strategic-management

high-quality southern-style doughnuts freshly baked in an observable oven was a concept
that generated great interest. Opportunities for this hot brand seemed endless. KKD
opened its first store in Canada in 2001. By 2004 Krispy Kreme was also operating stores
in Australia and South Korea.
The year 2004 began a period of steep decline for Krispy Kreme. Early that year,
Krispy Kreme announced that it had missed its quarterly earnings forecast and posted
its first loss ever. The company blamed a diet-conscious public pursuing the lowcarbohydrate
Atkins diet for its problems. The stock price plunged from $40 per share
to under $10.
Since 2005, Krispy Kreme has gone through a period of contraction. In Arizona and
New Mexico, the main franchisee filed for bankruptcy closing all the Krispy Kreme
stores. In 2008, another franchisee opened some stores in those states. In 2006, Krispy
Kreme terminated the franchise license of Great Circle Family Foods that operated 28
stores in California. While the dispute was settled, Great Circle filed for Chapter 11 bankruptcy
in 2007. Sheetz, a large convenience store chain on the East Coast and one of
Krispy Kreme’s largest customers, quit buying doughnuts in 2008 because it decided to
open its own kitchen. Finally, international outlets shrunk with stores in Canada and Hong
Kong shut down.
These trends have impacted the profitability of the company. For the last three fiscal
years, KKD has posted an operating loss. Quarterly earnings while mainly negative have been
quite erratic. The year 2008 has seen more bad news with all quarterly earnings negative.
Exhibits 1 and 2 show both the income statements and balance sheets for the past
three fiscal years.
In 2006, turnaround artist Stephen Cooper left Krispy Kreme, and Darryl Brewster
became CEO. Brewster left the company in early 2008. The CEO position was filled by
Jim Morgan, who continues to serve as chairman today. Krispy Kreme, however, continues
to experience declining sales in the United States. A more health-conscious public has
tended to shy away from glazed doughnuts, which have the perception of too many
calories and carbohydrates.
EXHIBIT 1 Krispy Kreme Doughnuts Income Statement
CASE 12 • KRISPY KREME DOUGHNUTS (KKD) — 2009 121
Period Ended February 1, 2009 (in thousands)
1-Feb-09 3-Feb-08 28-Jan-07
Revenues $ 383,984 429,319 461,195
Operating expenses: — — —
Direct operating expenses (exclusive of depreciation and
amortization shown below) 345,007 380,014 389,379
General and administrative expenses 23,458 26,303 48,860
Depreciation and amortization expense 8,709 18,433 21,046
Impairment charges and lease termination costs 548 62,073 12,519
Settlement of litigation — (14,930) 15,972
Other operating (income) and expense, net 1,501 13 1,916
Operating income (loss) $ 4,761 $(42,587) $(28,497)
Interest income 331 1,422 1,627
Interest expense (10,679) (9,796) (20,334)
Loss on extinguishment of debt — (9,622) —
Equity in losses of equity method franchisees (786) (933) (842)
Other non-operating income and (expense), net 2,815 (3,211) 7,021
Loss before income taxes $(3,558) $(64,727) $(41,025)
Provision for income taxes 503 2,324 1,211
Net loss $(4,061) $(67,051) $(42,236)
Source: www.krispykreme.com.