Case Study: Krispy Kreme Doughnuts, Inc.

In: Business and Management

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Case Study: Krispy Kreme Doughnuts, Inc.

Problem
The problem in this case deals with the loss in value of Krispy Kreme Doughnuts’ stock. Was the main reason for the fall in stock price due to article posted in the Wall Street Journal about the SEC investigation? Were there deeper issues within the company that caused the loss in earnings per share?
Analysis
In April of 2000, the CEO of Krispy Kreme Doughnuts took the company public and had one of the largest IPO’s in recent years. After Krispy Kreme went public, they stated that they were planning to expand from 144 to 500 stores over the next five years. The company grew rapidly for the next few years, and stock prices rose well above the S&P 500. On May 7, 2004 the company reported adverse results and told investors to expect earnings to be 10% lower than originally anticipated. Krispy Kreme’s reasoning for the decrease in expected earning was the growing trend in America toward a low-carbohydrate diet. On May 25, 2004 the Wall Street Journal published an article on the aggressive accounting treatment used by Krispy Kreme during a franchise acquisition. A franchisee owning seven stores in Michigan owed the company several millions of dollars. They asked him to close two underperforming stores and pay Krispy Kreme accrued interest on past-due loans. In return, the franchisor promised to raise the purchase price of the franchise. Krispy Kreme accountants recorded the interest paid as interest income resulting in immediate profit, and purchase price of the franchise as intangible assets. The franchisee stayed with the company after this as a top executive. Shortly after the deal for his stores was finished, the executive left the company with an additional $5 million due to the severance agreement. While this was going stock prices had dropped drastically to the point that they were barely above the…...

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