Krispy Kreme Doughnuts

1. Krispy Kreme Doughnuts May 20, 2006 Didi Bahig, Rubina Chouhdary, Lina Couto, Daulat Ladak

2. Agenda • Company Introduction • Strategy Analysis • Accounting Analysis • Ratio Analysis • Simple Dupont • Analysts’ Assumptions • Forecasted Statements • Actual Statements

3. Company Introduction • Founded in 1937 • Tasty high-quality doughnuts • IPO in 2000 for $5.50 offering price • April 2001 Stock Price $45.00 • Geographic expansion - 222 stores in 34 states by April 2002, 5 million donuts a day • Revenue Sources: • Company owned stores • Franchise Associates & Area Developers’ royalties • Sale of doughnut mixes & doughnut- making equipment

4. Strategy Analysis Group Discussion (Porter’s 5-Forces)

5. Strategy Analysis – Porter’s 5 Forces Buyer Power • Many donut stores • No affiliation High Effect on Profitability (Decrease)

6. Strategy Analysis – Porter’s 5 Forces Supplier Power • Basic ingredients • Readily available • Low costs to switch to other suppliers Low Effect on Profitability (Increase)

7. Strategy Analysis – Porter’s 5 Forces Barriers to Entry • Not much capital required for a mom & pop store, but substantial capital for big stores • Secret formula Low to Medium Effect on Profitability (Decrease)

8. Strategy Analysis – Porter’s 5 Forces Threat of Substitutes • Convenience foods • Other baked goods • Grocery stores High Effect on Profitability (Decrease)

9. Strategy Analysis – Porter’s 5 Forces Rivalry Among Exiting Firms • Fragmented Market • Several Players: • Dunkin Donuts – 2nd largest retailer • Winchell’s • Donut Connection • Honeydew Donuts High Effect on Profitability (Decrease)

10. Strategy Analysis – Company Strategy • 60s & 70s: high quality reputation • 90s: geographic expansion • New Area Developer Model • Increase sale of complementary product • Fall 2000: expansion into smaller & dense urban markets using smaller hot doughnut machine • Kept debt at minimum levels • Elected to purchase older franchised stores that showed growth potential

11. Accounting Analysis • Financial statements measure the economic activity • No red flags identified • Increasing amount of deferred compensation

12. Ratio Analysis – Simple Dupont

13. Can the Area Developers generate profit? Revenues ($72 x 52 weeks) $3744 Gross Profit (est. 0.18 x 3744) $674 Royalties (0.045 + 0.01) x 3744 (206) Mark-up on KKM&D Purchases (114137 x 0.18) = 20545 Profit/Franchised Store (20545/143) (144) Capital Costs ($1.425 x est. 0.10) (142) Net per Store $182

14. Summary of Findings • High quality product • Industry analysis’ decreasing effect on profitability • Plan to increase coffee sales • High sales generated by new stores taper off • Small hot doughnut machine • Net Profit Margin & Financial Leverage are good • Stores can generate profit

15. Analysts’ Assumptions

16. Critique of Analysts’ Assumptions • Sales Growth – reasonable, is increasing but less than historical rate • NOPAT Margin – too high, should decrease due to increased competition • After-tax net interest rate on debt – reasonable, is increasing as they are taking on more debt

17. Assumptions about Key Drivers Group Discussion

18. Assumptions about Key Drivers • Sales Growth • NOPAT Margin • After-tax net interest rate on debt • Net operating working capital/sales • Net operating long-term assets/sales • Net debt/net capital

19. Our Drivers

20. Forecasted Balance Sheet

21. Forecasted Income Statement

22. Forecasted Cash Flow from Operations

23. Forecasted Dupont

24. Optimistic – Higher Sales Growth

25. Pessimistic – Lower Sales Growth

26. Actual Statements - 2005

27. Earnings Per Share

28. Questions?

29. Actual Condensed Statements (additional slide)

30. Actual Condensed Statements (additional slide)