expansion
Change in Strategy
International Opportunity

RECALL KKDs GROWTH STRATEGY

Open 200 new stores from 2003-2006
Expand to Japan, South Korea, Australia,
Spain and the U.K

WAS CIBC RIGHT?

CIBC
Income Statement

2003

REVENUE (SALES)

494,818

COST OF GOODS SOLD

390,249

GROSS PROFIT

104,569

Reality
2004

2003

2004

606,197 491,549
473,864 381,489

665,592

132,333 110,060
52,999 50,243

158,196

507,396
56,110

SELLING, GEN. AND ADM.

44,080

EBITA

60,489

79,334

59,817

102,086

14

1,000

5,044

7,409

EBT

60,475

78,334

54,773

94,677

INCOME TAX

22,991

30,527

21,295

37,590

NET INCOME

37,512

49,807

33,478

57,087

NET INTEREST EXPENSE

CHECK IT OUT
Backin2002
222 stores in 34 states

By2004
360 stores in 48 states

75 company owned
53 franchised
94 area developer

144 company owned

57 franchised
159 area developer

1 store in Canada

12 in Canada
3 in Australia
2 in the U.K
2 in Mexico

5 million doughnuts a day

2 billion doughnuts a year

7.5 million per day

2.7 billion per year

SUMMARY

Diet Trends: Low fat/Carb hype

Competition with regional brands (i.e.
Mary-Ann Donuts)
Beverage sales not favorable
Forecasting is an art not a science

QUESTIONS