Krispy-Kreme-Questions-REV

JaspreetSingh10788064KrispyKremeDoughnuts1.WhatisKrispyKreme’sgrowthstrategyandbusinessmodel?KrispyKreme’sgrowthstrategyincludes:oRapidlyexpandingstoresintheU.S.andexplorelong-termgrowthopportunitiesininternationalmarkets.Thiswillbedoneprimarilythrufranchisedoperations.Theirgoalis200storesintheperiodfrom2003-2006.Alongwithnewstorestheywillimplementstrategiesthatwillincreasesaleofcomplementaryproductsthroughtheirexistingstores.ThisstrategyrequiredthecompanytoinvestheavilyinPP&Eandinvestaggressivelyinbothlong-termassetsandworkingcapital.oUpgradetheaptitudeoftheirbeverages(10%ofsales)andcoffeeofferings(5%ofsales).Thiswillincludeexpandingintotheespressobusinessthroughitsrecentlyacquiredcoffeecompany,DigitalJava.KrispyKreme’sbusinessmodelincludesprovidingoperatingincomefromthreemajorbusinesssegments,whichincludethesalesatcompanyownedstores,franchisefeesandroyaltiesfromnewstores,andsalesofdoughnutmixanddoughnutmakingequipmenttofranchises.Theirbusinessstrategyseemstobeinlinewiththeirbusinessmodel.2.Whatisyourassessmentofitsperformanceduring2000-2002intermsofrevenuegrowth;profitability;assetmanagement;financingpressures;sourcesoffinance?Pleaseincorporate,asappropriate,thefinancialinformationon“ComparableCompanies”.LookingattheKrispyKreme’sperformanceduring2000-2002,wecanseethattherevenuesincreasedin2001by37%andthendeclinedin2002to31%.Grossmarginshaveincreaseby6%indicatingacombinationofhigherproductpricingandlowerproductcosts.LookingatcomparativeinformationKKseemstohavethelowestgrossmargins.Operatingandnetprofitmarginshaveincreasedsignificantlyduringthesameperiod.Thisisduetodecreaseinoperatingexpensesrelativetoassets.Theincreaseinthemarginsisagoodsignofgrowthbecausetheyareabletolowerunitcostandreacheconomiesofscaleandsoincreasesinperformancethroughfiscalyear2002hasbeenquitegood.Also,thestrategyofexpandingnewstoresprovidesthecompanywithroyalties,franchisefees,andadditionalrevenuefromthesaleofnewequipment.Butthecompanyshouldproceedwithcautionandbeawarethatatsomepointinthecompanies’future,thegrowthofnewstoresisgoingtoslowdown.Fromtheperiodof2000-2002,25%,29%,and32%oftheKK’srevenuecamefromfranchiseoperationsandKKM&D.Thisisasignofconcernbecauseitsoperatingincomedependssomuchonitfranchiseoperationsthatprofitsmarginsaregoingtodeclineifthereisnomoreroomtogrow.LookingatthedecompositionofROE,wecanseethatKKdecreasedtheuseofleveragefrom2000to2002andtheprimarydriverfortheincreaseininROEwastheincreaseinprofitability.Wecanalsoseethatthecompanywaslessefficientinassetmanagement.Thisalsoapparentascollectionperiodincreasedfrom2001to2002andisconsiderablyhigherthanitcompetitors.BasedonstrategyofgrowththefinancialleveragewillincreaseandifmostoftheROEisnotsupportedbyassetturnoverorprofitmargins,thenthecompanywillneedtoworryaboutitslevelsofleverage.In2001wecanseethatthecompanyusedtheproceedsfromtheissuanceofstocktopayoffitslong-termdebtandthusloweringitsleverage.LookingatthecurrentratioofKKversusitscompetitors,itseemsthatithashigherlevelsofliquiditytomeetshort-termobligations.Butin2002,KKbegantoaddmoredebtintoitscapitalstructuretobeincompliancewithitsstrategyofexpansion.InthelateryearsKKwillneedtofurtherincreaseitsleveragetosustaintheirgrowth.Althoughin2002mostofthefinancingcanbefinancedinternallybutinthelateryearsthecompanywillneedtorelyonothersourcesoffinancingwhichmightincludelimitedequityandwillbemostlyfinancedthroughdebt.Thiscanberedflagforinvestorsbecausethecompanywillneedtogenerateenoughcashflowinternallytosatisfythoseobligations.AlongwithputtingthecompanyintofinancialpressuresfromitsdebtobligationsthiswillincreasethesolvencyratiossuchasdebttoassetanddebttocapitalmakingKKhavehigherfinancialriskandthusweakersolvency.ThiscanbeaproblemwhenthecompanydoesnothaveanyroomtogrowandthedecreaseinsalesgrowthcouldresultincashflowdeteriorationandKKcouldhavedifficultiespayingoffitsdebtfromitsoperations.3.Whatisthesignificance,ifany,oftheNotestoFinancialStatements?ThecapitalstructureofKKisriskywhenbothon-balancesheetandoff-balancesheetfinancingisconsidered.Thedebtratiohasdecreasedto26%asaresultofdecreasinglong-termdebtinboth2001and2002.Itappearsthattheissuanceofnewstockwasusedtopayoffitslong-termdebt.Itemsnotincludedonthebalancesheet,butstillrequiringoutlaysofcashincludesyntheticleaseofupto$35millionandoperatingleasepaymentsthattotal$58million.Addingtheseamountstothetotalliabilitiesonthebalancesheetresultsinfutureobligationsrepresenting62%percentoftotalassets.ThiswillinflatethesolvencyratiosandshrinkKK’sreturnoncapital,makingitlessattractiveforinvestors.KKhasshowntremendousgrowthinworkingcapital,largelyduetoreceivables.ThiswasduetoprimarilytoKKM&D.Analystsneedcarefullyexaminetotheextent,whichthesereceivablescoulddecreaseifthegrowthofKKhalts.Decreasingthereceivablesfromthebalancesheetwillshrinktheliquidityratiosandcouldputthecompanyintostrainintermsofpayingitsshort-termdebtwhenitcomesdue.Dupont Analysis:NPM xTAT =ROI xFL =ROE20002.702.105.672.2012.520014.901.758.591.3611.720026.691.5410.331.3614.14.DoesKrispyKremehavethefinancialstrengtht