Krispy Kreme Doughnuts, Inc

; ,. : ) j I 1 ‘ 7 I I I l-*–*** I I ___i Krispy Kreme Doughnuts,Inc. As the millennium began, the future for Krispy Kreme Doughnuts,Inc. , smelled sweet. Not only could the company boast iconic statusand a nearly cultlike following. it had quickly become a darling of Wali Street. Less than a year after its initial public offering, in April 2000, Krispy Kreme shareswere selling for 62 times earnings and, by 2003, Fortune magazinehad dubbed the company “the hottestbrand in America. ” With ambitiousplans to open 500 doughnutshopsover the frrst half of the decade,the company’sdistinctivegreen-and-red “Hot vintage logo and unmistakable Dor. ghnr-rts Now” neon sign had becomeubiquitous. At the end of 2004, however,the sweet story had begun to sour as the company made severalaccountingrevelations,after which its stock price sank. Frcm its peal. in August 2003, Krispy Kreme’s stock price plummeted more than 807c in the next l6 months. Investorsand analystsbegan asking probing questions aboLitthe con-ipany’s fundamentals, even by the beginningof 2005, many of those questions but remainedunanswered. Exhibits 1 and 2 provide Krispy Kreme’sfinancialstatements for fiscal-years 2000 throLrgh 2004. Was this a healthy company? What had happened to the companythat some had thought oLrldbecomethe next Starbucks? almost If everyone loved the doughnuts. why were so many investorsfleeing the popLrlar doughnutmaker? Company Background Krispy Kreme beganas a single doughnutshop in Winston-Salem, North Carolina, rn 1937, when Vernon Rudolph, who had acquired the company’sspecialdoughnut recipe from a French chef in New Orleans, started making anciselling doughnuts wholesaleto supermarkets. Within a short time, Rudolph’s productsbecame so popular that he cut a hole in his factory’s wall to sell directly to customersthus was born the central Krispy Kreme retail concept: the factory store.

By the late 1950s,Krispy Kreme had 29 shopsin 12 states,many of which were operated by franchisees. This casewas preparedby SeanCarr (MBA ‘03,1. under the direction of Robert F. Bruner of the Darden GraduateSchool of Business Administration. It was written as a basisfor classdiscussion ratherthan to illustrate effective ineffective or handlingof an administrative situation. CopyrightCI 2005 by the University Virginia of Darden School Foundation,Charlottesviiie, VA. All rights reserved. To order copies,sencl e-ntail to an sales@dardenbusinesspublishing. com. No part o. ,f publication ntay be reprociucec! this storedina retrieval system,usec! itt a spreac[slteet, transnitted irt antJbnn or b| any means-electrottic, ntechctnical, or photocopt,ittg,recording,or othemvise-withottt the pennission of the DarclenScltool Fotutdation. f, =;. B… 10i 102 Part Two FinanciaiAnnlysis and Forecasting After Rudolph’sdeath,in 1973, BeatriceFoods bought the companyand quickly expandedit to more than 100 locations. Beatrice introducedother products,such as of soups ancl sandwiches. and cllt costs by changing the appearance the Storesand mixture. The businesslanguished’ in substitutingcheaperin-gredients the dou-9hnut however,and by the early 1980s.

Beatrice put the company up for sale. led A group of franchisees by JosephMcAleer, who had beenthe frrst Krispy Kreme tranchisee,completeda leveragedbuyout of the company for $24 million in 1982′ formula and the company’straditionallogo’ McAleer broLrght back the original dou-9hnut It was also around this time that the company introducedthe “Hot DottghnutsNow” were coming off the line’ Tht’ when fresh dor-rghnuts neon sign, which told cr-rstomers company still stmggled for a while, bLrtby 1989, Ktitpy Kreme had becornedebtfree and had slowly begr-rn expand. The company focusedon its signaturedoughto nuts and addedbrandedcoffee in 1996.

Scott Livengood, who becameCEO in 1998 and chair the following year. took the companypublic in April 2000 in what was one of the largesrinitial p. iUti. offerings (IPO) in recentyears;one day after the offering. Krispy Kreme’s share price was $40. 63. giving the firm a market capitalizationof n e a rl y$ 5 0 0 mi l l i on. Krispy Kreme’s Business to strategy expanil an After the compi1ny’s IPO, Krispy Kleme announcecl aggressive over the next fi. re years. In addition’ the conrthe number of storesf1om i44 to 500 with 32 locationsplannedfor Canadaand more pany plannedto -qrowinternationally, for the United Kin,edorn,Mexico, and Australia.

Exhibit 3 providesan overview of the company’sstoreopenin-es. four primary sources: Krispy Kreme Doughnuts generatedrevenuesthrourgh for (accor-rnting 27Vo of rev’ on-premises retail sales at company-owned stores stores(40Vo);manufacturenLres): off-premisessales to grocery and convenience royalties in-9and. distribution of product mix and machinery(29? o);and franchisee retail locations,the company and fees GVo). In a,Jditionto the traditional dcmestic growth through smaller “satellite concepts,”which relied on factory stores sor-rght of to provide dou-ghnuts reheating,as well as the development the international for market. to On-premisessales; Each factory store allowedconsumers seethe productionof creareas doughnuts:Krispy Kreme’s cltstom machineryand doughnut-viewing In atedwhat the companycaiied a “doughnui theater. ” that way, Krispy Kreme 4I1 attemptedto differentiateitself from its competitionby offering cttstomers €r”rperiencerather than simply a product. Each factory storecollld producebetween doughnlrtsa day, which were sold both on- and 4,000-dozenand 10. 000-dozen off-premises. . both saleswere to grocerystores, Off-prernises About 60Voof off-premises sctles: The remainderwere sold to convenience in stand-alone casesand on storeshelves. ere also sold as privatelabel). The companymninstores(a small percentage sales. taineda fleet of delivery trucks for off-premises Case 7 lnc Krispy Kreme f)or-rgirnLrts, . and clisrributiort: Mlctntjacturing Krispy Kreme’s Manufacturingand Distribution (KKM&D) divisionprovidedthe proprietary doughnr-rt mixesand dou-efnutmakingeqllipmentto every company-owned and franchised factory store. This v e rti c a li n te g ra ti o n l ow edthe companyto mai ntai nqual i tycontroland prodal Llctconsistency throughoutthe system.

The companymaintained own menLrits facturingfacilitiesfor its mixes and machines, and it providedquarterlyservice units. All franchisees for all systen’r were requiredto buy mix and eqLripment from Krispy Kreme. KKM also includedthe company’scoffee-roastins which sLrpplied operation. brandeddrip coftee to both company-owned and tranchised stores. FranchiserovaltiesanclJees. ‘ exchange an initial franchise and annLral In for f-ee royalties, franchisees received assistance tiom Krispy Kreme witl’roperations. advertising marketing. nd accor-rnting. other information-management and systenrs. Franchisees had relationships that with the companybetorethe IPO in 2000 were calledAssociates, they typically had locationsin heritage and narkets in the southeastern United States. Associates were not responsible openingnew stores. for New franchisees werecalledArea Developers, they lvereresponsible defor and velopin,t nervsitesandbuildin-e markets in with high potentiai. Area Developers typicallypaid $20. 000 $50. 000in initial franchise to 4. 5% anc! feesanclbetween 67ain royalries.

Franchisees contribr-rted of their annui-ri also lVc to totll sales the corporate advertisine flrnd. ‘ Rour-ehly at 607c of satles a klispy Kreme store were derivedflom the cornpan)-‘s prodr-rct. glr. zed signature the dor-r-9hnut. differedfrorn Dunkin’Donut. s. comThis the pany’s largest competitor, which the majority of saiescame from coftee. for Holes in the Krispy Kreme Story On May 7,2004, for the first tirne in its history as a public ccmpan,v, Krispy Kreme announced adverseresults. The company told investorsto expecteainin-9s be 10% to lower than anticipated. laiming that the recent low-carbohydrare diet trend in the United Stateshad hurt wholesaleand retail sales. The company also said it planned to divest Montana Mills, a chain of 28 bakery cafds acqr-rired January2003 for $40 in million in stock, and would take a char-ee $35 million to $40 million in the first cf quarter. In addition, Krispy Kreme indicatcd that its new Hot Doughnut and Coffee Shops were falling short of expectations and that it had plans to close three of then-r (resulting a charge $7 million to $8 miliion). Klispy Kreme’sshares in of closeddown 3 0 Vo a t $ 2 2 . 1a s h a re . , Then, on May 25, the lVall Srreet Journa[published story describin-e a a-e-gressive accounting treatment franchise for acqr-risitions made by Krispy Kleme. ‘Accordingto ‘lvlark l v l a r e m o n t a n c l i c k B r o o k s . ” K r i s p y K l e r l e F u r u c h i s e u l , b a c k s v { a y p L r r N e u , C o n c e r n s . “u i l R B W f S StreetJourrtal,25 May 2004. Part Two FinancialAnalysis and Forecastiug the article. in 2003, Ktispy Kreme had begun ne-qotiating purchase to a struggling seven-store Michigan franchise. The franchisee owed the ompanysevetalmillion dollars for equipment,in-eredients, franchisefees and. as part the and of deal, Krispy Kreme askedthe franchiseeto close two underperlormingstoresand to pay Krispy Kreme the accruedintereston past-dlleloans. In return for those moves, Krispy Kreme promised to raise its purchaseprice on the franchise. According to the Jottrnal, Krispy Kreme recorded the interestpaid by the franchiseeas interestincome and, thns, as immediateprofit; however, theiompany booked the purchasecost of the franchiseas an intangible asset, under reacquired franchise rights, which the company did not amortize.

Krispy Kreme also allowed the Michigan franchise’stop executive remain employedat the company to after the deai,but shortly after the deal was completed, that executiveleft. In accordance with a severance agreement. this forced Ifuispy Kreme to pay the executive an additional $5 million, an expensethe company also rolled into the unamortized-asset categoryas reacquired franchiserights. The company denied any wron-gdoingwith this practice, maintainingit had a c c o u n te dfo r i ts franchi se acqui si ti onsi n accordance w i th general l yaccept ed accountin-e principles (GAAP).

On July 29, however,the company disclosed that th e U ‘ S’ S e c u ri t i esand E xchan-9e ommi ssi on(S E C ) C had l aunchedan i nfor m al i n v e s ti g a ti o n l a ted to ” franchi se reacqui si ti ons re and the company’ sprevi o usly announced reductionin earnin-qs guidance. “Observers remainedskeptical. “Krispy Kre me ‘ s a c c o u n t i ngfor franchi se acqui si ti onsi s the most a-ggressi ve e have w tound,” said one analyst at the time. “We surveyed l8 publicly tradedcompanies with tranchiseoperations,four of which had rerrcquired franchises, and they haci amortizedthem- That clearly seemslike the right thin-e to do. 2 Over the previous three years, Krispy Kreme had recorded$ 174. 5 million as intangibieassets (reacquired franchiserights), which the company was not requiredto amortize. On the date of the SEC announcement, Krispy Kr. -. ‘, sharesfeil anoth l5vo, clcsing at er $ 1 5 . 7 1a s h a r e . Analysts’ Reactions Since the heady days of 2001, when 80vo of the equity analysrsfollowing Krispy Kreme were making buy recommendations the company’s for shares, conventional the wisdom about the company had changed. By the time the Wall

Street Journal published the article about Krispy K-reme’sfranchise-reacquisition accountin-q practices in Ma;’ 2004, only 25vo of the anaiysts foliowing Krispy Kreme were recommending the company as a buy; another 50% had. do*ngr-adedthe stcck to a hold. Exhibits 4 and 5 provide tablesof aggregate analysts’recommendations and EpS (earningsper share)estimates. Krispy Kreme’s troublesmounted As during the secondhalf of 2004, anaiystsbecameincreasinglypessimisticabout the stock: a’Dtd s”*. one Say Doughnuts? yes. he sEC. ” New york Times,3OJutv 2004. Cese 7 Krispy Kreme Doughnurs,Iirc. 105 Analyst John lvankoe, J. P. Morgan Inc. Securities, Comment ln additionto the possibility an earningsrestatement, believemany of we problems persist,exclusive any “low-carb” fundamental of impact. Declining new-store volumesare indicative a worseninginvestment of model,and we believerestructured store-development contracts, a srnaller storeformat,and reducedfees chargedfor equipmentand ingredients are sold to franchises necessary.

We believethat the challenges KKD faces,includingmargincompression, lowerreturns,an SEC investigation, productsaturation, and currently positive outweigh company’s the drivers. addition,sharesof KKD are ln tradingat 16. 6x CY05 earningsversusits 15% growthrate. As such, we rate KKD shares HOLD. KrispyKreme’sbalancesheetbecamebloatedover the past two yearsby goodwillthat will likelyneed to be writtendown. As a result, acquisition KKD’sreturnon invested capitalhas plungedto about 107oversus ‘18% two yearsago priorto these acquisitions.

We’d view a balance portionof the sheetwrite-down, including eliminating significant a franchiserights,” a first step in the as $170+ millionin “reacquired rightdirection. In our opinion, management not focused operations way it was on the shouldhave been. As a result,too many unitswere openedin poor locations the companytripledits unit base since 2000. Additionally, as we believethat franchisees were not trainedproperlyas to how best to run their off-premises business. a result,we believemany unitsare As losingmoneyoff-premises, franchisees not motivated grow and are to thatbusiness. lso appears us that basicblocking lt to and tackling, execuiion, and cost discipline were seriously lackingin both the company and franchise svstems,resultinq inefficiencies. in Date July 29, 2004 JonathanM. Waite, KeyBancCapital Markets John S. Glass, CIBCWorld Markets Oct. 12, 2004 Nov. 8, 2004 GlennM. Guard, LeggMason 2004 Nov. 23, As the headlines about the SEC investigation and Krispy Kreme’s other management issues continued (e. g. , Ktispy Kreme’s chief operating officer stepped down on August 16,2004), observeis looked more critically at the fundamentals of kirpy Kreme’s business.

In September, the Wall Street Journal published an article that focused atterrtion on the company’s growth: The biggest problem for Krispy Kreme may be that the company grew too quickly and diluted its cult statusby selling its doughnutsin too many outlets,while trying to impress Wall Street. The number of Krispy Kreme shops has nearly tripled since early 2000, with 427 storesin 45 states and four foreign countriss. Some 20,000 supermarkets, convenience stores,truck stops. and other outsidelocationsalso sell the company’sdoughnuts.

Another issueis that Krispy Kreme has relied for a significantchunk of profitson high prcfit-margin equipmentthat it requiresfranchiseesto buy for each new store. its profits have also beentied to growth in the number of franchisedstores, because the upfront fee of each must pa,,,. 3 Jountc;L3 September “‘sticky Situation,”lVali Streer 2C04. Part Two FinancialAnalysis and Forecasting In September 2004, Krispy Kreme annollncedthat it would reduceits number of new storesfor the year to abor-rt from the previously announced120. 60 f Restatement

Announced On January4,2005, Krispy Kreme’s board of directorsannoLlnced the company’s that previously issuedfinancial statements for the fiscal year ended February 1,2004 (FY2004) would be restated “colrect certain errors. “The board determined to that the adjustments, which principally relatedto the company’s”accountingfor the acquisitions of certain franchisees,” would reduce pretax income for Ft’2004 by between$6. 2 million and $8. t million. The company also expectedto restateits financial statements for the first and secondquartersof FY2005.

Krispy Kreme also said it would delay the filing of its financial reports until the SEC’s investigation had been resolvedand the company’sown internalinquiry was complete. However,the failure of the company to provide its lenderswith financial statements January14,2005, could constitutea defaultunder the company’s by $150-million credit facility. In the event of such a default,Krispy Kreme’s bankshad the ri-ehtto terminate the facility and to demand immediate payment for any outstandingarnounts. Ktispy Kreme’s failure to file timely reportsalso placedthe company at risk of having its stock delistedfrom the New York Stock Exchan_9e (NYSE).

By the end of the next day, Krispy Kreme’s shareswere trading at less than $10 a share. Iv{ostanalysts felt thet Krispy Kreme’s lenderswoLrldgrant the corrrpany waiveia on its credit-facility default. and few felt the company was truly at risk of being delisted from the NYSE. The board’s announcement, however,servedonly to raise more qr. restions about the company. Since August 2003, the companyhad lost nearl;l $2. 5 billion in its market value of equity. Exhibit 6 illLrstrates stock-pricepatterns the for Krispy Kreme relative to the S&P 500 Composite Index. Were the revelations about the company’sfranchiseaccountingpracticessuffi. ient drive that mirch value to out of the stock? Were there deeperissuesat Krispy Kreme that deservedscrutiny? Exhibits 7, 8, and 9 provide analyticalfinancial ratios for Krispy’Kreme and a group of comparablecompanies the franchisefood-serviceindustry. in EXHIBIT t Statements I Income ($US thousands, except per-share amounts ) Three Months Ended May 5, 2003 148,660 112,480 8,902 4,1 1 0 (525) May 2, 2004 184,356 141,383 10,664 6,1 0 3 Three Months Ended Jan. 30, 2000 220,243 190,003 14,856 4,546 Jan. 28, 2001 300,715 250,690 20,061 6,457 Feb. 3, 2002 394,354 316,946 27,562 7,959 Feb. , 2003 491,549 3 8 1, 4 8 9 28,897 12,271 9,075 Feb. 1, 2004 665,592 507,396 36,912 19,723 (525) lncome Statement Total revenues expenses Operating Generaland administrative expenses and Depreciation expenses amortization award Arbitration Provision restructuring for charges and lmpairment closingcosts Incomefrom operations ihcome Interest Interest expense Equityloss in joint ventures Minorityinterest Otherexpense,nef lncomebeforeincometaxes for Provision incometaxes Discontinued operationsl Net income per earnings share Diluted Shareprice (fiscalyear close) Numberof shares (milliong) outstanding

Aug. 3, 2003 159,176 120,573 9,060 4,536 Aug. 1, 2004 177448 , 145,633 11,845 6,328 ‘l0,B3B 293 (1,525) 23,507 2,325 (607) (706) (716) (20) 23,783 9,058 14,725 o. 27 16. 22 41,887 2,980 (337) (602) (1,147) (235) 42,546 16,168 26,378 0. 45 39. 85 58. 6 59,817 1,966 ( 1, 7 8 1 ) (2,008) (2,287) (es4) 54,773 2 1, 2 9 5 33,478 0. 56 30. 41 6()R 102,086 921 (4,409) (1,836) (2,072) (13) 94,677 37,590 57,087 0,92 35. 64 62. 1 23,702 227 (866) (6e4) (616) (25) 21,728 8,588 13,140 7,543 ‘18,636 176 (1,433) (575) (126) (156) 16,522 6,675 34. 85 (24,438 (0. 38) 1,802 25,00;7 205 (ee7) (802) (616) (343) 22,454 9,014 439 13,001 11,840 226 (1,366) (3ee) 267 114 10,682 4,438 480 5,764 0. 09 9,606 3,650 5,956 0. 15 o. 22 o. 21 39. 7 54. 5 60. 7 63. 6 62. 1 63. 4 lRgsulting of from divestiture MontanaMills. (SEC). Commission and Exchange Sourceof data:Companyfilingswith the Securities { Part Two FinancialAnalysis and Forecasting EXHIBIT 2 | BalanceSheets FiscalYear Ended ThreerlVlonths Ended Feb. 1, 2004 M a Y2 , 2004 Aug. 1, 2004 in thousands) ASSETS Current Assets: Cash and cash equivalents Short-terminvestments Accountsreceivable Accountsreceivable, affiliates Other receivables Notes receivable, affiliates Inventories Prepaidexpenses Incometaxes refundable Deferredincometaxes Assets held for sale Total current assets Property and equipment, net Deferredincometaxes Long-terminvestments Long-term notesreceivable. affiliates Investments unconsolidated in jointventures Reacquiredranchise f rights, goodwill, otherintangibles Other assets Total assets Jan. 30, 2000 Jan. 28, 2001 Feb. 3, 2002 Feb. 2, 2003 3,183 0 17,965 ‘1,608 794 00 9,979 3,148 861 3,500 4 1. 3 S 60,584 i,398 0 00 7, 0 2 6 18,103 19,855 2,599 2,279 12,031 1,909 3,809 67. 61 1 21,904 15,292 26,894 9,017 2,771 UU 16,159 2,591 2,534 4,607 32,203 22,976 34,373 11,062 884 24,365 3,478 1,963 9,824 20,300 45,283 2A,482 2,363 458 28,573 5,399 7, 9 4 6 6,453 36,856 13,715 47,434 20,740 3,169 4,404 32,974 4,675 7, 4 4 9 13,280 3,374 19,309 44,329 19,933 4,868 5,440 33,076 6,749 8,139 20,005 3,325 1 0 1 7 6 9 1 4 1, 1 2 E . 78,340 112,577 202,558 0000 12,700 4,314 17,877 0 ) R27 151 214 165. 173 . 174. 1 3 1 281,103 301,160 297,154 0 7,609 12,426 175,957 9,456 660,664 2,988 10,728 176,078 12,315 654,483 2,925 9,921 176,045 10,390 661,608 ,000 6,87. 1 49,354 5,232 410,487 3,400 16,621 8,309 255,376 00 1,938 104,958 4,838 171,493 Case 7 Krispy Krerne Doughnuts,Inc. 109 EXHIBIT 2 | BalanceSheets (continued) FiscalYear Ended Jan. 30, 2000 Jan. 28, 2001 Feb. 3, 2OO2 Feb. 2, 2003 Feb. 1, 2004 Three Months/ Ended M a y2 , 2004 Aug. 1, 20A4 (in thousands) LIABILITIES AND SHAREHOLDERS’ EQUITY Gurrent Liabilities: p Accounts ayable 13,106 8,211 B o o ko v e r d r a f t 0 5,147 ‘14,080 Accruedexpenses 21,243 Arbitrationaward 0 0 Revolving of credit line 0 3,526 Currentmaturities of long-term debt 2,400 0 Short-termdebt 0 0 fncometaxes payable 41 0 Total current liabilities 29. 86 inccme Deferred taxes 0 (unpaid) Compensation deferred 990 Revolving linesof credit 0 Long-term debt,net of current portion 20502 Accruedrestructuring expenses 4,259 Otherlong-term obligations 1,866 Total long-term liabilities M i n o r i t yn t e r e s t i SHAREHOLDERS’ EQUITY: Commonstock,no par value, 300,000sharesauthorized; issuedand outstanding Commonstock,10 par valuq 1,000sharesauthorized; issuedand outstanding Paid-in capital Unearned compensation Notesreceivable, employees Nonqualified employee benefit plan assets Nonqualified employee benefit plan liability Accurnulated other comprehensive income(loss) Retained earnings 27,617 38. 168 579 1,106 0 0 3,109 1,735 6,529 1, 1 1 7 12,095 9,107 26,729 0 3,871 731 0 0 52. 533 3,930 0 0 2 3,91 0 4,843 12,685 2,491 ‘14,055 11,375 20,981 9,075 0 3,301 900 0 59. 687 9,849 0 7,288 49,900 0 5,218 72,255 5. 193 18,784 8,123 23,744 0 0 2,842 0 0 53. 493 6,374 0 87,000 48,056 0 1’1 1 ,21 152,641 2,323 18,866 12,670 27,107 18,817 13,107 32,249 4,663 5,566 63. 306 16,468 72,000 58,469 10,774 157,711 2,815 69. 739 25,564 62,000 50,135 12,078 149,777 2,593 85,060 121,052 173,112 294,477 296,812 299,865 ,670 10,805 (2,547) (188) (2,349) (126) 126 609 42,547 125,579 171,493 (186) (2,580) (138) 138 456 68,925 187,667 255,376 (119) (558) (33e) 339 (1,486) 1A2,403 273,352 410,487 (62) (383) (369) 369 (1,315) 159,490 452,207 660,664 (47) (383) (264) 261 (783) 135,052 430,651 654,483 (31) (383) (264) 264 (76e) 140,816 439,499 661,608 34,827 Total sharehoiders’ equity 47,755 Total liabilities and shareholders’equity 104,958 Source clata: of (SEC)i Companyfilingswith the Securities and Exchange Commission 1. 10 Part Two FinancialAnalysis and Forecastins EXHTBIT 3 Store growth Total company factory stores Beginning period of Storesopenings Storeclosings Storesacquiredfrom franchisees End of period Net change 7″ year-over-yeargrowth Total franchised factory stores Beginning period of Unitopenings Unit closings Storestransferred company to End of period Net change yea ? 6 r-over-year growth Total factory stores Beginning period of Storeopenings Storeclosings End of period Net change 7″ year-over-year growth % of total stores Company-owned Franchised Source of data: Company reports,case writefs Jan. 30, 2000 Jan. 28, 2001 Feb. 3, 2002 Feb. 2, 2003 F e b . 1 , 2004 61 z 5B o oo ‘7 I (5) 0 58 (3) (3) 0 63 5 9% 86 28 (3) 0 11 1 25 29″r'” 144 36 (6) 174 30 21% 36. 2% 63. 8% (2) ‘7 12 19% 111 41 (2) (7) 143 32 29% 174 48 (4) 218 44 25% 34. 4% 65. 6% 75 14 (3) 13 99 24 32% 143 49 (2) ( 13 ) 177 34 a . t o/ z. -f /o 99 28 (2) 16 141 42 42″,/o 177 58 (3) (16) 216 39 aao. z. z o 70 19 (3) 0 B6 ‘131 1l 218 63 27e 8e (8) .IAA la- (s) 276 58 27% 35. 9% 64. 1Yo (sl 357 81 29,”a 39. 5% 60. 5% 13 40. % 59. 7″/” analvsis. Case 7 Krispy Kreme Doughnuru,Inc EXI{I8lT 4 | Analysts’Recommendations Percentage Flecommending: Period 14-Jun-01 19-Jul-01 16-Aug-01 20-Sep-01 18-Oct-01 15-Nov-O1 20-Dec-01 17-Jan-02 14-Feb-02 14-Mar-02 1B-Apr-02 16-May-02 20-Jun-02 1B-Jul-O2 15-Aug-02 19-Sep-02 17-Qct-02 14-Nov-02 ’19-Dec-O2 16-Jan-03 20-Feb-03 2O-t’;! ar-03 17-Apr-03 15-tvlay-O3 19-Jun-03 17-Jul-03 14-Aug-03 18-Sep-03 16-Oct-03 20-Nov-03 18-Dec-03 15-Jan-04 19-Feb{4 1B-Mar-04 15-Apr-04 20-May-04 17-Jun-M 15-Jul-04 19-Aug-04 16-Sep-04 14-Oct-04 ‘lB-Nov-04 16-Dec-04 20-Jan-05 Buy 80. 0% 80. 0% 80. 0% 80. 0% 80. 0% 80. 0% 80. 0% 66. 7% 57. 1% 71. 4″/” 66. “/” 66. 7% 71. 4″/” 71. 4% 71. 4% 66. 7% 57. 1% 57]% 50. 0% 50. 0% 625% 62. 5% 62. 5% 55. 6% 66. 7% 80. 0% 83. 3% 66. 7″/” 66. 7% 66. 7% 42. 9″/o 42. 9% 28. 6% 28. 6″/” 375% 25. 0% 25. 0% 33. 3ol” 28. 6″/” 25. O% 14. 3y” 14. 3% 14. 3″/” 14. 3″/” Sell 24. 00/” 20. o% 20. 0″/” 20. 0% 20. 0% 20. 0% 20. 0/” 33. 3% 28. 60/” 28. 6% 3s. 3% 33. 3% 28. 6% 28. 6% 28. 6% 33. 39′. 28″6% 28. 6% 125% 12. 5% 12. 5% 12. 5. L 12. 5% 11. 1% 0. 0% 0. 0% 0. 0% 16. 7″k 16-7″/” 16. 7″/” 14. 3/” 14. 3/” 14. 3k 14. 3% 25. O% 25. Ok 25. 4/” 11. 10/” 28. 6k 37. 5% 42. 9% 42. 9″/o 57. 1% 57. 1″/. Hold 0. 0% 0. 0% 0. 0% 0. 0% 0. 0% 0. 0% 0. 0% 0. 0% 14. 3% 0. 0% O. 0% 0. % 0. 0% 0. 0% 0. 0% 0. A% 14. 3% 14. 3/” 37. 5% 37. 5’/L 25. O% 25. 0% 25. 0% 33. 3% 33. 3% 20. a% 16. 7″k 16. 7% 16. 7% 16. 7% 42. 9″/o 42. 9% 57. 1% 57. 1% 37. 5% 50. 0% 50. 0% 55. 6% 42. 9% 37. 5% 42. 9″/” 42. 9% 28. 6% 28. 6% Sourceof data:liBlE/S(Thomson Financial/First Call). tL2 Part Two FinencialAnalysis and Forecasting EXH|BIT 5 | Consensus EPSEstimates Estimate (Mean) $ 0. s8 $ 0. 43 $ 0. 41 $ 0. 44 $ 0. 43 $ 0. 62 $ 0. 63 $ 0. 63 $ 0. 63 $ o. oa $ 0. 64 $ 0. 63 $ 0. 66 s u. 05 $ 0. 66 $ 0. 87 $ 0. 8e $ 0. 90 $ 0. 90 $ 0. 9i $ 0. 91 $ 0. 92 $ 1. 17 $ 1. 00 $ 0. 9e $ 0. 98 $ 0. 92 $ 0. 59 $ 0. 69 $ 0. 65 $ 0. 58 $ 0. 45 EstimateDate -Jul-01 24-Aug-01 25-Oct-01 16-Nov-01 21-Dec-O1 8-Mar-02 24-May-02 3-Jun-02 1-Jul-02 29-Aug-02 3-Sep-02 B-Oct-02 22-Nov-02 10-Jan-03 14-Feb-03 20-Mar-03 29-May-03 30-Jul-03 21-Aug-03 15-Sep-03 17-Dec-03 27-Jan-04 10-Mar-04 7-May-Q 26-May-04 24-iun-O4 16-Aug-04 27-Aug-Q 10-Sep-04 13-Sep-04 3-Nov-04 23-Nov-04 Source o{ data |/B/E/S(ThomsonFinancial/First Call). Case 7 IncKrispy Kreme Dor-rghnuts, 113 EXHIBIT 6 6. 00 5. 00 o | Stock-Price PatternsRelative the S 500 Compositelndex to q 4. 00 ll o o lo sf 3. 00 2. 00 1. 00 0. 00 x o E u,%i1″$. . $of o$”$’$. $. $’ … $”$of Source of data: Datastream. +r EXHIBIT 7 Financial Ratiosfor KrispyKreme | Analytical Fiscal Year Ended Jan. 30, 2000 Jan. 28, 2001 Feb. 3, 2002 Feb. 2, 2003 Feb. 1, 2OO4 Ratio definitions

Liquidityratlos ratio Quick{acid-test} ratio Curr€nt Leverage ratios D€bt-to equily(book) D€bt-to-capital Times inlerest earned Asset6 equity to Aclivity ratios Receivablss turnover lnventory turnover Assetturnover Cashturnover Profltablllty ratlob Return assets on Relurn equity on profitmargin Operating Netprofitmargin 1. 05 1. 39 47. 96o/. 32. 417. 7. 11 2. 20 10. 81 19,04 2,lO 69. 19 5. 676/” I 12,47″/” 4. 92″/” 2. 70o/” 1. 46 1,’77 0. 00% 0. 00v. 38. 73 L36 12. 16 20. a4 1. 75 42. 80 8. 59″/” 11. 72″/” 7. A2″/” 4. 9o% 1. 63 1. 94 2. 47″/” 2. 41″/” 124. 29 1. 36 10. 19 19. 61 1. 54 18. 00 10. 33% 14. 06% 10. 62V” 6. 69% 1. 96 2. 36 19. 46% 16. 29% 33. 59 1. 50 10. 61 15. 66 1. 20 15. 26 8. 16% 12. 25% 12. 17o/” 6. 81% 2. 72 3. 25 11. 26/. 10. 12% 23. 15 1. 46 9. 70 17. 76 1. 01 32. 79 A. 64/” 12. 62/o 15. 34″/” 8. 58’/. (current liab. assets-inventories)/curr current assetycurr. liab.

LTdebt/shareholders’ equity equity LTdebt/(shareholders’ + debt) EB|T/interest expense totalassewshareholders’ equity sales/accounts receivables costof goodssold/inventory sales’/total assets sal€6’/cash cashequivalents and netincome/asset$ equity netincome/shareholders’ sales operating income/net net income/sales (SEC) Sburceof data:Companyfilingswith the Securities and Exchange Commission EXHIBIT I Financial Ratios:Quick-Service Restaurants End of FY2003 at I Analytical Checkers $ 19 0 0. 96 1. 42 CKE $ 1, 4 1 3 Domino’s $1,333 0. 60 0. 99 Jack in the Box $2,058 0. 23 0. 63 6 1. 8 2 38. 20 5. 44 2. 50 71. 22 52. 83 1. 8 4 147. 12 Krispy Kreme $666 2. 72 3. 25 McDonald’s $17,141 0. 49 0. 76 Panera Bread $356 1. 34 1. 58 Papa Johns $e17 0. 33 o. 77 Sonic $447 0. 77 0. 92 CompanyName (millions) Sales-net Llquidity ratios Quick ratio Current ratio

Leverage ratios (%) LT debVequity Long-term debVtotal capital(%) Interest coverage beforetax Total assets/total equity Activity ratios Receivables turrtover lurnover Inventory Tctal assetturnover Cash turnover Profitabilityratios Returnon assets(%) Returnon equity(%) EBIT margin(%) Net profitmargin(%) nmf = not a meaningful figure. Yum Starbucks Wendy’s Brands $4,076 0. 76 1. 52 $3,149 0. 61 0. 88 $8,380 0. 26 0. 55 183. 57 64. 74 5. 79 5. 02 49. 73 91. 32 1. 52 46. 04 o. 47 Ll. /o 33. S7 25. 36 6. 99 1. 76 262. 97 (131. 07) 421. 90 72. 45 (0. 0e) 2. 05 (0. 62) 5. 2e 20. 63 46. 88 3. 16 40. 90 1 1. 2 6 10. 12 2 3 . 15 1. 46 9. 70 17. 76 1. 0 1 32. 79 77. 97 43. 81 6. 3 2j3 21. 56 89. 84 0. 69 41. 64 0. 00 0. 00 1,014. 10 1. 26 38. 30 62. 53 1 26. 98 38. 1 8. 93 14. 09 2. ‘,18 1. 83 50. 29 27. 49 44. 87 111. 24 2. F7 1. 00 11 0 . 7 3 4 0 . 3 1 0. 21 o. 21 nmf 1. 31 38. 44 ‘t 0. 58 1. 62 10. 84 39. 39 28. 26 9. 25 1. 80 65. 08 133. 39 ‘1. 50 12. 00 35. 15 59. 30 1. 75 38. 83 (5. e2) (31. 30) 3. 49 (3. 24) 32. 42 38. 75 1. 64 8. 74 28. 42 79. 58 1. 0 8 17. 12 12. 23 21. 55 8. 24 8. 32 I66 nml 13. 20 2. e1 6. 26 15. 65 6. 94 3. 58 8. 64 12. 62 15. 34 8. 58 5,91 12. 59 19. 62 8. 80 12. 46 15. 64 14. 02 8. 61 9. 79 2 1. 3 3 6. 38 3. 70 10. 75 13. 69 23. 42 11. 70 9. 83 12. 89 9. 48 6. 58 7. 46 13. 42 ‘f3. 35 7. 49 1 . 0 0 55. 18 12. 77 7. 37 Sourceof data: Standard& Poor’s Researchlnsight. (rl EXHTBIT I (continued| | Firms Descriptions Comparable of Papa John’s International,Inc. : Papa John’sis the #3 pizzachain,with 3,000pizzemarkets. PapaJohn’sowns and rias acrossthe UnitedStatesand in 17 international operates about20% of its locertions. drive-ins the UnitedStates,Sonic in Sonic Corp. : The largestchainof quick-service operatesabout 535 restaurantsand franchisesmore than 2,325 locationsin 30 states. operates retailer, and Starbucks Corp. : The world’s#1 specialty-coffee Starbucks licenses In Starmore than 8,500coffeeshopsin more than 30 countries. ddition, its bucksmarketsits coffeethroughgrocerystores,and licenses brandfor other food and beverageproducts. Wendy’s International,Inc. : Wendy’sis the #3 hambur[erchainby sales. There worldwide; about787″ of them are franchised. are almost6,700Wendy’sfestaurants in franchisers the YUM! Brands, Inc. : ‘/UM! Brandsis one of the largestfast-food in the world,trailing only McDonald’s overallsales. lt outnumbers burgergiant,how(The ever,in storelocations, with more than 33,000unitsin about 100 countries. mostof companyowns and operates almosta quarterof its storesand franchises the others. ) The company’s flagshipbrandsincludeKFC,PizzaHut, and Taco Bell. Food Restaurants Yum! also owns A&W All-American and LongJohn Silve/s. ts long-term multibranding strategy(offering more than one of its brandsat one site) has provensuccessful. is of Checkers Drive-in Restaurants,Inc. : Checkers the #1 operator drive-through restauranls, with more than 780 ownedand franchised locations. Nearly fast-food 30″/”oI its locationsare company-owned. operalorof quick-service food chains, CKE Restaurants,Inc. : CKE is a leading CKE owns and operates with about3,100locations. more than a thirdof its restaurants;the rest are operatedby franchisees. Domino’s Pizza,Inc. : Domino’s the world’s#2 pizzachain,with more than 7,750 is locaDomino’s storesare principally delivery in locations more than 50 countries. tionsand generally not have any dine-inseating. o over 2,000of its Jack in the Box Inc-: Jack in the Box opdrates and franchises are outletsin 17 states. Morethan 1,550localions companyflagship hamburger owned,whilethe rest are franchised. is companyby sales,with McDonald’sCorp. : McDonald’s the world’s#1 fast-food more than 31,000flagshiprestaurants servingburgersand friesin more than 100 Almost30% of its locations company-owned; othersare run by the countries. are franchisees. restaurant PaneraBread Company: PaneraBreadis a leaderin the quick-casual 70″/” business,with more than 740 bakerycaf6s in about 35 states. Approximalely of its locationsare operatedby franchisees. Inc. Sourceof data: Hoover’s. Case 7 Krispy Kreme Doughnuts,Inc. 117

EXHTB|T I Common-Sized s Restaurant Financial Statements: Limited-Service Averagesand Krispy Kreme (KKD) 2001 Balance Sheet: Assets (%) Cash & equivalents Trade receivables(net) Inventory All other current Totalcurrent Fixedassets(net) (net) Intangibles All other noncurrent Totalassets Balance Sheet: Liabilities & Equity (%) Notes payable,short-term Currentmaturity, long-term debt Tradepayables lncometaxespayable All othercurrent Totalcurrent Long-term debt Deferredtaxes All other non-current Shareholders’ equity Totalliabilities equity & Income Statement (%) Net safes Operating expenses Operaiingprofit (net) All otherexpenses Profitbeforetaxes 100. 56. 3 4. 0 t. J 2002 12. 4 0. 9 2. 6 19. 2 57. 0 14. 2 9. 6 100. 0 2003 13. 7 1. 4 3. 8 22. 4 Iz. o KKD2003 12. 8 1. 6 4. 0 z. o 21. 0 tr. ^ -7 | . 1.. ) J. l 10. 4 4. 3 8. 6 26. 4 42. 5 26. 6 a. J 11. 0 100. 0 10. 0 100. 0 4tr, 100. 0 4. 7 o. l 5. 6 6. 0 1A 5. 8 6. 8 9. 3 0. 3 14. 0 36. 4 4’1. 9 0. 1 8. 7 12. 9 100. 0 0. 0 0. 4 2. 8 0. 0 4. 8 8. 1 7. 3 1. 0 14. 9 68. 4 100. 0 9. 2 0. 2 13. 9 .)+. I 0. 2 16. 9 oo. I 40. 2 u. l 45. 6 0. 2 8. 3 9. 9 100. 0 4. 7 20. 9 100. 0 100. 0 55. 6 4. 7 1. 6 3. 0 100. 0 58. 1 4. 0 IA 100. 0 76. 2 15. 3 1. 1 14. 2 2. 7 2. 5 Sourceof data: Annual Statement Studr’es: 2004-2005,The Risk ManagementAssociation.