Case Study: Krispy Kreme Doughnuts, Inc.
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?
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 ...view middle of the document...
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 S&P 500.
Two years ago I took a franchise management class with Dr. Robert Justis. Over the semester, we heard from many franchisees, franchisors, and founders. There seemed to be one common concept with all the successful founder/franchisors. They wanted their franchisees to truly be in line with their company’s vision and mission statement. For instance, Todd Graves (founder of Raising Canes) spoke about how everyone (including management) in the company is fry cook and cashier. Meaning he wanted everyone to know not only how to run their store buy truly be involved with operations and committed to providing a great fried chicken. We also heard from executives from the corporate office of Home Instead Senior Care. They wanted franchisees to really care about the elderly and do what they can to make their lives better. As you can assume, both of these companies will have to weed out a lot of potential franchisees. To go from 144 to 500 stores Krispy Kreme was probably granting stores to anyone who had the money and little to no criminal background. With the rate at which they were opening stores it’s very likely to have bad franchisees. It so happened that Krispy Kreme had one in Michigan. The purchases of the stores from this franchisee led to faulty accounting statements. The situation led to an SEC investigation published by the Wall Street Journal. The investigation, accompanied by the growing trend in America toward a “low-carb” diet, drove earnings per share down. So in the end, problems such as the bad franchisee in Michigan probably could have been handled better or avoided if the company had not been growing so rapidly. Therefore, the loss in earnings per share was primarily due to how fast the company was growing rather than the accounting errors.