Krispy Kreme Doughnuts

Krispy Kreme Donuts, Inc.

Since Krispy Kreme was founded in 1937, it has grown into a leading branded

specialty retailer, producing more than 5 million doughnuts a day and over 1.8 billion a

year. In addition to Krispy Kreme stores, their premium quality doughnuts are sold in

supermarkets, convenience stores and other retail outlets throughout the country. Best

known for their fresh, glazed, yeast-raised doughnuts, known as "Hot Original Glazed”,

Krispy Kreme also make more than a dozen other varieties of yeast-raised and cake

doughnuts. But the company is currently going through financial turmoil along with

possible earnings management.

Krispy Kreme Doughnuts recently announced that they are slashing 125-130 jobs,

the vast majority in Winston-Salem. The company is eliminating one-fourth of their staff

in order to cut costs. Also, they recently sold their corporate jet to a Wilmington company

for $30.5 million. It is evident that the donut empire is suffering from liquidity and cash

flow problems. Some investor argue that they didn’t see this coming because the once

highly profitable, ever expanding company, seemed incapable of fiscal failure. The

layoff shows that they have experienced a major downturn in the past year. Less than two

years ago, Krispy Kreme’s shares sold for $50 and are currently selling for $7.21. The

bottom line is that Krispy Kreme must revamp sales in order to increase cash flow or they

will not make it.

Their board of directors said that the downsizing would create an annual pretax

savings of about $7.4 million; they will take a restructuring charge in their fiscal first

quarter to pay for the work force reduction. The company also stated that selling the jet

will result in annual pretax savings of $3 million; but it will have to take a $300,000

charge in its current fiscal first quarter because of the deal.

Also in January, Krispy Kreme's long-term debt lenders contracted to extend for

two months to March 25, 2005, the date on which the company would be in default on its

$150 million credit agreement. This agreement restricts the company from borrowing