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Krispy Krème Doughnuts. A Harvard Business School Finance Case Study

734 words - 3 pages

Krispy Krème DoughnutsObjective:To develop an investment recommendation for Krispy Krème Doughnuts and conclude whether they should go ahead with their on going expansion strategy or not.To achieve this objective, historical financial statements will have to be analyzed and an assessment of the future financial health of the firm be made.Based on the case, it is evident that Krispy Krème Doughnuts opened to the public with a boom, with its share prices rising form $5.5 to $9.25 in just one day. The increments in the value of their shares are commendable. However, now the issue faced by the company is whether Krispy Crème Doughnuts will be able to sustain this growth. The revenues form all sources, company stores, franchises and KKM&D need to be maximized.Krispy Crème Doughnuts is a comparatively young company and a good potential to grow further. With just 222 stores by April 2002, it is already a ...view middle of the document...

P/E Ratio is very high thus indicating the health of the company is very good.The Investment Utilization Ratios have also been almost constant throughout. The Investments have been utilized well and the company is working under normal operations and is not suffering with any problems.The company has high profit margins hence better sustainability.The financial ratios are an indication of a good financial leverage which is again a sign of efficient operations.Control of Franchises:However, there seems to be a problem with the control of their franchises. It can be seen from exhibit 1, fig 2, that the returns at the franchise stores are less than the returns from the company owned stores (though it has gone down from 45% to 26%), the manager should probe into why this is happening. The machines are provided by the company and so is the dough; then what could be the reason for lower sales?Recommendation:The Company should go ahead with its trend of expansion. The market is receptive and the potential is huge. Being a young company they have greater number of markets to venture into and more ideas to implement.With their good operations and policies:- Having a vertically integrated management and providing the manufacturing plant and the dough, they can keep a check on the quality of their products and hence, have an upper over their competition which is a fragmented market. Besides, they have a delivery system operating under KKM&D which results not only in quality checks but timely delivery and a source of revenue as well. Selling the machinery through the same company is also a higher margin business.However, apart from going into further expansion, they should try and probe into the reasons why the sales from the franchise operated stores are below those of the company. They need to have a right balance between their three sources of revenues and knowing the implications of each is important.Last but not the least, looking at their financial statements it can be concluded that to satisfy their monetary requirements, they can raise the funds through a combination of both, stock offerings as well as through debt financing.

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