4

4. In light of your answer to question 3, what accounts for the firm’s recent share price decline?
Regarding to Krispy Kreme situation, the firm’s share price decline due to several reasons. One of the reasons is that the recent low-carbohydrate diet trend in the United States. No doubt, this trend directly affects their wholesale as well as retail sales. The trend brings significant influences towards the firm since approximately 60% of the sales were derived from their glazed doughnut. Hence, the investors were told earlier that the expect earnings would be 10% lower than anticipated.
As Wall Street Journal said “the biggest problem Krispy Kreme may be that the company grew too fast.” The firms so eagerly to grow but the products were on the decline and still they seemed to just want to expand. Their aggressive store expansion cause the number of stores was overwhelming in such a short time even though the overall revenues seemed to increase in previous years, but it could not sustain. Therefore actual revenues per store had decreased along with the bad headlines it received from Wall Street. The company grew too quickly and saturated the market, diffusing the product market ability and when expansion plans had been eliminated, the company lost the majority of its capital. This reveals that the firm’s poor capital spending.
Moreover, the firm’s decision to divest Montana Mills was resulting in a charge of $35-$40 million in the first quarter. The firm also blamed that the new coffee shops were falling short of expectations and that it had plans to close down three of them which take a charge of $7-$8 million. Accordingly, the shares closed down 30%, at $22.51 a share.
Report on Wall Street Journal on May 25 published a story of Krispy Kreme acquiring a Michigan franchise after agreeing to raise the purchase price in return for payment for interest, equipment and ingredients owed to it by the franchisee. Furthermore, Krispy Kreme reordered the interest as interest income and booked inflated price of the store and franchising rights as intangible assets, which it did not amortize. At last, Krispy Kreme ends up with $174.5 million of intangibles on their balance sheet. The $174.5 million of intangibles on the balance sheet is a serious problem. In fact, this amount is greater than accumulating the net income of the previous five years. On July 29, Securities and Exchange Commission (SEC) had launched an informal investigation related for franchise reacquisition and the company’s previously announced reduction in earnings. As a result, the shares fell another 15%, closing at $15.71 a share.

Lastly, when the financial scandals became public, the investors lost confidence in the company. In addition, future cash flows and the growth were contributors as well and the company’s strategy in both of these was not well managed. Combined with internal mismanagement and a formal investigation launched with analysts revealing poor capital spending, the market response to Krispy Kreme drastically decreased.

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