Financial Analysis Of Krispy Kreme Doughnuts Inc Finance Essay

Krispy Kreme Financial Analysis

Krispy Kreme Doughnuts Inc is business that is involved in retail and wholesale of packaged sweets and doughnuts. Its initial business is franchising and also owning Krispy Kreme stores. At the beginning of 2010, they had 224 outlets in America and 358 shops all over the world. The company has four segments of operation; company stores, KK supply chain, international franchise stores and also stores franchised in America.

In Krispy Kreme depreciation analysis, there are various methods used to calculate depreciation and these methods include; units of production, double declining balance and straight line (Warren 2008). Krispy Kreme uses the straight line method to calculate depreciation on their assets such as buildings, equipment, machinery and also leasehold equipments. The straight line method of calculating depreciation results in a constant annual depreciation charge.They make a breakdown of depreciation of all their assets and it consists of buildings, equipment, machinery, leasehold improvement, construction that are in progress and also land. In 2002, the total gross property and equipment was $156,484,000 and in 2003 it was $252,770,000. What had accumulated depreciation was $43,907,000 in 2002 and $50,212,000. Finding the net property and equipment is calculated by taking the gross amount for equipment and property and subtracting the depretiation that has accumulated.

Krispy Kreme also uses SFAS-142 to account for all the intangible assets. In this method, intangible assets that have indefinite life are not amortized, since they will be subject to impairment test. By using SFAS-142 it results in more volatility in the reported income since impairment losses can occur irregularly in varying amounts.

In the reports it is clear that, in reporting Operating Cash Flows Krispy Kreme uses the Indirect Method. In 2001 the money that was provided for operating activities was $32,112, 000 and the money allocated for dividends was $7,005,000. The money that was used for operating activities was more than the paid for dividends. The company decided it will pay cash dividends in 2002 and 2003. The item used in reconciling the difference that is between net income and cash flow from operations is the increase from expenses of $7,966,000, while in 2002, the highest value item in reconciling the difference between net income and cash flow from operations was $13,317,000 increase in receivables; in 2003, the highest value item that was used to reconciling the difference between net income and cash flow from operations is the tax benefit from the exercise of nonqualified stock options which was $13,795,000.

The highest amount for investing activities was $37,310 for additions to property and equipment. In 2003, the highest amount for investing activities is $83,196 and was used for additions to property and equipment. So, cash outflow in investing activities increased in 2003. The highest amount for financing activities in 2002, is the cash inflow of $17,202 these are the proceeds from stock sale. In 2003, the highest amount for financing activities is the $2,170 cash outflow that is meant to repay the companies long term debt.

There is an improvement in Liquidity from 2002 to 2003, this is evident by the increase in the cash flow provided to operating activities which increased from $36,210 in 2002 to $51,036 in 2003. The Company funds the capital requirements by using the cash that is generated from the business operations. As it is well stated in the report, “We funded our capital requirements for fiscal 2000, 2001, and 2002 primarily through cash flow generated from operations….Over the past three years, we have greatly improved the amount of cash we generate from operations. We believe our cash flow generation ability is becoming a financial strength and will aid in the expansion of our business.”

By the using the financial ratios, Krispy Kreme has a good financial healthy with a lot of growth prospects in the market; in using the Liquidity Ratios, The Company’s Current ratio has grown from 1.94 in 2002 to 2.36 in 2003. The Quick ratio has grown from 1.63 for 2002 to 1.96 for 2003. Cash ratio has grown from 0.42 for 2002 to 0.54 for 2003. The increase in liquidity ratios in the years 2002 and 2003 is an indicator that company has improved in ability to repay short term debt and also good message to the company investor and prospective investors.

In the Long Term Solvency Ratios, the Total Debt ratio for Krispy Kreme has grown from 0.27 for 2002 to 0.33 for 2003, and the Debt-to-Equity ratio has grown from 0.36 for 2002 to 0.50 for 2003. An increase in Debt-to-equity ratio is an indicator that company uses debts to run its operation. As the cost of debt is less than the cost of equity so WACC of the company will reduce down. A high debt-to-equity ratio puts a company at the risk of solvency if the debt is not managed. The Times Interest earned ratio has dropped from 127.25 for 2002 to 31.75 for 2003. High increase in debt-to-equity ratio and drop in Times Interest earned ratio are indicators that the company ability to pay its long term debt is put into question.

The Asset Utilization Ratios for Krispy Kreme’s Inventory Turnover, has decreased from 22.49 for 2002 to 18.83 for 2003 and the Day Sales for Inventory has increased from 18.61 for 2002 to 23.31 for 2003. This is an indicator the inventory is not as well managed in 2003 as it was done in 2002. The Receivables Turnover ratio has decreases from 16.87 for 2002 to 16.05 for 2003 and the Day Sales in Receivables has increased from 24.89 for 2002 to 25.52 for 2003. The Total Assets Turnover ratio has also deteriorated from 1.85 in 2002 to 1.48 in 2003. The ratio indicates efficiency of utilization of assets has reduced in 2003.

In the Profitability Ratio for Krispy Kreme, although the company’s Profit Margin has increased from 6.69% for 2002 to 6.81% for 2003, the Return on Assets has declined from 10.33% to 8.16%, and also the Return on Equity have also gone down from 14.06% to 12.25%. But EPS of Krispy Kreme has increased from 0.49 for 2002 to 0.61 for 2003, which is a rise of 24.5%. Company’s profit margin and EPS have both increased in 2003 when compared to 2002; this is even when the increase in profit margin is not significant.

Krispy Kreme has been able to generally control its costs of sales. The Costs of sales are growing slower than the growth in sales. The growth in the operating expenses is less than growth of sales in both years 2002 and 2003. In 2002 and 2003 percentage increase in income tax is higher than percentage change in sales. The Net profit increase in percentage terms is more than the increase in the amount of sales increase. This is an indicator that there is an efficient operation of Krispy Kreme. Increase in percentage of the General and Administrative Expenses is more than increase in sales in both years 2002 and 2003. The company say that this is the case due to the massive expansion program that they have embarked on and thus they have incurred cost by hiring more employees by paying their salaries and other related costs.

The number of shares which are outstanding has increased from 54,271 thousand to 56,295 thousand in 2003; this is a rise of 3.73%. Krispy Kreme has allowed 10,000 shares of preferential stock but has not gone forward to issue them. There have not been any dividend payments since 2001 by Krispy Kreme. Therefore the Yield from Dividend s is 0% for 2002 and 2003. There is an increase in Earnings per share from $0.49 for 2002 to $0.61 in 2003; this is an evidence of potential for the growth of the company. The assets of the company have also grown in 2003. This helps to indicate that Krispy Kreme’s stock is a “Growth Stock” and helps to explain the investors have not been paid any dividend. This is well stated in the report as is well explained, “…We intend to retain our earnings to finance the expansion of our business and do not anticipate paying cash dividends in the foreseeable future……Dividend Payments are restricted by our bank credit facilities to 50% of our net income for the immediately preceding fiscal year…”

Like a lot of companies globally, there is an increase in the number of challenges that affect operations of all companies in the market. Some of the challenges that are facing Krispy Kreme are; increase in competition, there are changes in customer preferences and tastes, the abilities of Krispy Kreme to manage growth, the quality of the franchise stores that are in operations, also the delays in the opening of stores and changes in technology. The price and also the availability of the raw materials necessary to run their operations is also a major challenge to Krispy Kreme. The human resource that is hired by the company is the most important asset and thus they should ensure that they help the company to overcome all the challenges. The staff must work hard by developing strategies that position Krispy Kreme for success in the future. The management must drive the company to success, this will be possible by the managing accounting ensuring they maintain well and report all the financial results to the managers. These reports should be both nonfinancial and financial reports and in them they should include; projections, company estimates and forecasts.

Krispy Kreme is a company that is growing well and has a health financial position. The company has a solid capital investment worldwide and its cash flow is commendable. The cash flow is used to fund a lot of operations and is very important to the company. The Improvement in liquidity ratio is a good sign for the company and a growth by 24.5% in EPS shows that the company is growing. The decision by the company not to pay dividend in 2002 and 2003 is wise since the company has embarked on expansion program. The major concern is the ability of the company to service its long term debts; the company should also improve its utilization of assets and efficiently manage its inventory.