Krispy Kreme Doughnuts, Inc

Marketing Case Analysis Course: MBA 524 Instructor: Mary A. Higby Date: April 22, 2008

Presented by: Jack Szczepaniuk Chun-Chiang Chan

Summary
Introduction to Krispy Kreme Krispy Kreme Downturn Krispy Kreme Finances S.W.O.T. What is the Problem? Critical Issues Alternatives Our Recommendation

Introduction to Krispy Kreme

Founded by Vernon Carver Rudolph in 1933 First donut shop (partnered) was in Paducah, KY

Operations were moved to Nashville, TN

Focused on selling to grocery stores Rudolph opened his own shop in Winton-Salem,NC in 1937 with $25 dollars and a 1936 Pontiac

Introduction to Krispy Kreme

Out the door Around the corner Down the block

Introduction to Krispy Kreme

Automatic doughnut cutting machine Air-pressure doughnut pourer Donut hole does not exist Entire process is automated Hot Original Glazed The Red Light

Krispy Kreme U.S.

Krispy Kreme Worldwide

Krispy Kreme Stock

Opened on the NASDAQ on April 5, 2000 (KREM) Bought Digital Java Coffee Company in April 2001 Moved up to the NYSE on May 17, 2001 (KKD)

Krispy Kreme Downturn

Low-carb, low-sugar doughnuts Increase cost in ingredients Too many stores in too little time Lack of advertising has caught up with KK

Krispy Kreme Finance

Iss 4/6/2000: $9.60 12/28/2001: $45.75 1/31/2003: $30.41 8/18/2003: $49.37 11/5/2003: $44.31 5/5/2004: $32.37 5/10/2004: $20.30 10/27/2005: $4.05 1/16/2007: $11.42 1/16/2008: $2.23

4/18/2008: $3.11

Krispy Kreme FinanceIncome Statement

2007 Revenue Total Revenue Cost of Revenue, Total Gross Profit Selling/General/Administrative Expenses, Total Depreciation/Amortization Unusual Expense (Income) Operating Income Interest Income (Expense), Net Non-Operating Other, Net Income Before Tax Income Tax - Total Income After Tax 461.2 461.2 389.38 71.82 48.86 21.05 28.49 -26.58 -19.55 5.11 -41.03 1.21 -42.24 2006 543.36 543.36 474.59 68.77 67.73 28.92 90.9 -118.77 -23.44 5.67 -136.54 -0.78 -135.76 2005 707.77 707.77 598.28 109.49 55.3 31.93 161.85 -139.6 -7.72 -0.06 -147.38 9.67 -157.05 2004 649.35 649.35 493.65 155.7 45.23 22.31 -0.53 88.68 -5.85 0.16 82.99 33.15 49.85 2003 490.73 490.73 380.64 110.08 30.07 14.68 9.08 56.26 -2.01 -3.47 50.78 19.72 31.06

Total Extraordinary Items

Accounting Change Discontinued Operations Net Income

0
0 0 -42.24

0
0 0 -135.76

-41.29
-1.23 -40.05 -198.34

-1.28
0 -1.28 48.56

0
0 0 31.06

KK FinanceBalance Sheet (Asset)

2007 Assets Cash and Short Term Investments Cash & Equivalents Short Term Investments Total Receivables, Net Accounts Receivable - Trade, Net Accounts Receivable - Trade, Gross Provision for Doubtful Accounts Notes Receivable - Short Term Receivables - Other Total Inventory Prepaid Expenses Other Current Assets, Total Total Current Assets Property/Plant/Equipment, Total - Net Goodwill, Net Intangibles, Net Long Term Investments Note Receivable - Long Term Other Long Term Assets, Total Other Assets, Total Total Assets 36.24 36.24 0 62.57 27.6 29.51 -2.75 0 34.97 21.01 0 12 131.82 168.65 28.09 0.84 3.22 0 16.86 0 349.49 16.98 16.98 0 73.8 37.68 39.18 -13.66 1.15 34.97 23.76 0 32.49 147.03 205.58 29.18 1.11 8.6 0.04 19.32 0 410.86 27.69 27.69 0 45.71 44.77 40.64 -11.38 0.94 0 28.59 0 17.38 119.36 309.21 32.69 1.69 5.97 2.12 9.23 0 480.28 21.03 21.03 0 71.82 63.09 46.09 -1.27 0.75 7.97 29.82 0 14.83 137.5 287.49 197.16 0 14.58 6.56 13.31 0 656.6 55.18 32.2 22.98 48.28 45.44 35.83 -1.45 0 2.85 24.37 3.48 9.82 141.13 202.56 0.2 49.15 11.22 1 5.23 0 410.49 2006 2005 2004 2003

KK Finance Balance Sheet (L+S)

2007 Liabilities and Shareholders' Equity Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current Liabilities, Total Total Current Liabilities Total Long Term Debt Long Term Debt 7.87 125.25 0 1.73 0.02 134.87 105.97 105.97 8.9 140.48 0.11 4.43 0 153.92 118.24 118.24 17.44 43.62 8.48 48.1 0 117.64 90.95 90.95 19.11 23.3 8.12 8.14 0 58.67 137.11 137.11 14.06 20.98 12.28 3.3 9.08 59.69 57.19 57.19 2006 2005 2004 2003

Deferred Income Tax

Minority Interest Other Liabilities, Total Total Liabilities Redeemable Preferred Stock Preferred Stock - Non Redeemable, Net Common Stock Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Other Equity, Total Total Equity Total Liabilities & Shareholders Equity

0
0 29.69 270.53 0 0 310.94 0 -233.25 1.27 78.96 349.49

0.85
0 29.18 302.18 0 0 298.26 0 -191.01 1.43 108.67 410.86

3.91
0.39 26.45 239.34 0 0 295.61 -0.2 -55.25 0.78 240.94 480.28

0
2.15 22.26 220.19 0 0 294.48 -0.38 143.09 -0.77 436.41 656.6

9.85
5.19 5.22 137.14 0 0 173.11 -0.56 102.4 -1.61 273.35 410.49

KK Finance Cash Flow

2007 2006 2005 2004 2003 Net Income/Starting Line Depreciation/Depletion Deferred Taxes Non-Cash Items Accounting Change Unusual Items Equity in Net Earnings (Loss) Other Non-Cash Items -42.24 21.05 -0.01 39.65 0 28.52 -6.47 17.6 -135.76 28.92 -1.89 102.87 0 87.76 4.34 10.77 -198.34 31.98 10.12 213.2 1.23 198.54 1.62 11.8 48.56 22.81 -3.49 40.32 0 0.94 2.24 37.14 31.06 14.68 0.06 21.03 0 0.93 2.09 18.01

Changes in Working Capital

Accounts Receivable Inventories Other Assets Payable/Accrued Taxes Payable Other Liabilities Cash from Operating Activities

3.66
0.5 2.56 6.85 -9.05 0 2.8 22.11

7.73
3.86 4.12 -2.97 0.44 0 2.28 1.87

27.97
10.98 2.14 -4.06 8.28 7.97 2.65 84.92

-25.53
-18.73 -4.07 -0.97 -7.12 1.03 4.32 82.67

-14.92
-6.98 -8.52 -0.33 0.74 0.57 -0.41 51.91

Krispy Kreme Finance Cash Flow

2007 Capital Expenditures Purchase of Fixed Assets Other Investing Cash Flow Items, Total Acquisition of Business Sale of Business Sale of Fixed Assets Sale/Maturity of Investment Purchase of Investments Other Investing Cash Flow -4.01 -4.01 16.64 -2.9 2.5 9.66 9.59 -0.82 -1.4 2006 -10.38 -10.38 -2.32 0.43 2.54 7.33 0 -12.22 -0.4 2005 -74.31 -74.31 29.92 -3.62 0 28.66 0 -3.47 8.35 2004 -78.32 -78.32 -91.63 -108.4 0 0.46 33.14 -13.96 -2.87 2003 -81.7 -81.7 -9.94 -4.97 0 2.14 33.1 -41.14 0.93

Cash from Investing Activities

Financing Cash Flow Items Other Financing Cash Flow Total Cash Dividends Paid Issuance (Retirement) of Stock, Net

12.63
-0.43 -0.43 0 0

-12.7
-1.57 -1.57 0 0.15

-44.39
-0.18 -0.18 0 1.18

-169.95
-1.96 -1.96 0 19.52

-91.64
1.4 1.4 0 7.14

Issuance (Retirement) of Debt, Net

Cash from Financing Activities Foreign Exchange Effects Net Change in Cash Net Cash - Beginning Balance Net Cash - Ending Balance

-15.05
-15.48 0 19.26 16.98 36.24

1.55
0.14 -0.01 -10.71 27.69 16.98

-35.21
-34.21 0.34 6.66 21.03 27.69

58.55
76.11 0 -11.17 32.2 21.03

41.5
50.03 0 10.3 21.9 32.2

Krispy Kreme Finance

Krispy Kreme Doughnuts Starbucks Tim Hortons Caribou Restaurants Industry Specialty Eateries Industry

Market Cap: Employees: Qtrly Rev Growth (yoy): Revenue (ttm):

201.84M 3,875 -11.70% 430.56M

12.81B 172,000 17.50% 9.82B

6.29B 525 10.50% 1.86B

53.85M 1,603 5.20% 256.83M

204.46M 4.70K 7.10% 402.90M

1.29B 759 20.90% 1.07B

Gross Margin (ttm):

EBITDA (ttm):

11.21%
19.00M

57.24%
1.47B

26.82%
461.55M

16.13%
25.57M

28.56%
41.75M

32.41%
147.18M

Oper Margins (ttm):

Net Income (ttm): EPS (ttm): P/E (ttm): PEG (5 yr expected): P/S (ttm):

0.10%
-59.65M -0.944 N/A N/A 0.47

9.72%
675.74M 0.888 19.89 1 1.31

20.42%
264.34M 1.400 24.22 1.47 3.45

-3.47%
-30.66M -1.586 N/A N/A 0.20

5.72%
8.81M 0.59 19.92 1.10 0.54

1.14%
-22.36K N/A 23.91 1.21 1.21

Strengths of Krispy Kreme

Signature hot Original Glazed doughnut People know Krispy Kreme Hot light January 28,2007, 395 Store worldwide, of which 113 were owned, 282 were owned by franchisees

Weaknesses of Krispy Kreme

Not flexible difficulties reordering when non-Hot light stores are sold out Franchisees close stores No other standout products (weak menu) Bad relations with franchisees (cost of equipment, packaging, ingredients, etc) Corporate Structure (CEO retired)

Opportunities for Krispy Kreme

Reputation Fundraising program has helped non-profit organizations raise millions of dollars in needed funds Worldwide sales May steal back customers Untouched domestic locations

Threats to Krispy Kreme

Dunkin Donuts, Tim Hortons, Starbucks, and other National Chains/Specialty Eateries KK stores went up too fast Store locations too scattered Increasing cost of ingredients Increasing utility and fuel costs

What is the Problem?

How will Krispy Kreme return to profitability?

- Competitiveness - Efficiency - Franchisee relations

Critical Issues
Banks saved KK in 4/08 extending life of loan agreement (interest rate higher) New CEO in fiscal 2008 Highly competitive w/ Dunkin Donuts, Tim Hortons and Starbucks Focus on marketing Closing of Franchises Globalizing Krispy Kreme

Alternative 1
Close unprofitable stores, and focus on other domestic areas and global market

A1 Advantages and Disadvantages

Advantages Increase capital from sold locations and properties Decrease loss Develop new market Disadvantages Lose domestic locations Lose foothold in certain regions Risk for international locations Increase cost for new locations

Alternative 2
Diversify and expand product mix Develop culturally oriented products Redesign current product names and descriptions Redesign packaging (cups, wrappers, bags, etc.)

A2 Advantages and Disadvantages

Advantages Attracts new customers Attractive to the international market More Competitive with the market May keep existing customers May increase items sold per purchase More efficient More cost effective in the long run Disadvantages New development and packaging costs New ideas may discomfort old customers Risk of not selling

Alternative 3
Themed doughnuts
Holiday doughnuts Special order birthday doughnuts Special event catering (wedding, etc.)

Krispy Kreme Club w/ emails, games, coupons, events

A3 Advantages and Disadvantages

Advantages Attractive young ages Increase the holidays' sale Loyal customers will increase Increase the customers' database Disadvantages Remodel the production line Increase the website setup cost Need to find more workforce to support new activities

Alternative 4
Develop Krispy Kreme Mascot Formulate marketing strategy for mascot and 2008 Beijing Olympics Begin advertisements on TV and Radio

A4 Advantages and Disadvantages

Advantages Increase the visibility on market Increase sales Increase celebrity/icon marketing possibilities More helpful on increasing the international market

Disadvantages A huge cost of advertising expense KK visibility is too low, it may not have big help May be too late to plan for Olympics Olympic sponsors and partners were chosen years ago

Our Recommendation
Alternative 1 Unprofitability must be realized Back to the basics Avoid being greedy again Grow slowly Other alternatives may be implemented in the future

Krispy Kreme Doughnuts, Inc

Marketing Case Analysis

Course: MBA 524 Instructor: Mary A. Higby

Date: April 22, 2008

Presented by: Jack Szczepaniuk Chun-Chiang Chan

Sources
Krispy Kreme website www.krispykreme.com The Triangle Business Journal www.bizjournals.com Investopedia www.investopedia.com