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

KRISPY KREME DOUGHNUTS FORECASTING. Group: Tammy Cheung , Shelly Khindri, Parm Marway, Hari Stirbet. AGENDA. Background (Shelly) Industry Analysis (Shelly) Current Financials (Parm) Forecasting (Hari) Forecasting Verification (Tammy) Reality Check (Tammy). HISTORY.

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

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  1. KRISPY KREME DOUGHNUTS FORECASTING Group: Tammy Cheung , Shelly Khindri, Parm Marway, Hari Stirbet

  2. AGENDA • Background (Shelly) • Industry Analysis (Shelly) • Current Financials (Parm) • Forecasting (Hari) • Forecasting Verification (Tammy) • Reality Check (Tammy)

  3. HISTORY 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 1937 1960 2002

  4. INDUSTRY ANALYSIS • Threat of New Entrants (MODERATE) • High startup costs • Franchise costs high • Strong Brand Identity • Bargaining Power of Buyers (HIGH) • Quality & Price • Taste • Alternative products • Bargaining Power of Suppliers (LOW) • Vertical Integration • Rivalry Among Existing Firms (HIGH) • Highly fragmented • Largest donut retailer • Large competitors and • regional players • Threat of Substitutes (HIGH) • Geographical presence

  5. INDUSTRY 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)

  6. REVENUE 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

  7. GROWTH 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

  8. PROBLEM 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

  9. CIBC 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%

  10. CIBC ANALYST FORECAST

  11. THINGS TO CONSIDER • CIBC forecast • What elements did you consider in their forecast? • What assumptions would you make regarding store expansion & sales per store?

  12. CONDENSED BALANCE SHEET

  13. CONDENSED INCOME STMT

  14. RATIO ANALYSIS

  15. KEY FORECASTING TOOLS • Ratio Analysis • Publicly available information about: • Growth plans (new stores) • Profitability (per store) • Industry/environment assessment

  16. FORECASTING 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?

  17. FORECASTING SALES EXERCISE Are the Developer Store profitable?

  18. KKD’s EXPANSION PLANS? • 200 new stores from 2003-2006 • 62 to open in 2003 • Store opening forecast:

  19. # OF STORES IN SYSTEM

  20. PROFITABILTY: FRANCHISE 2002 weekly averages: • 23K per “old franchised” • 72K per “area developer store” and company store Average per franchise?

  21. SYSTEM SALES FORECAST (Annual Sales = Average# of Stores * Weekly Sales per Store * 52)

  22. KKD’s REVENUE GROWTH

  23. FORECAST VERIFICATION

  24. DUPONT: ACTUAL vs. FORECAST

  25. CHANGE IN DUPONT RATIOS • Why do we see the change in Dupont ratios? • Class Exercise: Discussion about efficiency

  26. ADDITIONAL DISCUSSION • What would impact sales other then expanding stores? • Mini Plants • Product line expansion • Change in Strategy • International Opportunity

  27. RECALL KKD’s GROWTH STRATEGY • Open 200 new stores from 2003-2006 • Expand to Japan, South Korea, Australia, Spain and the U.K

  28. WAS CIBC RIGHT?

  29. CHECK IT OUT

  30. 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

  31. QUESTIONS

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