Introduction: I. INTRODUCTION Krispy Kreme Doughnuts, Inc.

(KKD) is a unique brand offering doughnuts, beverages, collectibles, and franchise opportunities. Pioneered as a small bakery in Winston Salem, North Carolina on July 13, 1937; KKD has evolved into a publicly traded firm boasting 395 retail stores and over four million dollars in sales (second quarter fiscal year 2008). So, why did the firms president and chief executive officer Daryl Brewster (pictured right) say After several quarters of progress on our turnaround, second quarter results [fiscal year 2008] did not meet our expectations.? His statement is largely due to the significant losses the firm has experienced since fiscal year 2005. KKDs total revenues sunk from the five million dollar range at the close of fiscal year 2006 to the four million dollar range at the close of fiscal year 2007. The sharp decline in sales is accompanied by a system wide decrease in retail stores. KKDs retail operation shrunk from 433 stores at the close of fiscal year 2005 to 395 stores at the close of fiscal year 2007. Nonetheless, the quick-service restaurant (QSR) industry that KKD competes in has experienced everincreasing growth during the last two decades, and the trend is expected to continue as a greater percentage of Americans work more and enjoy less home cooked meals. KKD executives, namely the aforementioned president and chief executive officer, believe the key to improving the firms performance and capitalizing on industry growth is to increase the percentage of stores operated by franchisees. Is this the best strategy for the firm to pursue? To answer this question we must identify where the QSR industry is positioned according to the industry life

cycle framework; assess the attractiveness of the QSR industry based on Porters Five Forces Model, and reveal KKDs strengths, weaknesses, opportunities, and threats. The information presented will determine if KKD should continue with their current strategy of increasing franchisees or an alternative strategy. We will begin with an assessment of KKDs strengths, weaknesses, opportunities, and threats. Krispy Kreme Doughnuts was the dream of a great entrepreneur, Vernon Carver Rudloph. Although, Mr. Rudolph did not invent the doughnut, he definitely improved the process of making the doughnuts and the taste of the doughnuts, with his secret recipe for yeast-raised doughnuts. There are many values, within, this organization that are passed onto employees, and then to customers. The company's shared values include: integrity, authenticity, passion, learning, sharing, and positive expectations. Krispy Kreme is business to produce a top-notch doughnut and share it with the world. Their commitment to being an ethical and social responsible company shows in all they do. Krispy Kreme helped to raise some $43 million for various charities and social causes in their last fiscal year. They do not only say they are socially responsible, they prove they are in their day-to-day operations. I plan to address many issues affecting Krispy Kreme in this case study. For instance, this case study will include discussion of; the growth strategy of the company, identifying ways in which the company can effectively expand using ecommerce, identifying the company?s competitors and discussion of their competitive advantages and disadvantages, how the company uses its production processes to enhance customer relations, and predictions for company?s growth and continued success in the future.

Introduction In 2003 Krispy Kreme was named by Fortune Magazine as America s Hottest Brand andin 2004 they reported net income of $50 million. However over-expansion, an expensivestore network, revelations of falsified financial reports and changing trends in diet havemeant that Krispy Kreme revenues have declined by 50% between 2005 and 2010 1 .The strategic problem considered is to analyse Krispy Kreme s current operations andsuggest recommendations for how this may be tailored for the UK market for long-termprofitability given cultural and retail differences

CENTRAL PROBLEM: The high visibility franchise reacquisition program by Krispy Kreme Doughnuts Inc. and several associated aggressive and highly controversial accounting treatments that weaken its leverage standing. MINOR PROBLEMS The lost of Krispy Kreme Doughnuts market value of equity of Abs $2.5 billion since August 2003. The delay in filing and submission of financial reports to intended users on the specified date. The decrease of about 10% of the investors expected earnings. Reliance of Krispy Kreme Doughnuts Inc. for a significant of profits on high profit-margin that it requires the franchises to buy for each new store. The tied to growth in number of franchised stores because of upfront fee each must pay. Krispy Kreme Doughnuts Inc. shares of stocks may possibly delisted from New York stock exchange. OBJECTIVES :

To correct the accounting errors and treatments and issue accounting reports before January 14, 2005. To strengthen not just the liquidity but also the leverage standing of the company in the current year. To lessen the companys goal into an attainable one for a specified period. To gain back the stockholders expectations and support in the company within the current period. To gain back the lost in market value of equity of KKD within two years. SWOT ANALYSIS / FACTORS: STRENGTH *Distinctive green-and-red vintage logo and unmistakable Hot Doughnuts Now Neon Sign* One of the best things to do in order to get the attention of the customers is to do or show something that is distinct and different. And what Krispy Kreme Doughnuts do is through the use of a vintage logo in a current year with the green-and-red colors. These colors will easily catch the attentions of the people because the colors used is the same with the colors used in the traffic signals before crossing the streets and it will make them conscious with the green-and-red vintage logo. In addition, they were using neon lights which are used in illuminating advertisements in their hot doughnuts. *Special Doughnut Recipe* There is something in the doughnut that make it special and different with the other doughnuts, though we cannot pinpoint or specify if what makes the doughnut special, but we can stick to the fact given that is made and created special. With its performance in the wall street, it is proven and tested to be different and favorable for the consumer than other doughnuts. *Aggressiveness for Expansion* Aggressiveness of the management to expand and to have greater number of store outlet is strength. It simply shows that the company exist for a certain goal and managers and employees have the motivation to hit the company goals. The desire to grow and expand attracts more investor to invest the company. *Offering customers an experience rather than simply a product* Consumers prefer to buy things of foods that contains more than what they pay. Just like what Krispy Kreme Doughnuts offered to their customers. They are not just selling the doughnuts but also the experience

that they will in buying doughnuts on-premises customer will personally experience in the different processes in making doughnuts. *Product consistency and quality throughout the system* Krispy Kreme Inc. produces doughnut products in consistent taste and of quality throughout the process. This was done by Krispy Kreme through consistency supervision of different franchise outlets and providing quality and taste. WEAKNESSES *Franchising which only gives the company 4% of a total revenue* As stated in the case facts, the companys goal is to have more franchise outlets nationwide. But this is ironic to what has given that franchises only give 4% of the total revenue. So the company is focusing in the weak area of their businesses. *Timeliness* KKD doesnt have control in the time period of their accounting reports. They dont have the ability to deal with the pressure in environmental work in relation to the time. OPPORTUNITIES *Popularity of Rudolphs Doughnuts product in a short time* The biggest challenge of an entry in business is the first time in operation. But with just a short span of time, Rudolphs doughnuts become popular which will boost the interest and passion of Rudolph in making the business grow. With the popularity of the product, Rudolph found the big room for opportunities in expansion. *Scott Livengood took the company to the public in one of the largest initial public offerings* For a long years of existence, the popularity of the product increased even better when Scott Livengood took the company to the public and introducing doughnut as its specialty. This initial public offering gives opportunity for Krispy Kreme to expand even better through and increase in working capital from the new investors. THREATS *Acquisition of a struggling seven-store Michigan Franchise* This acquisition is a big threat to the companys profitability and stability. Because of this acquisition, The company is recognizing income that should not have been realized and having wrong for accounting treatments. These errors makes the stockholders to mislead in their expectations. *Franchise-Reacquisition Accounting Treatments*

Erroneous accounting treatments of KKD for Franchised-reacquisition is a threat to the companys sustainability. They may issure wrong financial reports to investors and creditors which may lose their confidence and trusts. ALTERNATIVE COURSES OF ACTION Krispy Kreme Doughnuts Inc. Needs to increase its credit requirements and to hold issuing shares of stocks in order to increase its debt to equity ratio. One of the factors that decreases the earnings per share of KKD was its increase in liability and the increase in equity. So companys income would be divided into a bigger number of shares and installment payments of debt.

*Increasing debt , increasing equity Debt to equity ratio = Total liabilities Total equity

=10/2 =5

=11/3 =3.67

=12/4 =3

As illustrated above, As liabilities and equity increases the debt to equity ratio also decreases. ___ To curb this movement of a debt to equity ratio, either the liability or equity will hold while increasing the other. *Increasing debt, hold liability Debt to equity ratio = Total liabilities Total equity

=10/2 =5

=11/2 =5.5

=12/2 =6

=13/2 =6.5

The best thing for the company to do is to increase its debt and maintain its equity in order for them to curb the decrease in debt to equity ratio. ALTERNATIVE COURSES OF ACTION

Krispy Kreme Doughnuts Inc. Needs to increase its credit requirements and to hold issuing of stocks. In order to increase its debt to equity ratio. One of the factors that decreases the earnings per share of KKD was its increase in liability and the increase in equity. So companys income would be divided into a bigger number of shares and installment payments of debt. *Increasing debt, increasing equity Debt to equity ratio = Total liabilities Total equity

=10/2

=11/3

=13/2

As illustrated above, As =5 =3.67 =3 liabilities and equity increases, the debt to equity ratio also decreases. ___ to curb the movement os debt to equity ratio, either the liability or equity will hold while increasing the other. **Increasing debt , increasing equity Debt to equity ratio = total liabilities Total equity =10/2 =5 =11/2 =5.5 =12/2 =6 =13/2 =6.5

The best thing for the company to do is to increase its debt and maintain its equity in order for them to curb the decrease in debt to equity ratio. To correct the accounting treatment for interest charges. KKDs interest charges should be treated as expenses___ the year it is incurred. KKD recognized interest as expense when it received the borrowed capital, resulting to a dropped from 124 in 2002 to 23 in 2003 for its times interest earned.

*KKDs interest accounting treatment

Principal =$1,000,000 Interest rate = 10% Interest = $100,000 Net income = $ 12,400,000 Amortization = $100,000 per share for 11 years Time interest earned = 12,400,000 100,000 = 124 *GAAP treatment for interest Time interest earned = 12,400,000 100,000/11 = 12,400,000 9,090.90 = 1,364 GAAPs treatment for international is to divide the international expense into the number of years. The company should cease in issuing ordinary shares. The increase in ordinary shares an income of the company makes the return on equity meager of the decline in earnings per share in order for the earnings per share increase, cessation of issuance of ordinary shares is the best thing to do.

*Situation why Roe declines even improving margin profit Return on equity = ______net income____ Average ordinary share

=P 10,000,00 100,000 = 100

=P 15,000,000 100,000 = 150

= P 20,000,000 100,000 = 200

Restate the companys ________________

Treat reacquisition cost of a franchise as a deduction to its investments in franchise and not an intangible asset. This is an accounting treatment prescribe by GAAP in recognizing reacquisition of franchise. The return on assets of the company become stagnant even though there is an increase in net profit because of the accounting treatment used by KKD in reacquisition of franchise. Franchise reacquisition should be deducted from asset particularly investment account. But instead, KKD added reacquisition as part of the asset, thus, overstating average total asset accounting.