Krispy Kreme Case Study Essay

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| Krispy Kreme Doughnuts Case | Seminar in Finance | | Gregory Steigerwalt | 4/17/2012 |


Krispy Kreme Case – Discussant

Krispy Kreme’s rapid expansion may have been the reason for its rapid fall. Recently becoming a publicly traded company in April 2000, Krispy Kreme shares had seen amazing growth as they were selling for 62 times earnings. Naturally, this created a buzz around Wall Street, and an “obsession” with Krispy Kreme began as it became one of the hottest stocks on the market. Yet, analysis of the fundamentals of Krispy Kreme needed to by analyzed to see the true threats the company had brought upon itself.
Analysis of Krispy Kreme’s business model and strategy gives a good insight as to how the company
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The first problem came about on May 7th, 2004 when Krispy Kreme announced adverse results for the first time. This announcement was only the tip of the iceberg as shortly after the Wall Street Journal published an article about the aggressive accounting Krispy Kreme used for reacquired franchises.
The actions being criticized within the article involved Krispy Kreme’s negotiations to purchase a seven-store Michigan franchise. The franchise had been struggling, and owed Krispy Kreme several millions of dollars in franchise fees, for equipment, and ingredients. The settled deal required the franchise chain to pay the accrued interest on past-due loans in return for a raise in the acquisition price. This interest was then recorded as interest income and thus was immediate profit for Krispy Kreme. The price to acquire the franchise was booked as an intangible asset which was not amortized. Moreover, the executive of the seven-store chain was allowed to stay on after the purchase, but the executive left shortly after, and Krispy Kreme had to pay $5 million in severances which was also recorded as an unamortized asset.
Looking at it from the market perspective, Krispy Kreme was in the minority with how they treated their accounting
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