Essay: Krispy Kream Is a Historic

Pages: 4 (1481 words)  ·  Bibliography Sources: 1  ·  Level: College Senior  ·  Topic: Business  ·  Buy This Paper

SAMPLE EXCERPT:

[. . .] However, in the real world, questions should be raised as to how the company is accomplishing this superior performance relative to peers.

Is Krispy Kreme financially healthy at year-end 2004?

The company, on paper, seems financially healthy at year end 2004. It seems that the company put many of the restatement issues of the past behind it. Many key metrics such as total assets, earnings, and debt seem favorable given the market circumstances prevailing at the time. For instance, at the year end of 2004, the company had roughly $660,000 assets, as compared with liabilities of roughly $154,000. Net income also increased substantially over the year. The company also owns much of the land and stores in which it operates providing assets that can be sold in the event of adverse company operations. Finally, in the event that the company needed equity financing, I believe the market would provide the necessary funding, in part, due to its loyal customer following. These aspects, I believe, provide a stable financial foundation by which the company can continue to operate with.

In light of your answer to question 3, what accounts for the firm's recent share price decline?

Human emotions are the primary catalyst for share price decline. In many instances, investors have a herd mentality. Then tend to follow "experts" who are believed to be more adept at financial analysis and stock picking. Trusting these authoritative figures, investors tend to follow their recommendations regarding individual securities. As such, during the period in question 3, the company had numerous sell recommendations from these "experts" As such, the investments community, following the herd mentality elected to sell their shares. This action resulted in the recent decline in the stock price. Instead of looking at the franchise, investors are instead relying on opinions of authoritative figures. This herd mentality often causes extreme movement in regards to over optimism, or extreme pessimism. The latter is prevailing in regards to Krispy Kream's stock price.

What is the source of intrinsic investment value in this company? Does this source appear on the financial statements?

The source of intrinsic value for the company is its brand and loyal customer base. This "asset" will not appear on financial statements because it is difficult to quantify. How valuable is the following of Nike? How valuable is the following of Starbucks? It is hard to put a precise number on this intrinsic value, so many analysts elect not to consider it. In regards to Krispy Kream however, the loyal following and devotion by its customers is an extreme competitive advantage for the firm. Companies can not replicate the overall feeling associated with the Krispy Kream donut experience. This provides value in many forms including a loyal customer base, deeper relationships, and a recurring revenue stream.

The brand is also very valuable within the competitive landscape. The brand of Krispy Kream relies heavily on the customer experience and the fulfillment that its products provide. As the case indicates, the company during its inception altered the donut formula in order to save costs. This was a terrible mistake as performance languished. Why did this occur? This occurred because the brand was tarnished. Customers expected a certain taste and quality in regards to their donut experience. By tampering with the formula, the company alienated loyal consumers who were conditioned with the previous formula. This example showcases the power and sway the Krispy Kream brand has with consumers. Competitors can replicate it, which therefore makes it very valuable. This brand is the source of much of the intrinsic investment value of the company.

Conclusion

In conclusion, the company, much like many other companies during the period, made very critical mistakes. In regards to its accounting and product assortment, the company altered an otherwise sound franchise. However, the company through perseverance remains intact with much of its intrinsic value remaining. Consumers still enjoy the product offering of the franchise. The overall brand also continues to command a cult like following. In addition the company has strong earnings potential and free cash flow. All of which bode very well for the company in the future. What is needed however is a culture that eliminates accounting gimmicks that incentivize the inflation of short-term performance at the expense of long-term performance. As indicated by the case, accounting gimmicks combined with market mistrust can ultimately ruin a company. This action is ultimately to the detriment of both consumers… [END OF PREVIEW]

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