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Introduction
Vernon Rudolph started Krispy Kreme Doughnut in
Milestones
1996
2000 2001 2002
First store in New York City to capture market in metropolitan region through area developer franchise model.
Issued IPO at $5.50 which soared to $9.25 on the first day of trading.
Type of Franchise
Associate
Royalty Scheme
3% for on-premise sales + 1% on other items except private label items. Contract for 15 yrs 4.5% of all sales + 1% for advertisements. One time franchise fee of $20,000 to $40,000.
Area developer
Competitors in 2002
Dunkin donuts: 4,736 franchise stores in 43 states
Atlantic region
Honeydew Donuts: 100 stores in New England Few hundred regional bakery shops.
in addition to the 200 new stores that the area developers are contractually obliged to open from 2003 to 2006. Exploring opportunities in Japan ,South Korea, Australia, Spain, and the United Kingdom. Plans to increase the sales of complementary products through existing stores, like in February 2001 it acquired Digital Java, a small Chicago-based coffee company for addition of enhanced espresso and coffee offerings at Krispy Kreme stores. Use of smaller hot doughnut machine, producing the same quality doughnuts as existing larger machines. It will allow them to expand into smaller markets and into dense urban areas that were more costly to reach under the larger factory store model.
require the company to invest heavily in plants, property and equipment. In February 2002, the company spent $37 million to construct and equip new company-owned factory stores, to upgrade manufacturing facilities, to install coffeeroasting operations in stores, and to construct doughnuts and coffee shops. It planned to invest aggressively in both long-term assets and working capital to achieve growth targets.
million stock offering (for 10.4 million shares) Increased its revolving credit facility from $28 million to $40 million. Agreed to a $35 million bank loan to fund the construction of a new mix and distribution facility. In 2002, Company planned to fund its next 24 months capital needs through IPO completed in April 2000, follow-on public offering completed in Feb 2001, cash flow generated from operations and borrowing capacity through credit. It had other plans like to raise additional capital through public or private equity or debt financing in case of capital offshoot.
Analysts forecasts:
Feb 3,2002 Number of stores at the end of the period: Company Franchised Average # company stores Average # franchise stores Average weekly sales per store: Company Franchised System sales (avg stores*weekly sales*52) Company sales Franchise sales System sales Company revenues: Company stores Franchise operations (4% of the franchise sales) KKM&D (32% of franchise sales) Net Revenue Revenue Growth rate $302,250 21,403 171,226 $494,879 25% $332,163 31,975 255,798 $619,936 25% $258,336 350,012 608,348 $302,250 535,080 837,330 $332,163 799,370 1,131,533 $72 53 $75 60 $77 65 218 75 143 69 127 Feb 3,2003 280 80 200 77.5 171.5 Feb 3,2004 360 87 273 83.5 236.5
earnings per share of $0.64 for the year ended January 2003 and $0.83 for the January 2004 year. The forecasts projected earnings growth of 42 percent and 33 percent for the next two years All analysts covering Krispy Kreme predicted the same trend.
recognition. Strong opportunities to extend network of stores geographically. Small stores growth with new technology and international growth hold promise, although untested. Beginning to compete with Starbucks. Will donuts appeal to non-US market?
Net 35 If area developer models went broke,KKMD seems to be able to operate them profitably.
Political Concerns:
Is this a fad? Will consumers tire of donut craze?
Revenue forecasts.
The CIBC analysts were constructed using per store
information. Company plans to add 62 new stores in 2003, mostly through area developers. What are revenue per new store? Initial boom, followed by leveling off. Also, not all new stores are open for full year. Revenue growth per new store has been impressive. What do we forecast for these? Company store growth is stabilizing(dropping from 28 % to 4%) in last years. (continued..)
Revenue forecasts(continued..)
We may be able to sustain 4%. Franchise store revenue
growth is still high, as the number of area developers increase, with the store revenue patterns comparable to company stores. This is likely to persist for several years before revenue per store are similar for company and franchise stores. Royalty revenue has been increasing over time since area developers pay higher royalty rates than old associates (5.5 % versus 3%). These have averaged 4% for the last 2 years. KKM&D revenues are driven by franchisee revenues, since sales are to franchisees and will vary with their volume. They have averaged 33% of franchise sales in last two years. Use 32% of the franchise sales.
Franchise sales
System sales Company revenues: Company stores Franchise operations (4% of the franchise sales) KKM&D (32% of franchise sales) Net Revenue Revenue Growth rate
350,012
608,348
535,080
837,330
799,370
1,131,533
These vary greatly by business. For company stores they have increased to 18%. Royalty income has 65% margin and KKM&D is 17%. The CIBC analysts have forecasted that margins increase 19% of the company stores, 70% of franchise operations, and 18-19% for KKM&D. Using these value, the costs are:
Feb3, 2003 Gross Profit Company Stores (18%) Franchise operations (65%) KKM&D (17%) $54,504 13,912 29,108 $97,425
$ 44,539
$ 55,794
2,398
The prior years decision to raise new equity to meet future growth plans
Feb. 3, 2003
$302,250 21,403 171, 226 $494,879
Feb. 3, 2004
$332,163 31,975 255,798 $ 619,936
44,539
1,605
51,281 600 51,881 $19,715 $32,166
2,398
65,867 0 65,867 $25,029 $40,837
30%.
eliminated by the beginning of 2004, (excess cash will finance growth); KKD will be an all equity firm.
But, it is likely to change, since KKD will probably
146,950 168,092
186,038 210,843
Net Capital Net Debt Common Equity -19,575 187,667 168,092 0 210,843 210,843
investment banking client, o If they participate in selling a new issue to investors. It makes it unlikely that analysts will be very critical of company so as to encourage management to use firm for new equity placements
Brokerage services
Analysts rewarded based on commissions generated
for the companies they follow Produces incentives to producing research that encourages investors to trade. Given costs of short selling and identifying customers, it is easier for analyst to increase trading volume. Incentives particularly strong for analysts catering to retail investors.