Krispy Kreme Doughnuts

The following atomic number 18 the study problems cod were facing It mistakenly tied up the improvement, the look of stores, and the sales of machines and ingredients to find outher. Moreover, it was too aggressive. It was hungry to show its perfect performances to investors by beautifying their book abide by. From non- pecuniary perspective, at that place are serious drawbacks behind the expanding, and the growing numbers of stores made the K Doughnuts everywhere, which made customers lost their feelings of freshness of It.As the case mentioned, boor raised Its bribe equipment casualty on the Michigan franchise In regularize to get the Interest of loans back and KID recorded the entertain under as an immediate income, profit. In the meanwhile, it booked the cost of buyback the franchise and the retri justion to the executive as an intangible asset, which the company did not amortize. In my opinion, the liaison should be recorded under fair-mindedness and the cost and payment could be booked as properties, cost, or at least they need to be amortized.KID got the interest from the franchise and successfully raised Its taxation to attract Investors that it in fact sacrificed Its hardliners benefits by offering an over value purchasing prize. Moreover, keeping the previous executive till the trade closed and fine-looking a huge amount of compensation makes me wonder if there was an inside(a) trade. Exhibit 1, 2& 3 shows the unhealthy growth of KID. Compared to the growth of sum revenues in the whole company, revenue that each stores contributed (total revenue/ total manufacturing plant stores) was not increasing accordingly.On the contrary, the expansion of stores brought the corporation full(prenominal) expenses and venture. The cost of curtain raising a new store, aqualung It and close It was paid in vain. The number of stores grew too quickly. The exhibit also shows the abnormal high value of stock- toll patterns compared to the S 500 Com posite Index but it was finally d proclaim to the earth in the end of 2004 influenced by the divesting of t Mills and closing down of 3 underperformed stores.Viewing the company structure, revenues were generated from on-premises retail sales at company-owned stores ( report for 27% of revenues) off-premises sales to market place and convenience stores (40%) manufacturing and diffusion of crossway mix and machinery (29%1 and franchisee loyalties and fees (4%). Actually, the ideal revenue resources of this kind of corporation should mainly come from the franchisee royalties and fees but not from distribution of mix and machine. The company supposed to boost the sales of its main product doughnuts but not to expansion blindly.Once its doughnuts become popular and profitable, people volition be go forthing to get In to the business and pay KID franchisee royalties and fees. However, the realistic was many units were losing money off-premises, and franchisees were not motivated to grow their sales, which fleets a governance problem in this corporate that the company itself did not has uncouth benefits with its franchisees. The stock price of KID was fluctuated severely in recent days and the suggestions of buy, sell or hold from analysts were closely related to the stock price and scandal. ND January 2005, when the stock price was at its peak, at 22. 51 dollars per dowry (first under estimate), at 15. 71 dollars per share (divested Montana Mills) and at less(prenominal) than 10 dollars per share (credit-facility defaulted). Crispy Seekers share price was $40. 63 reform after its PIP, giving the firm a market capitalization of most $500 lions. The stock price might be over value at first beca role KID was so popular at the sentence and therefore the public drove up the price. After a serial of problem, the company restated its financial statements for the PAYOFF, which reduced pretax income by between $6. Million and $8. 1 million. This movement sharp ly decreased the tax expenses of the company, which is proved by items of income ahead income taxes, provision for income taxes and income taxes refundable in Exhibit 2. It is strange that given a Brobdingnagian amount of amortized intangible asset, the company still ad a high level of tax shield as shows in the depreciation and amortization expenses from Exhibit 1 . Thus, the company might be showing a higher(prenominal)(prenominal) profit for investors but lower income for tax purposes, changing the treatment of amortization between the two.This practice violated the requests and rules in GAP. Knowing the accounting tricks that KID was playing, people can approximately calculate its book value by amortizing its asset, increasing its cost and tax, which leads to a deduction of profit. Influenced by the divesting of Montana Mills, the interest expenses, income tax refundable, long-term notes receivable, Joint venture ND intangible in 2004 increased dramatically and the share pric e dipped compared to them in 2003 as we can see from the Exhibit 1&2.However, it is odd that the interest expense raised so much when then the long-term debt decreased. Furthermore, from the Debit-to- equity ratio in Exhibit 7, we can see that the level of debt and financial distress went down in 2004. Therefore, guess is that the company might use the total long-term liabilities in calculating the interest expenses in order to have more tax benefits. As its known to all that the higher the ratio of liquidity, average, activity and profitability are the better the companys topographic point is in.Compared to early(a) quick-service restaurants in Exhibits, only the receivables turnover and inventory turnover of KID was jolly lower than the average, which means the corporation was not performing absolutely badly. And in Exhibit 9, when comparing to average restaurant, Kids cash & equivalents, notes payable, long-term debt, income taxes payable, all otherwise current were much more lower and the trade receivables, intangibles, deferred taxes and shareholders equity were higher than the common stores.Unexpectedly, the net income of KID on May 9, 2004 was negative 24,458, but it went up to positive 5,763 three months later on August 1, 2004. How could the situation be turned around in such a small time? As a matter of fact, an over-valued stock price will eventually go down to what it supposed to be in a high efficient market. This is one of the reasons that the bubble of the stock broke and the price slumped. Along with the revelation about the companys franchise accounting practices and the wrong operational methods, they explained the devalued of its stock.I think the doughnuts company should not rely heir profit on the sales of high margin machines but to make its literal product (signature doughnuts) better since it contributed around 60% to the total sales. In the meanwhile, KID should inherit its factory style, which provides newly baked fresh healthy prune among people influenced the sales of its products, improve their ingredients or explore new recipes are necessary. Furthermore, through research and sufficient preparation are important to begin with exploring overseas market or expansion. KID already had its brand, goodwill and own steady customer group, it still has a chance to fight back.