Krispy kreme assignment for HIFSA SHAUKAT

The Hole Story: How Krispy Kreme became the hottest brand in America. If you've never sampled a Krispy Kreme, we should get one thing straight: These doughnuts—particularly the original glazed served hot—are amazingly good. They are loved equally by 5-year-olds and 75-year-olds; by whites, blacks, Asians, and Hispanics; by New Englanders and Southerners; by Californians and New Yorkers.

Sure, Krispy Kreme is still relatively small compared to Dunkin' Donuts. But, boy, does it have oomph. There's the power of the Krispy Kreme brand. No, it's not as recognizable as Coke or McDonald's—yet. Still, despite the fact that it is a fraction of the size of those icons and spends zilch on national advertising, the company's retro red, white, and green logo is rapidly becoming part of American popular culture.

No question that Krispy Kreme is hot, but is the company for real? Is it a great American growth story or merely a culinary flash in the pan? Those are not idle questions. Not for the many folks who have been hired by the company over the past three years, nor for the companies that supply Krispy Kreme, nor for those who have invested in its yeasty stock. But the question of Krispy Kreme's viability touches on something more significant than all that. It has to do with the American dream. It may seem grimly amusing that in a time of economic pain, corporate scandals, and troubles overseas, this company should be growing so explosively. But the Krispy Kreme story is about far more than comfort food—the company's wild success in this hard environment is a tale of shrewdness and original thinking. The man behind Krispy Kreme's dramatic ascent is its CEO, Scott Livengood (pronounced Saturday Night Live-ngood). Livengood, 50, has seen just about everything. Yes, he's at the helm of a high-end growth company, but to hear him tell it, his job is actually easier now. "Running a public company growing like this—that's nothing," he says. "I'm enjoying myself." The Krispy Kreme faithful have gathered for the company's annual meeting in the Adam's Mark Hotel. Before long, Livengood marches through the company's financial vitals. Then the fun begins. Livengood gives a year's supply of doughnuts to the oldest and to the youngest attending shareholders, and to the shareholder who has traveled the farthest (from Finland). But he spends even more time talking about the company's charitable works and, in long citations, singles out six employees who've helped their churches, Little Leagues, and communities. To the folks at Krispy Kreme, this isn't just about doughnuts; it's a calling.

Krispy Kreme brings in money three ways. It makes 65% of its revenue selling doughnuts directly to the public through its company-owned stores. Another 31% of its sales come from selling flour mix, doughnut-making machines, and sundry doughnut supplies to its 186 franchised stores. And it gets about 4% of its revenue from franchisee licenses and fees. The company also provides millions of doughnuts at a discount to charitable organizations, which then sell them for fundraising. It's hard to think of a brand that's been in more movies and TV shows—How to Lose a Guy in Ten Days, Bruce Almighty, The Sopranos, Will & Grace—than Krispy Kreme this decade. "This is a marketing company," says Bowles. "Scott Livengood once told me if a finance guy ever gets a hold of Krispy Kreme, sell every share."

Krispy Kreme's IPO in April 2000—right at the peak of the tech boom—has been a sweet success. The stock ended the first day of trading at $9.25, split adjusted, and today sells for $37 and change. That's up four times, while the market is off some 30% during the same period. Not that there haven't been a few bumps in the road. The company got major grief for entering into a $35 million lease to fund the new Illinois mixing plant back in 2001. This off-balance-sheet financing raised eyebrows during the days of Enronitis, and the company terminated the lease a year later. There have also been governance problems, like partnerships that allowed company management to invest in its stores, not enough outside directors, and loans to managers. (Those issues have since been rectified.) And Livengood has been criticized for selling some $15 million of company stock since the IPO.

Whether you think Krispy Kreme is a buy or a sell at $27 or $37 or $57, here's the thing: unless the fat police run riot across this land, Krispy Kreme is here to stay. It isn't some fly-by-night dot-com. There's 66 years of history here. It's a product that people not only love but understand. The world is always filled with unknowns, never more so than right now. With all that's wrong out there, sometimes it's easy to lose focus on the big picture. So take a second and ask yourself: Is the American dream still alive? Is Krispy Kreme for real?

KRISPY KREME DOUGHNUTS INC	1998	1999	2000	2001	2002	1998	1999	2000	2001	2002
Sales	180.880	220.243	300.715	394.354	491.549	100.0%	100.0%	100.0%	100.0%	100.0%
Cost of Goods Sold	157.641	188.903	250.690	316.946	381.489	87.2%	85.8%	83.4%	80.4%	77.6%
Gross Profit	23.239	31.340	50.025	77.408	110.060	12.8%	14.2%	16.6%	19.6%	22.4%
SG&A	10.897	14.856	20.061	27.562	28.897	6.0%	6.7%	6.7%	7.0%	5.9%
Operating Income Before Depreciation	12.342	16.484	29.964	49.846	81.163	6.8%	7.5%	10.0%	12.6%	16.5%
Depreciation & Amortization	4.278	4.546	6.457	7.959	12.271	2.4%	2.1%	2.1%	2.0%	2.5%
Operating Profit	8.064	11.938	23.507	41.887	68.892	4.5%	5.4%	7.8%	10.6%	14.0%
Interest Expense	1.507	1.525	0.607	0.337	1.781	0.8%	0.7%	0.2%	0.1%	0.4%
Non-Operating Income/Expense	-11.836	-0.807	0.883	0.996	-12.338	-0.065	-0.004	0.008	0.008	-0.016
Pretax Income	-5.279	9.606	23.783	42.546	54.773	-2.9%	4.4%	8.1%	11.1%	11.6%
Total Income Taxes	-2.112	3.650	9.058	16.168	21.295	-1.2%	1.7%	3.0%	4.1%	4.3%
Net Income	-3.167	5.956	14.725	26.378	33.478	-1.8%	2.7%	4.9%	6.7%	6.8%

KRISPY KREME DOUGHNUTS INC
ASSETS	1998	1999	2000	2001	2002	1998	1999	2000	2001	2002
Cash & Equivalents	4.313	3.183	25.129	37.196	55.179	4.6%	3.0%	14.7%	14.6%	13.4%
Net Receivables	15.607	21.228	24.733	41.216	48.282	16.7%	20.2%	14.4%	16.1%	11.8%
Inventories	9.886	9.979	12.031	16.159	24.365	10.6%	9.5%	7.0%	6.3%	5.9%
Prepaid Expenses	1.529	3.148	1.909	2.591	3.478	1.6%	3.0%	1.1%	1.0%	0.8%
Other Current Assets	2.445	3.500	3.809	4.607	9.824	2.6%	3.3%	2.2%	1.8%	2.4%
Total Current Assets	33.780	41.038	67.611	101.769	141.128	36.2%	39.1%	39.4%	39.9%	34.4%
Gross Plant, Property & Equipment	82.353	93.243	116.896	156.484	252.770	88.3%	88.8%	68.2%	61.3%	61.6%
Accumulated Depreciation	28.778	32.659	38.556	43.907	50.212	30.8%	31.1%	22.5%	17.2%	12.2%
Net Plant, Property & Equipment	53.575	60.584	78.340	112.577	202.558	57.4%	57.7%	45.7%	44.1%	49.3%
Long Term Investments	0.000	0.000	22.572	16.100	11.215	0.0%	0.0%	13.2%	6.3%	2.7%
Intangibles	0.000	0.000	0.000	16.621	48.703	0.0%	0.0%	0.0%	6.5%	11.9%
Other Assets	5.957	3.336	2.970	8.309	6.883	6.4%	3.2%	1.7%	3.3%	1.7%
TOTAL ASSETS	93.312	104.958	171.493	255.376	410.487	100.0%	100.0%	100.0%	100.0%	100.0%
LIABILITIES
Current Portion of Long term Debt	2.400	2.400	0.000	0.731	3.301	2.6%	2.3%	0.0%	0.3%	0.8%
Notes Payable	0.000	0.000	3.526	12.978	12.275	0.0%	0.0%	2.1%	5.1%	3.0%
Accounts Payable	11.536	13.106	14.697	12.095	14.055	12.4%	12.5%	8.6%	4.7%	3.4%
Taxes Payable	1.155	0.000	0.041	0.000	0.000	1.2%	0.0%	0.0%	0.0%	0.0%
Accrued Expenses	8.784	14.080	17.862	24.647	19.496	9.4%	13.4%	10.4%	9.7%	4.7%
Other Current Liabilities	1.518	0.000	2.042	2.082	10.560	1.6%	0.0%	1.2%	0.8%	2.6%
Total Current Liabilities	25.393	29.586	38.168	52.533	59.687	27.2%	28.2%	22.3%	20.6%	14.5%
Long Term Debt	18.620	20.502	0.000	3.912	57.188	20.0%	19.5%	0.0%	1.5%	13.9%
Other Long term Liabilities	25.672	27.617	7.646	15.176	77.448	27.5%	26.3%	4.5%	5.9%	18.9%
EQUITY
Common Stock	4.670	4.670	85.060	121.052	173.112	5.0%	4.4%	49.6%	47.4%	42.2%
Capital Surplus	8.706	8.258	0.000	-0.186	-0.119	9.3%	7.9%	0.0%	-0.1%	-0.0%
Retained Earnings	28.871	34.827	40.619	66.801	100.359	30.9%	33.2%	23.7%	26.2%	24.4%
Common Equity	42.247	47.755	125.679	187.667	273.352	45.3%	45.5%	73.3%	73.5%	66.6%
TOTAL EQUITY	42.247	47.755	125.679	187.667	273.352	45.3%	45.5%	73.3%	73.5%	66.6%
TOTAL LIABILITIES & EQUITY	93.312	104.958	171.493	255.376	410.487	100.0%	100.0%	100.0%	100.0%	100.0%
Total Employees (000)	@NA	3,016	3,200	3,632	3,913
COMMON SHARES OUTSTANDING	1.868	1.868	51.832	54.271	56.295