Krispy Kreme Doughnuts

The following are the major problems electric shaver were facing It mistakenly tied up the profit, the number of stores, and the sales of machines and ingredients together. Moreover, it was too aggressive. It was hungry to show its perfect performances to investors by beautifying their book value. From non-financial perspective, there are serious drawbacks behind the expanding, and the growing numbers of stores made the K Doughnuts everywhere, which made customers lost their feelings of bangle of It.As the case mentioned, KID raised Its purchase price on the Michigan franchise In order to get the Interest of loans back and KID enter the interest under as an immediate income, profit. In the meanwhile, it booked the cost of buyback the franchise and the payment to the executive as an intangible asset, which the company did not amortize. In my opinion, the interest should be recorded under equity and the cost and payment could be booked as properties, cost, or at least they deficie ncy to be amortized.KID got the interest from the franchise and successfully raised Its revenue to attract Investors but it in fact sacrificed Its hardliners benefits by offering an over value buy prize. Moreover, keeping the previous executive till the trade closed and giving a huge amount of compensation even ups me wonder if there was an inside trade. queer 1, 2& 3 shows the unhealthy growth of KID. Compared to the growth of total revenues in the whole company, revenue that each stores contributed (total revenue/ total factory stores) was not change magnitude accordingly.On the contrary, the expansion of stores brought the corporation risque expenses and venture. The cost of opening a new store, aqualung It and close It was paid in vain. The number of stores grew too quickly. The exhibit in like manner shows the abnormal high value of have a bun in the oven-price patterns compared to the S 500 Composite Index but it was finally down to the earth in the end of 2004 influenc ed by the divesting of Montana mill about and closing down of 3 underperformed stores.Viewing the company structure, revenues were generated from on-premises retail sales at company-owned stores ( business relationship for 27% of revenues) off-premises sales to grocery and convenience stores (40%) manufacturing and distribution of product mix and machinery (29%1 and franchi construe loyalties and fees (4%). Actually, the ideal revenue resources of this kind of corporation should brinyly come from the franchisee royalties and fees but not from distribution of mix and machine. The company so-called to boost the sales of its main product doughnuts but not to expansion blindly.Once its doughnuts become popular and profitable, spate will be willing to get In to the business and pay KID franchisee royalties and fees. However, the realistic was many units were losing money off-premises, and franchisees were not motivated to grow their sales, which fleets a governance problem in this cor porate that the company itself did not has mutual benefits with its franchisees. The gestate price of KID was fluctuated severely in recent years and the suggestions of buy, sell or hold from analysts were closely related to the stock price and scandal. ND January 2005, when the stock price was at its peak, at 22. 51 dollars per share (first under estimate), at 15. 71 dollars per share (divested Montana Mills) and at less than 10 dollars per share (credit-facility defaulted). crisp Seekers share price was $40. 63 right after its PIP, giving the firm a market capitalization of nearly $500 lions. The stock price office be over valued at first because KID was so popular at the time and therefore the public drove up the price. after(prenominal) a series of problem, the company restated its financial statements for the PAYOFF, which reduced pretax income by between $6. Million and $8. 1 million. This movement sharply decreased the tax expenses of the company, which is proved by items of income before income taxes, provision for income taxes and income taxes refundable in break 2. It is strange that given a large amount of amortized intangible asset, the company still ad a high level of tax shield as shows in the depreciation and amortization expenses from submit 1 . Thus, the company might be showing a high profit for investors but lower income for tax purposes, changing the treatment of amortization between the two.This practice violated the requests and rules in GAP. Knowing the accounting tricks that KID was playing, people can approximately calculate its book value by amortizing its asset, increasing its cost and tax, which leads to a deduction of profit. Influenced by the divesting of Montana Mills, the interest expenses, income tax refundable, long notes receivable, Joint venture ND intangible in 2004 increased dramatically and the share price dipped compared to them in 2003 as we can see from the Exhibit 1&2.However, it is odd that the interest expen se raised so much when then the long-term debt decreased. Furthermore, from the Debit-to- equity ratio in Exhibit 7, we can see that the level of debt and financial distress went down in 2004. Therefore, guess is that the company might use the total long-term liabilities in calculating the interest expenses in order to have more tax benefits. As its known to all that the higher the ratio of liquidity, average, activity and profitability are the better the companys situation is in.Compared to early(a) quick-service restaurants in Exhibits, only the receivables turnover and inventory turnover of KID was slightly lower than the average, which means the corporation was not performing absolutely badly. And in Exhibit 9, when comparing to average restaurant, Kids cash & equivalents, notes payable, long-term debt, income taxes payable, all other current were much more lower and the trade receivables, intangibles, deferred taxes and shareholders equity were higher than the common stores.Un expectedly, the scratch income of KID on May 9, 2004 was negative 24,458, but it went up to positive 5,763 three months later on August 1, 2004. How could the situation be turned well-nigh in such a short time? As a matter of fact, an over-valued stock price will eventually go down to what it supposed to be in a high efficient market. This is one of the reasons that the bubble of the stock broke and the price slumped. Along with the revelation about the companys franchise accounting practices and the wrong operating methods, they explained the devalued of its stock.I think the doughnuts company should not rely heir profit on the sales of high margin machines but to make its actual product (signature doughnuts) better since it contributed around 60% to the total sales. In the meanwhile, KID should inherit its factory style, which provides newly baked fresh healthy gallery among people influenced the sales of its products, improve their ingredients or explore new recipes are necessa ry. Furthermore, through research and sufficient preparation are important before exploring oversea market or expansion. KID already had its brand, goodwill and own steady customer group, it still has a chance to fight back.