KRISPY KREME DOUGHNUTS

FORECASTING

Group: Tammy Cheung , Shelly Khindri,

Parm Marway, Hari Stirbet
AGENDA

 Background (Shelly)
 Industry Analysis (Shelly)
 Current Financials (Parm)
 Forecasting (Hari)
 Forecasting Verification (Tammy)
 Reality Check (Tammy)
HISTORY

Vernon Krispy Kreme 222 stores in

Rudolph gained a 34 states,
purchased reputation in produced 5
“secret recipe” U.S. for million donuts
from French making high a day, 2 billion
chef in New quality, tasty donuts a year
Orleans donuts

1937 1960 2002

 INDUSTRY ANALYSIS
Threat of New Entrants
(MODERATE)
• High startup costs
• Franchise costs high
• Strong Brand Identity

Bargaining Power of
Buyers (HIGH) Rivalry Among Existing Bargaining Power of
• Quality & Price Firms (HIGH) Suppliers (LOW)
• Taste • Highly fragmented • Vertical Integration
• Alternative products • Largest donut retailer
• Large competitors and
regional players

Threat of Substitutes (HIGH)

• Geographical presence
INDUSTRY ANALYSIS

 CONCLUSIONS:
 Highly competitive environment with
exception of supply chain
 To continue growth levels, high investments
in long-term assets and working capital
would be needed
 Profitability outlook relies heavily on ability to
carry forth expansion plans (outside of U.S)
REVENUE SOURCE

(1) Owned and operated doughnut stores

(2) Royalties from franchise associates and
area developers
(3) Sale of doughnut mixes and doughnut-
making equipment to franchise
associates and area developers
GROWTH STRATEGY

 Mid 1990’s: grew geographically through

franchising
 2003: 62 new stores (mostly franchise)
 2003 to 2006: open 200 new stores

 LONG TERM: Exploring growth in Japan,

South Korea, Australia, Spain and UK
PROBLEM IDENTIFICATION

 CIBC World Markets has to forecast the

company’s financial performance for the
next few years. Items to consider:
 Ability to sustain revenue & earnings growth
 Forecasting number of stores in the system
 Ensure forecast is consistent with corporate
trends
CIBC ANALYST FORECAST

 Reflective of corporate expansion;

 January 2003  $0.64 Earnings per share
 Projected earnings growth of 42%
 January 2004  $0.83 Earnings per share
 Projected earnings growth of 33%
CIBC ANALYST FORECAST

CONDENSED INCOME STATEMENT 2003 2004

REVENUE (SALES) 494,818 606,197
COST OF GOODS SOLD 390,249 473,864
GROSS PROFIT 104,569 132,333
SELLING, GEN. AND ADM. EXPENSES 44,080 52,999
EARNINGS BEFORE INTR. AND TAXES 60,489 79,334
NET INTEREST EXPENSE 14 1,000
EARNINGS BEFORE TAXES 60,475 78,334
INCOME TAX 22,991 30,527
NET INCOME 37,512 49,807
THINGS TO CONSIDER

 CIBC forecast
 What elements did you consider in their
forecast?
 What assumptions would you make regarding
store expansion & sales per store?
CONDENSED BALANCE SHEET

2000 2001 2002

ASSETS:
CASH 3.18 7.03 21.90
NON CASH CURRENT ASSETS 37.86 60.58 79.87
LONG-TERM ASSETS 63.92 103.88 153.60
TOTAL ASSETS 104.96 171.49 255.37

LIABILITIES AND STOCKHOLDERS'

EQUITY:
CURRENT LIABILITIES 29.60 38.17 52.53
LONG-TERM LIABILITIES 27.62 6.53 12.69
STOCKHOLDERS' EQUITY 47.74 126.79 190.15
TOTAL LIB. AND STOCKHLDRS' EQUITY 104.96 171.49 255.37
CONDENSED INCOME STMT

2000 2001 2002

REVENUE (SALES) 220.24 300.72 394.35
COST OF GOODS SOLD 190.00 250.69 316.95
GROSS PROFIT 30.24 50.03 77.40
SELLING, GEN. AND ADM. EXPENSES 19.41 27.95 37.27
EARNINGS BEFORE INTR. AND TAXES 10.83 22.08 40.13
NET INTEREST EXPENSE 1.23 -1.70 -2.40
EARNINGS BEFORE TAXES 9.60 23.78 42.53
INCOME TAX 3.65 9.06 16.17
NET INCOME 5.95 14.72 26.36
RATIO ANALYSIS

2000 2001 2002

Sales growth 36.54% 31.14%
NOPAT Margin 2.97% 4.52% 6.65%
After-tax net interest rate on debt 11.32% -7.71% -5.78%
Net operating working capital/sales 3.73% 7.44% 6.95%
Net operating long-term assets/sales 29.05% 34.49% 38.98%
Net debt/net capital 33.84% -0.63% -5.14%
Shareholders' equity/net capital 66.14% 100.40% 105.09%
KEY FORECASTING TOOLS

 Ratio Analysis
 Publicly available information about:
 Growth plans (new stores)
 Profitability (per store)
 Industry/environment assessment
FORECASTING KKD’s REVENUES

 What do we know about KKD’s plans?

 What is the Net Profit per Area Developer

store?

 What is the average number of stores in

the system? Could you project this for the
next 2 years?
 FORECASTING SALES EXERCISE

Are the Developer Store profitable?

2002

Revenues

Gross Profit

Royalties

Markup of KK purchases

Capital Costs

Net Income per store

KKD’s EXPANSION PLANS?

 200 new stores from 2003-2006

 62 to open in 2003
 Store opening forecast:

2003 2004 2005 2006

Company Store Openings ? ? ? ?

Developer Area Store
Openings 62 ? ? ?
# OF STORES IN SYSTEM

2001 2002 2003 2004

Actual Forecast
Company owned 63 75 80 85
Franchised 111 143 200 262
System wide 174 218 280 347

Average# of company stores 69 77.5 82.5

Average# of franchise stores 127 171.5 233.5
PROFITABILTY: FRANCHISE

2002 weekly averages:

 23K per “old franchised”
 72K per “area developer store” and company store
Average per franchise?

2002 2003 2004

Actual Forecast
Company weekly sales 72K 75K 78K
Growth 4% 4%
Franchise weekly sales 53K 63.8K 73.5K
Growth 20% 15%
SYSTEM SALES FORECAST

(Annual Sales = Average# of Stores * Weekly Sales per Store * 52)

2002 2003 2004

Actual Forecast
Company Sales 258,336 302,250 330,330
Franchise Sales 350,012 535,080 739,230

Total System Sales 608,348 837,330 1,119,560

Growth rate 37.6% 33.7%

KKD’s REVENUE GROWTH

INCOME STATEMENT FOR THE YEAR 2003 2004

Sales 504,768 615,817

Net operating profits after tax 40,381 49,265

Net interest <income> expense after tax 464,386 566,551

Net income 39,917 48,698

Basic Earnings Per Share 0.75 0.91

FORECAST VERIFICATION

2001 2002 2003 2004

Actual Forecast

D+A 0.02 0.02 0.02 0.0195

G+A 0.066 0.0698 0.068 0.067

Taxes 0.03 0.04 0.046 0.05

Margins 0.166 0.196 0.21 0.22

DUPONT: ACTUAL vs. FORECAST

2000 2001 2002 2003 2004 2005 2006 2007

Actual Forecast

Net Income/ Sales 0.03 0.05 0.07 0.08 0.08 0.08 0.06 0.05

Sales/Assets 3.05 2.38 2.18 1.78 1.89 1.98 2.03 2.03

Assets/Stockholders'
Equity 1.51 1.00 0.95 1.05 1.05 1.05 1.05 1.05

ROE 0.12 0.12 0.14 0.15 0.16 0.16 0.13 0.10

CHANGE IN DUPONT RATIOS

 Why do we see the change in Dupont

ratios?

 Class Exercise: Discussion about

efficiency
ADDITIONAL DISCUSSION

 What would impact sales other then

expanding stores?
 Mini Plants
 Product line expansion
 Change in Strategy
 International Opportunity
RECALL KKD’s GROWTH STRATEGY

 Open 200 new stores from 2003-2006

 Expand to Japan, South Korea, Australia,

Spain and the U.K
WAS CIBC RIGHT?

CIBC Reality
Income Statement 2003 2004 2003 2004
REVENUE (SALES) 494,818 606,197 491,549 665,592
COST OF GOODS SOLD 390,249 473,864 381,489 507,396
GROSS PROFIT 104,569 132,333 110,060 158,196
SELLING, GEN. AND ADM. 44,080 52,999 50,243 56,110
EBITA 60,489 79,334 59,817 102,086
NET INTEREST EXPENSE 14 1,000 5,044 7,409
EBT 60,475 78,334 54,773 94,677
INCOME TAX 22,991 30,527 21,295 37,590
NET INCOME 37,512 49,807 33,478 57,087
CHECK IT OUT
Back in 2002
 222 stores in 34 states
75 company owned
53 franchised
94 area developer
 1 store in Canada
5 million doughnuts a day
2 billion doughnuts a year
By 2004
 360 stores in 48 states
144 company owned
57 franchised
159 area developer
12 in Canada
3 in Australia
2 in the U.K
2 in Mexico
7.5 million per day
2.7 billion per year
SUMMARY

 Diet Trends: Low fat/Carb hype

 Competition with regional brands (i.e.
Mary-Ann Donuts)
 Beverage sales not favorable

 Forecasting is an art not a science

QUESTIONS