Krispy Kreme Doughnuts Analysis Project - Case Study Example

Krispy Kreme Doughnuts Analysis Project INTRODUCTION Krispy Kreme is a company producing doughnut and running a chain of coffeehouses. It is a globalcompany headquartered in America and was founded on 13th July, 1937. The founders of the company were Vernon Rudolph and his uncle Joseph LeBeouf’s, who started their business from a small doughnut shop. Contextually, the small doughnut shop today is one of the well known international food retail company, which delivers superior quality of doughnuts and other beverages to customers. It was observed that within a short span of time the company expanded its business through the establishment of several franchises all over the world. Krispy Kreme Company claims that the doughnuts, which they are made, are very affordable in nature, and is much famous among the people while organizing small get together, office parties and as lunch for the working people. The doughnuts of this company were famous amid people because of its quality and affordability. The Krispy Kreme Doughnut Company are much clear and focused towards it business prospective. The main intention and objectives of the company is to increase the sales of its products by increasing the retail outlets all over the world. The company wants to reduce the operating cost and reduce the funds used for external increasing the sales level. Moreover, another aspect of the company is to upsurge the market for increasing production as well as sales. The company is planning to reduce the amount of fixed cost by centralizing the production procedures, which will help to reach more production efficiency and as well as profitability. The Krispy Kreme Doughnut Company is recently focusing upon stores development in the south eastern area of the United States for increased market share and operational efficiency (EDGAR Online Inc. 1-282). The objective of the paper is to evaluate the financial position of the company with the competitor company name Dunkin Doughnuts. The study is also evaluates the Competitor Company and the profitability structure, capital structure and the market positioning structure of the company with respect to Krispy Kreme using ratio analysis. The management teams of the company play a vital role in the strategic management, for the attainment of the business goals. The current chairman of the company is James H. Morgan. He is serving for the company since 2005. Tony Thompson is the chief executive officer of the company. Douglas R. Muir is the present Executive Vice President, Chief Financial Officer and Treasurer of the company since 2007. ANALYSIS OF RATIOS The ratio analysis is an important tool by which the financial stability of a company can be examined. The ratio analysis is of significance as it provides accuracy of data. There are several types of financial ratios, which have been used for defining the several financial terms. The Liquidity Ratio has been used for calculating the ability of the company to pay out the short term loans. The Liquidity Financial Analysis contains the Current Ratio analysis and accounts receivable turnover and the number of day to collect receivable. The Current Ratio specifies the company’s capacity of paying the current liabilities by the current assets in the given year. The current ratio analysis of the company is conducted to ensure the liquidity flow of the company and its financial strength. Current Ratio Analysis of Krispy Kreme Doughnut Company- Total Current Assets for the year 2013 is $ 134784 and the total Current Liabilities for the year 2013 is $46676. Current Ratio= Current Assets/ Current Liabilities For 2013 =137784/46676=2.95:1 The total Current Assets for the year 2014 is $ 127487 and the total Current Liabilities for the year 2014 is $46408 Current Ratio= Current Assets/ Current Liabilities For 2014 =127487/46408=2.75:1 From the analysis of the Current Ratio it is evident that the company is capable to pay its short term debt. However, the company’s Current Ratio has declined in 2014 from 2013 but the company is still on a sound position to repay its short term debts. By the study of company’s annual report it can be stated that in 2014 the company has been losing its all receivables, inventories and as well as the cash liquids and current liabilities. On contrary the Current Ratio Analysis of Dunkin Doughnuts – The total Current Assets for the year 2013 is $ 461760 and the total Current Liabilities for the year 2013 is $344298. Current Ratio= Current Assets/ Current Liabilities = 461760/344298 = 1.34:1 By the evaluation of the Dunkin Doughnut Company it can be observed that the Dunkin Doughnut is not that efficient to pay out its short term debt as compared to Krispy Kreme. Though the company earned more current assets than the Krispy Kreme but it is not in financially stable position as per the Accounts receivable turnover (EDGAR Online Inc. 2012). The account receivables ratio provide support to the managers of the company determine the ability of the company that how much the company is efficient to collecting in credit sales. Accounts receivable turnover of Krispy Kreme – Account Receivables turn over = Average net receivables/Sales on Account*365 For 2013 = 26.33/435.84*365 = 0.06*365 =21.9 For 2014 = 25.94/460.33*365 =0.056*365 =20.44 In respect to the Account Receivables Turnover Ratio it is found that in the year 2013 the company has efficiency in collecting the credit sales. However, Account Receivables turn over the ratio also provides the information about the decreasing efficiency of the company in the year of 2014 from the above analysis. Correspondingly, Account Receivables turnover ratio Dunkin Doughnuts- Account Receivables turn over = Average net receivables/Sales on Account*365 = 10277/713840*365 = 0.014*365 =5.11 In the context of the Account Receivables turnover ratio of the company, Dunkin Doughnuts had been able to collect the credit receivables from the market, which is quite sound in nature but it is lower than the Krispy Kreme’s position. Another determinant to evaluate the company performances and standard Profitability Ratio is used. In this context, Profitability Ratio is a tool, which provides help to evaluate the company’s efficiency regarding the various types of earnings such as sales, equity, profits and assets. This Ratio Analysis always describes the company’s performance through its cash flow statements, profits and various incomes of the company to a considerable extent. The Gross Profit Margin ratio is a measurement instrument, which mainly describes the profitability of the gross profits against the net sales of the company. Gross Profit Margin Ratio Analysis of Krispy Kreme- Gross Profit of 2013= 73.01 million and sales during the year of 2013 is 435.84 million (amigobulls.com, 2014). Gross Profit Margin Ratio = Gross Income/ Sales*100 For 2013 = 73.01/435.84*100 explain = 16.75% Gross Profit of 2014= 84.19 million and sales during the year of 2014 is 460.33 million (amigobulls.com, 2014). For 2014 = 84.19/460.33*100 =18.29% By the Gross Profit margin Analysis, it is witnessed that the company’s growth in profit earnings has increased. The company has increased its profits percentage over (18.29% - 16.75%) = 1.54 % within a year. This increase in Gross Margin Ratio explains the profitability situation, which is due to the outcome of sales of the company’s inventories. Operating Profit Margin Ratio is the key tool, which provides the company accurate information and thus advice regarding the cost control. The Operating Profit Margin Ratio Analysis describes the owner about the expenses of the firm and the remaining profit after the payment of cost expenses. All these aspects are important while evaluating the business performance of a company in a competitive world. Operating Profit Margin Ratio Analysis of Krispy Kreme- Operating Profit Margin = Operating Income/ Sales*100 For 2013 =37729/435843*100 = 8.66% For 2014 = 46570/460331*100 = 10.12% In respect of analysis of the operating margin ratio it is clear that there is a growth in operating cost, which is relatively increasing over the period of time. Operating Profit Margin Ratio Dunkin Doughnuts- Operating Profit Margin = Operating Income/ Sales*100 = 304736/713840*100 = 42.69% Here the company Dunkin Doughnuts has been leading with its operating profit margin over the period of time, which has depicts the good position holdings in the market through the financial sides as compared to Krispy Kreme Furthermore, the financial analysis of accompany largely depends on the net profit. In this regards, Net Profit Margin is termed as ultimate profit of the company, which is calculated after considering every payments of the company. The shareholder of the company mainly focuses upon the net profit of the company. Net Profit Margin Ratio Analysis of Krispy Kreme- Net Profit Margin= Net Income/Sales*100 For 2013 =20779/435843*100 = 4.77% For 2014 =34256/460331*100 = 7.44% The net profit analysis of the Krispy Kreme Doughnuts Company has been evaluated for the two consecutive period of time. The net profit margin explains the profitability earnings related to the increase or decrease of the same. In the year 2013 the net profit ratio of the company was 4.77% but in 2014 the net profit of the company come has raise to 7.44%. This analysis depicts the progressive position of the net profit of the company in a year span. Conversely, Net Profit Margin Ratio Analysis of Dunkin Doughnuts- Net Profit Margin= Net Income/Sales*100 =146304/713840*100 =20.49% In the period of 2013 the Dunkin Doughnut Company has made a huge amount of profit, which is far greater than the Krispy Kreme Doughnuts Company. The earnings per share of the Krispy Kreme Doughnuts Company in the year 2013 Net Income = 20.77 Weighted Average shares or Average number of common shares outstanding is = Earnings Per share of the year 2013 are $67624 million. It can be described from the current market scenario that the company still has its good control over the market. In the present era, it can be seen that the Krispy Kreme has many competitors, which are the main threats for the company annual turnover. The annual report explains that the sales of the company has increased but the expenses related to the sales has also increased, which indicates that the company has many threats in the market that is challenging the productivity of the company. Another determinant regarding the financial analysis of a company is the Debt Leverage Ratio. It is specially used to describe about the outstanding debts of the company, which will explain the capital structure of the company. The Debt Ratio describes the proportion of liabilities of the company related with the assets. Debt Ratio Analysis of Krispy Kreme- Debt Ratio = Total Liabilities / Total Assets Total liability = 95506 Current liability=46676 Long term Debt and capital lease obligation, less current portion= 23,595 Other long-term obligations and deferred credits = 25235 (46676 + 23595 + 25235= 95506) For 2013 = 95,506/341938 = 0.28:1 Total liability = 73,453 Current liability=46,408 Long term Debt and capital lease obligation, less current portion= 1,659 Other long-term obligations and deferred credits = 25,386 73,453 = 46,408 + 1659 + 25386 For 2014 =73,453/338546 = 0.22: 1 Debt Ratio Analysis of Dunkin Doughnuts- Debt Ratio = Total Liabilities / Total Assets Total Liabilities =2478104 =2478104/3234690 =0.77 :1 The Debt Ratio of the both company over the given periods of time have shown the in equality between Total Assets as well as Total Liabilities of the company. The good position of the company has been determined by the ratio of 1:1 but both the companies are fails to fulfill the prosperity ratio. Debt to Equity Ratio explains the amounts that have been used by the company to fund equity shares as well as the assets of the company. Debt to Equity Ratio Analysis of Krispy Kreme- Debt to Equity = Total Liabilities / Owners Equity For 2013 = 95506/246432 = 0.39:1 For 2014 = 73453/265093 =0.28:1 Debt to Equity Ratio Analysis of Dunkin Doughnuts- Debt to Equity = Total Liabilities / Owners Equity =2478104/407358 = 6.08:1 By the evaluation of all the financial ratios it is found that the both companies are financially sounds in nature. However, the ratios of the companies are explaining several aspects of its financial structures as well as the effects of the financial liabilities over the sales and market structure. The liquidity ratio explains the Liquidity value and its stability power, which helps to make all the payments of short term debt without involving profit generated from the investments. The profitability ratio of the companies has explains the profit growth which is directly related to profit maximization and cost minimization. Moreover, the Operating Profit Margin Ratio assesses the growth in operating income and describes the efficiency of the management for controlling operational expenses. From the above analysis of the companies through ratio it is clear that the cost related expenses such as cost of production, material cost and operating cost has decreased and the amount of incomes has increases from 2013 (Periasamy 233-297). OPERATIONAL PERFORMANCE By the evaluation of the company’s annual report it can be determine that the company has to maintain its profitability by holding a good position in the market. The annual report of the company has describes that the turnover of the company is increased by the (460.33-435.84) 24.49 million in the year 2014. The total expense for the year 2014 is (selling and general expenses + interest expenses) = (26.52 + 1.05) = 27.57 million, which is increase by (25.39 + 1.64) = 27.03 (27.57-27.03) = 0.54 million. However the total expenses has increase by the 0.54 million but the increase in net profit by (34.25 – 20.77) = 13.48 million, which is more efficient to meet up those expenses throughout the year. The increase in selling expenses has express the increasing rates of sales, and the result can be determine that the company has maintain its profitability in a good position. The annual reports has been shown that the company has increase its net profits from the previous year. It can be notices after breaking the net incomes of the company in the year 2013 that the company has earn the profit of before the pay out of non-recurring income was 32.92 million, which has increased by the (43.24-32.92) = 10.32 million in the year 2014. The non-recurring income of the company was in 2013 (-)12.14 million which has decreased in 2014. In 2014 the non-recurring income is (-)8.98 million, which shows the good position or the improvement in the company’s performance The Krispy Kreme Doughnut Company has expanded its business all over the country as well as the worldwide. Globalization has proved to be very effective for the company as it assisted the company to expand its business throughout the globe. The company opened its retail outlets both domestically and internationally. The company at present has its own 95 company stores all over the country and 733 franchise outlets all over the world including the domestic region. Out of 733 franchises outlets of the company, 159 are in the domestic country and rests of those are situated throughout the world. There are several strategies which helps the company in gaining more market share by capturing the wide market of beverages. The Krispy Kreme Doughnut Company can be referred to as Quick Service Restaurant (QSR) industry. In order to launch its franchises throughout the world the company at first evaluates the political factors of all the estimated countries in which it has its outlets. The political enforcement is much important for the company for establishment of its business. The company has promised countries government to train the semi-skilled workers and offer them proper wages. Furthermore, the economic condition of a country is also a big factor, which creates s great for an impact on the sale of the company. In this context, a country which has been suffering from poor economic condition will not have the ability to intake doughnuts as the basic food. .These aspect might affect the turnover of the company. Technology plays a crucial role in relation to the operational related work for every company. Technology helps the company to be more productive in its works, and it also increases the efficiency of the workers for the long term sustainability in the market. Technology should be more up to date in nature to prepare the premium shops of the company in reference to Krispy Kreme. In respect to technology for the increase in the productivity and profitability in the long run the company should implement innovative and create an environment for the people to make the visit more pleasant. Every company has some responsibility towards its society. In this context, Krispy Kreme Doughnut Company has many more responsibility towards the environment and towards the society. The social factors involves around the use of ingredients which have been used by the company for preparing the doughnuts. It is observed that every nation and culture have different requirement towards their food. Moreover, the eating habits of the people express their culture, such as people who belong from United Kingdom are much conscious about the boycotting trans-fat foods and they avoid such products. Therefore, to attain profitability Krispy Kreme Company removes the fats from its doughnut preparation ingredient. The company also ethically supports the environment by using the wheat and soybean oil in the preparation procedures of the doughnuts. Every business expands its business for more profit and therefore faces risks. Those risks are associated with the sales of the company and other relative issues. The risk factors that affect business in the long run are many. The consumer movements and their likings about the products or services can hamper the sales procedures of the company. The competition with the other companies in the similar industry also affects the business and creates a major threat for the company. Economy of a country is another important risk that affects the business at large. Firce competition from others and the availability of numerous varieties of the health drinks as well as many beverages for instance cakes, pastries and cookies and biscuits many that might affect the business of Krispy Kreme. There are many more challenges, which are involving in the business of food related products. The complaints are regarding the taste and quality of the food creating immense health related issues. Therefore, it is crucial for the business to eradicate the upcoming challenges by providing quality service with strong financial stability. (John Ellis Group 1-28). The other risk factors which are involving with Krispy Kreme Doughnut Company are the economic issues which will be related with the markets and its financial issues. The company’s internal operation can also influence huge change in the company’s position. The inventories are important factors, which will lead to the increase in the cost price of the products (John Ellis Group 1-28). CONCLUSION From the above the analysis of ratios and company’s various operational activities it is found that the Krispy Kreme Company is an international food outlet, which is losing its financial stability from the market. The study conducted on the Krispy Kremer Company explained about the relatively decreasing financial background of the company. In some situations it is found that the competitor company named Dunkin Doughnuts has done a better performance than the Krispy Kreme. At the initial stage the company has taken many wrong decisions regarding the procedure of making Doughnuts, which affected the company sales. By the study it is proved that the Krispy Kreme is still a leading doughnut manufacturing company and has a great future prospective of growth. The important aspect is regarding strategizing effective policies and analyzing the finances in an effective way for potential growth. Works Cited EDGAR Online, Inc. “Krispy Kreme Doughnuts Inc.” Annual Report (2011):1-282. Print. Amigobulls.com . Krispy Kreme Financial Statement 2014, 2013. Web. 15 Oct. 2014 Periasamy, P. “Ratio Analysis”. A Textbook of Financial Cost and Management Accounting (2010): 233-297. Print. Sutorius, Brian; Kunz, Jordan and White, Benjamin. “Strategic Report for Krispy Kreme Doughnuts, Inc.”Competitive Analysis (2007):1-25. Print. EDGAR Online, Inc. “Dunkin Brands Group, Inc.”Annual Report (2012):1-112. Print. John Ellis Group. “Krispy Kreme Turnaround Strategy.” Strategy Coursework (2011):1-28. Print. Read More