Krispy Kreme Company Analysis Project - Case Study Example

Krispy Kreme company analysis project Part I. Memorandum 9/13 Re: A report for Krispy Kreme company analysis project accounting and competitor Dunkin Thank you for giving me this opportunity to provide you with this report regarding the financial affairs of Krispy Kreme Doughnuts, Inc, as well as Dunkin Brands Group, Inc, a competitor. I am delighted to present this report to you, which clearly outlines the company analysis of the company. This analysis is basically based on the annual reports and financial statements of the both the companies and it tries to determine whether or not Krispy Kreme Doughnuts, Inc is a good investment, and a good “corporate citizen.” The issues discussed in the body of this report includes 1) liquidity ratios; 2) profitability ratios; 3) debt leverage ratios; 4) operational performance 5) evaluation and interpretation of the ratios 6) write-up about the company 7) conclusion. From the company analysis, it is evident that the company is a good investment and a good “corporate citizen.” WRITE UP REPORT ABOUT KRISPY KREME Company history Krispy Kreme is a top American global doughnut company and coffeehouse chain a retailer and wholesaler based in Winston-Salem, North Carolina. Founder of Krispy Kreme was Vernon Rudolph and his uncle Joseph LeBeoufs on then Broad Street in Paducah. The company that officially began its operations in July 13th1937 and major growth occurred in the 1950s, which included an early store in Savannah, Georgia. By the late 1960s, Krispy Kreme was recognized throughout the Southeast.Rudolph till 1950s used the method of hand-cutting the doughnuts and after 1950s embarked on automated by machinery and this ensured steady supply of doughnuts. Historically Krispy Kreme began selling doughnuts to local grocery stores. Krispy Kreme Doughnut Company in 1976 became a fully owned adjuvant of Beatrice Foods of Chicago but six years later a group of franchisees bought the corporation back from Beatrice Foods. Company officers Krispy Kreme is, a reputable company with a great team of officers charged with the duty of ensuring daily operations, is accomplished. Krispy Kreme is guided by the board of directors and currently under the leadership of Charles A. Blixt, Lynn Crump-Caine, C. Stephen Lynn among other experienced persons who at one time held various managerial positions in the company. Apart from the board of directors there is the management teaming which superintendents various levels of operation from production all through to marketing of Krispy Kreme products. James H. Morgan is the current Executive Chairman leading the management team. Tony Thompson sits as President and Chief Executive Officer. There are also various committees that succor in policy implantations. Other junior employees follow in this order and assist in production and distribution of the products ofKrispy Kreme to various stores located in USA and beyond through franchisees Krispy Kreme corporate citizenship and ethical behavior This is the level to which company is socially responsible for meeting permissible, ethical and economic obligations put on them by various shareholders. Krispy Kreme for years has partnered with various organizations like Kyle Petty and Victory Junction in bringing a smile to many children with various chronic heart diseases. This has enabled over 700 chronically ill children find hope for life. Krispy Kreme has also for close to ten years worked closely with local law enforcement agents towards the annual Cops on Doughnut Shops plan to assistance to Special Olympics. Krispy Kreme also partners and sponsors local golf tournament Krispy Kreme Market position Krispy Kreme has over 800 retail stores found in 23 countries including USA. Other countries of operations include the Republic of Korea, Qatar, Russia, Singapore, the Kingdom of Saudi Arabia, Singapore, and Taiwan among others. Krispy Kreme competes in both domestic and international markets with his products. Apart from retail doughnut outlets, the domestic doughnut market also has other various sales channels, such as a grocery store packaged products. Market research conducted by various organizations indicates that Krispy Kreme’s market share expands to across all major demographic groups such as age and income thought the united states. Krispy Kreme products and strengths Krispy Kreme produces various brands of doughnuts, coffees, drinks, kool Kreme, bagels and oatmeal. Through these products, Krispy Kreme Company has been able to compete effectively in both domestic and international markets, and this has created their strengths such as • The quality of business and franchise chain store operation and relationship that exist between the company and franchise and wholesale customers. • The ability of Krispy Kreme to effectively implement both local and international growth strategies which include effecting small shop model. • Good relationship with the government and policies concerning production of products and marketing • Fair prices the company charges on their products and the ability to obtain raw materials easily and great cost • Producing quality products with unique secret recipe that has existed since 1937 • Continuously flexibility in its operations and incorporating and implementation of information technology in production and distribution • Highly differentiated products Risk relating to Krispy Kreme business Foreign risk Different foreign countries have various foreign policies concerning how multinational companies should operate in their countries (Healy and Paul 134-6). These are in terms of tariffs and other regulations. The export quantizes and various regulations. Krispy Kreme export their products majorly doughnut mixes to their franchisees in markets outside the United States and such negative regulations and requirements delay opening of stores abroad and implementation of expansion strategies by the management and this is a great risk. Domestic risk The secret to the unique tastes in the doughnuts by the Krispy Kreme has been attributed to secret in the recipe (Healy and Paul 232-7). The brand created has several unique essentials that for years enabled the company to create a bond with the customers they serve. The domestic risk hence occurs should the brand secret recipe be exposed to other domestic competitors this will adversely affect company’s overall profitability. Regulatory risk Krispy Kreme just as any other multinational company is subjected to various regulation in its daily operations that must be adhered to. For instance, Krispy Kreme is subordinate to franchise laws and regulations that control the company position in the industry as a franchisor and control various features of franchise relationships (Ireland, Robert and Michael). This is limit their capability to develop new franchised stores and imposing various contracts this goes a long way in causing a decline in overall revenue could cause our franchise revenues to decline. These regulations also if not checked could cause could affect the management efforts in implementing the companies strategies. Political risk Krispy Kreme is a multinational company, and 65% of the store count is operated by franchisees outside USA in the more than 20 countries. Times the stores may be completely shut down as operating in the countries becomes difficult. Mature market and changing market Krispy Kreme is a food service industry and as such affected by preference and their perception, national and regional economic trends and demographic patterns (Healy and Paul 234-6). These factors are linked directly to demand of the product of the company and changes in taste and preference by individuals may put profitability at a risk. Technological risk Krispy Kreme is the only manufacturer of the equipment that they use in making their doughnuts and as such when there is any problem in production of this equipment there could be a delay in production of this important product. This affects the entire profitability and possesses a technological risk. Krispy Kreme as a company too is at the peak of developing new systems and incorporating information and technology in its operations to enable efficiency in all levels of its production (Ireland, Robert and Michael). Due to these facts, any technological failures, system failure or interference in any of the above systems of technology or design would affect company reputation, and this possesses a great risk. Part II. Liquidity Liquidity ratios being the main measure of a firm’s financial health show its ability to meet its maturing near-term obligations as well as meeting its unexpected cash needs (Dyson, 223-3). Such ratios include: 2013 2014 Current ratio 134784/46676=2.89 127487/46408=2.75 Inventory turnover 362,828/12502 = 29.02times 376,132/14554 = 25.84 X Number of days to sell 365/29.02= 12.577 = 13days 365/25.84= 14.125 =14days Accounts receivable turnover 435843/24800 = 17.57X 460331/25447.5= 18.09 X Number of days to collect 365/17.57= 20.77 =21days 365/18.09= 21.18 =20days Dunkin Brands Group, Inc 2012 2013 Current ratio 419780/353515=1.19 461760/344298=1.34 Inventory turnover 121091/0=∞ 131375/0=∞ Number of days to sell ∞ ∞ Accounts receivable turnover 658181/34765=18.93 X 713840/39784.5= 17.94 X Number of days to collect 365/18.93= 19days 365/17.94= 20days For every $1 in current liabilities, Krispy Kreme Doughnuts, Inc has $2.89 and $2.75in current assets in 2013 and 2014. The short-term liquidity of Krispy Kreme Doughnuts, Inc has decreased 4.84% from 2013 to 2014. However, the company is able to pay for its short-term obligation when due because the current ratio is greater than one. In addition, the company’s inventory and receivables appear to be pretty liquid because they are converted into cash more often. The decrease in the company’s liquidity is as a result of faster decrease in current assets than in current liability (Annual report, 86). Krispy Kreme Doughnuts, Inc is more liquid than Dunkin Brands Group, Inc because it has higher profitability ratios. Its receivable and inventories are converted to cash faster than Dunkin Brands Group, Inc. Profitability Krispy Kreme Doughnuts, Inc 2012 2013 2014 Profit margin ratio 166269/403217 =41.24% 20779/435843 =4.77% 34256/460331 = 7.44% Asset turnover ratio 403217/252437=1.60 435843/338443=1.29 460331/340242=1.35 Return on assets 166269/252437=65.87% 20779/338443=6.14% 34256/340242=10.07% Return on equity 166269/162764 =102.15% 20779/247779 =8.39% 34256/255763 =13.39% Dunkin Brands Group, Inc 2012 2013 Profit margin ratio 108308/658181=16.46% 146903/713840=20.58% Asset turnover ratio 658181/3220775=0.2044 713840/3226102=0.2213 Return on assets 108308/3220775=3.36% 146903/3226102=4.55% Return on equity 108308/546295=19.83% 146903/378666.5= 38.79% Profitability ratios outline the overall performance business (Kapil, 125). Such ratios help investors to determine the ability of the business to generate earnings or returns using its assets and stockholders’ equity (Kimmel et al. 299). Profitability ratios show the operating success or income of the business for a particular time period. The profit margin ratio measures how well Krispy Kreme Doughnuts, Inc manages its expenses in order to generate profits for the business. The company’s gross margin percent increased from 16.75% in 2013 to 18.29% in 2014. This was due to the company’s attractive small factory store model which is being embraced by the company’s traditional franchisees. The increase in gross profit was also brought about by an increase in mean weekly sales per door due to an increase in the number of stores. The company created 80 new stores worldwide (Annual report, 1). The profit margin ratio rose from 4.77% in 2013 to 7.44% in 2014 indicating that the company is managing its expenses well. This increase was primarily the better management of the company’s operating expenses because the rate of rise in total revenue was greater than the increase in operating expenses. A better management of the company’s operating expenses has translated to an increase in net income between 2013 and 2014. This has led to an increase in earnings per share from $0.31 in 2013 to $0.51 in 2014. This implies an increase of 64.52% [(0.51-0.31)/0.31]. The company’s increase in profitability is directly attributed to an increase in gross profit. Gross profit increased due to the company’s attractive small factory store model which is being embraced by the company’s traditional franchisees. Additionally, the rise in gross profit was brought about by an increase in mean weekly sales per door due to the rise in the number of stores. The company created a total of 80 new stores worldwide (Annual report, 1). The enterprise has a relatively higher performance than Dunkin’ Brands Group, Inc because some of its profitability ratios are higher than those of its competitors. Krispy Kreme Doughnuts, Inc has a higher return on assets and asset turnover ratios implying that it is using its assets efficiently. However, it has a lower return on equity and profit margin ratio than Dunkin’ Brands Group, Inc. Debt leverage Krispy Kreme Doughnuts, Inc 2012 2013 2014 Debt to equity ratio 85822/249126 = 0.34 X 95506/246432 =0.39 X 73453/265093 =0.28X Debt to asset ratio 85822/334948 =25.62% 95506/341938 =27.93% 73453/338546 =21.70% Times interest earned 32024/1666 = 19.22 X 37958/1642 =23.12 X 46117/1057 =43.63 X Dunkin Brands Group, Inc 2012 2013 Debt to equity ratio 2867538/349975 =8.18 X 2822402/407358 =6.93 X Debt to asset ratio 2867538/3217513 =89.12% 2822402/3234690 =87.25% Times interest earned 236,032/74,031  =3.19 X 298,323/80,235 =3.72 X Debt leverage ratios measure the ability of the firm to cover its total liabilities over the long-term. Debt leverage ratios highlight the financial risk inherent in the firm’s capital structure (Kapil, 120). The company’s debt to equity ratio implies that for every $1 in equity financing, Krispy Kreme Doughnuts Inc has $0.39 and $0.28 in debt financing in 2013 and 2014. The firm’s debt financing has decreased 28.21% from 2007 to 2008 [(0.28-0.39)/0.39], which decreases the inherent financial risk to the company. This implies that the aggressiveness with which the company is managing its financial position has decreased in 2014. The firm’s debt financing of assets decreased 22.31% from 2013 to 2014 which also indicates a decrease in the inherent financial risk to the company. This implies that the debt to equity ratio improved over the period examined. Further, for every $1 in interest expense, Krispy Kreme Doughnuts Inc generates $19.22, $23.12, and $43.63 in profits to cover the interest obligations for the years 2012-2014, respectively. In comparison to a competitor, Dunkin Brands Group, Inc., the company is doing better. The company has low debt to equity and debt to asset ratios implying low financial risk inherent in the firm’s capital structure. Krispy Kreme Doughnuts Inc has a higher times interest earned meaning it is generating more profits to cover the interest obligations than the Dunkin Brands Group, Inc. Operational Performance Krispy Kreme Doughnuts, Inc has controlled its operating costs effectively over the period. This has resulted to an increase in gross profit from $ 73,015 in 2013 to 84,199 in 2014. The company has sustained its profitability due to better cost management. This is evidenced by higher rate of increase in net sales than rates of increase in operating expenses. Net sales increased by 5.62% while expenses increased by only 3.67%. The company has a high quality of earnings because it lacks non-recurring items that inflate income. The future expectations of net income are anticipated to remain stable owing to lack of any current period non-recurring items. From the analysis Krispy Kreme Doughnuts, Inc has a high overall performance and efficiency than Dunkin Brands Group, Inc. Conclusion Krispy Kreme Doughnuts, Inc is a good investment and a good “corporate citizen.” The company is relatively liquid and is able to meet its short-term debt obligations and unexpected cash needs. Krispy Kreme Doughnuts, Inc is profitable because it manages its expenses effectively in order to generate profits for the business. Additionally, the company has low debt to equity and debt to asset ratios implying low financial risk inherent in the firm’s capital structure. Further, Krispy Kreme Doughnuts, Inc is generating more profits to cover the interest obligations. The company is socially responsible for meeting permissible, ethical and economic obligations put on them by various shareholders. Work cited Dyson, J. R., Dyson, J., Dyson, J., & Dyson, J. Accounting for non-accounting students. Harlow, Financial Times Prentice Hall, 2007. Print. Top of Form Bottom of Form Healy, Paul. Krispy Kreme Doughnuts. Boston, MA: Harvard Business School Publishing, 2003. Print. Top of Form Ireland, R D, Robert E. Hoskisson, and Michael A. Hitt. Understanding Business Strategy: Concepts and Cases. Mason, OH: South-Western Cengage Learning, 2008. Print. Kapil, S. Financial management. Noida, India, Pearson, 2011.  Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. Accounting: tools for business decision making. Chichester, John Wiley, 2008. Print. Yahoo Finance: Retrieved from: http://finance.yahoo.com/q/is?s=KKD&annual Read More