BM6023: As the millennium began, the future for Krispy Kreme Doughnuts, Inc., smelled sweet Not only could the company boast iconic status: Managerial Accounting & Finance Case Study, HWU, Malaysia

As the millennium began, the future for Krispy Kreme Doughnuts, Inc., smelled sweet. Not only could the company boast iconic status and a nearly cultlike follow-ing, but it had also quickly become a darling of Wall Street Less than a year after its initial public offering, in April 2000, Krispy Kreme shares were selling for 62 times earnings and, by 2003, Fortune magazine had dubbed the company “the hottest brand in America.”

With ambitious plans to open 500 doughnut shops over the first half of the decade, the company’s distinctive green-and-red vintage logo and unmistakable “Hot Doughnuts Now” neon sign had become ubiquitous. At the end of 2004, however, the sweet story had begun to sow as the company made several accounting revelations, after which its stock price sank.

From its peak in August 2003, Krispy Kreme’s stock price plummeted more than 80% in the next 16 months. Investors and analysts began asking probing questions about the company’s fundamentals, but even by the beginning of 2005, many of those questions remained unanswered.

Exhibits 1 and 2 provide Krispy Kreme’s financial statements for fiscal years 2000 through 2004. Was this a healthy company? What had happened to the company that some had thought would become the next Starbucks? If almost everyone loved the doughnuts, why were so many investors fleeing the popular doughnut maker?