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Case Analysis Krispy

3037 words - 13 pages

Journal of Business Case Studies – April 2008

Volume 4, Number 4

Lessons From Krispy Kreme
J. Richard Anderson, Stonehill College

The recent decline of Krispy Kreme Doughnuts, Inc. raises a natural question: shouldn’t investors
(and auditors) have been more wary of this Wall Street darling? Weren’t there tipoffs that would
have allowed investors to avoid another franchisor “crash and burn” situtation like Boston
Chicken or TCBY frozen yogurt? This paper traces the meteoric rise and fall of Krispy Kreme and
discusses a number of advance indicators of future problems: insider share-dumping, conflicts of
interest within the Board of Directors and senior management, ...view middle of the document...

C. in 1937 when Vernon Rudolph began selling
doughnuts to grocery stores using a secret recipe from a French chef. Strong demand from customers who wanted to
buy their doughnuts freshly made and still warm caused him to open almost 100 retail outlets throughout the South.
After Rudolph’s death in 1973, his heirs sold the chain to Beatrice Foods, which immediately began to tinker with
the successful recipe. By 1982 franchisees were so upset with Beatrice that they joined together to repurchase the
chain. This created a franchisor owned and dominated by its own franchisees, which would create serious
difficulties later on.
By the mid-1990’s Krispy Kreme had escaped its Southern heritage and opened shops in the Midwest and
Northeast, even invading Manhattan, home to many influential writers. But instead of deriding hot doughnuts as a
provincial culinary fare like hominy or grits, the critics raved. A New York Times columnist even wrote: “When
Krispy Kremes are hot, they are to other doughnuts what angels are to people.” The product began to appear on TV
in sitcoms and late-night talk shows; people bragged about their attempts to “score a dozen” of the treats, and a new
cultural phenomenon was born.


Journal of Business Case Studies – April 2008

Volume 4, Number 4

A part of the plan to escape the South and make Krispy Kreme a national brand was the decision to take the
company public. In April 2000, $65 million was raised through the sale of 26.7% of the company’s stock, giving it a
market capitalization of $270 million. By the end of the year, the stock price had almost quadrupled and CBS
Marketwatch labeled Krispy Kreme the top performing IPO of the year. The company’s ability to meet or slightly
exceed the optimistic earnings projections of market analysts combined with news stories describing hour-long lines
outside newly-opened stores to push the stock to a split-adjusted $46 per share by the end of 2001. Investors loved
the concept: this was a brand that seemed to combine high quality, exclusivity, and a gimmick – customers could
actually watch their doughnuts being made. The opportunities seemed endless, as the company quickly carved up
geographic regions for expansion and granted exclusive franchising rights, often to board members and other
existing franchisees.
When Krispy Kreme CEO Scott Livengood was named Restaurants and Institutions magazine’s Executive
of the Year and Forbes put the firm on its list of “200 Best Small Companies,” the momentum became almost
impossible to sustain. The stock traded at 65-100 times projected earnings, and the demand intensified to produce
earnings gains sufficient to justify such an extreme price-earnings multiple.
In May 2004 Krispy Kreme issued its first-ever profit warning, triggering a series of shareholder lawsuits
alleging that the company had attempted to hide year-to-year declines in same-store sales. In fall of that year...

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