Group: Tammy Cheung , Shelly Khindri, Parm Marway, Hari Stirbet

KRISPY KREME DOUGHNUTS

FORECASTING

AGENDAAGENDA

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

HISTORYHISTORY

1960 20021937

Vernon Rudolph purchased “secret recipe” from French chef in New Orleans

Krispy Kreme gained a reputation in U.S. for making high quality, tasty donuts

222 stores in 34 states, produced 5 million donuts a day, 2 billion donuts a year

INDUSTRY ANALYSISINDUSTRY ANALYSIS

Rivalry Among Existing Firms (HIGH)• Highly fragmented• Largest donut retailer• Large competitors and regional players

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

Bargaining Power of Buyers (HIGH)• Quality & Price• Taste• Alternative products

Threat of Substitutes (HIGH)• Geographical presence

Bargaining Power of Suppliers (LOW)• Vertical Integration

INDUSTRY ANALYSISINDUSTRY 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 SOURCEREVENUE 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 STRATEGYGROWTH 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 IDENTIFICATIONPROBLEM 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 FORECASTCIBC 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 FORECASTCIBC 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 CONSIDERTHINGS 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 SHEETCONDENSED 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 STMTCONDENSED 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 ANALYSISRATIO 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 TOOLSKEY FORECASTING TOOLS

Ratio Analysis Publicly available information about:

Growth plans (new stores) Profitability (per store)

Industry/environment assessment

FORECASTING KKD’s REVENUESFORECASTING 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 EXERCISEFORECASTING 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?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# 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: FRANCHISEPROFITABILTY: 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 FORECASTSYSTEM 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 GROWTHKKD’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 VERIFICATIONFORECAST 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. FORECASTDUPONT: 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 RATIOSCHANGE IN DUPONT RATIOS

Why do we see the change in Dupont ratios?

Class Exercise: Discussion about efficiency

ADDITIONAL DISCUSSIONADDITIONAL DISCUSSION

What would impact sales other then expanding stores? Mini Plants Product line expansion Change in Strategy International Opportunity

RECALL KKD’s GROWTH STRATEGYRECALL 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?WAS CIBC RIGHT?

Income Statement 

CIBC Reality

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 OUTCHECK IT OUT

Back in 2002 By 2004 222 stores in 34 states 360 stores in 48 states 75 company owned53 franchised 94 area developer

144 company owned57 franchised 159 area developer

1 store in Canada 12 in Canada3 in Australia2 in the U.K2 in Mexico

5 million doughnuts a day2 billion doughnuts a year

7.5 million per day

2.7 billion per year

SUMMARY 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

QUESTIONSQUESTIONS