Lawrence Sports Generic Benchmarking

Lawrence Sports Generic Benchmarking

The lifeblood of free enterprise opportunities over the span of centuries has for all tense and purposes been either currency or precious metals. The lack of free cash flow after all the liabilities are satisfied, generally spells disaster to the free enterprise effort, regardless of how the actuals have been formulated on balance sheets, income statements, or quarterly financial reports issued to appease federal regulators and sway governing boards. Lawrence Sports financial managers have come accustomed to finding themselves at the precipice of either boon or ruin, on a weekly basis for the last three quarters.

Unfortunately, real world of funding of business operations in the 21st century rely upon monetary mechanisms created to insure adequate compensation of stakeholders across the spectrum of most organizations, despite the actual inflow of cash from B to B or B to C transactions. Funding that has on more than one occasion, (i.e. Enron, Anderson, and World Com) led to the unscrupulous and/or risk taker to being hailed as a savoir or forever damned as a Judas. The sword of finance shows no remorse and possesses the ability to cut in all directions, which on rare occasions is the unfortunate hand that wields it.

The chosen firms selected as benchmarks in this article: Krispy Kreme and American Woodmark Corporation have both enjoyed business successes for generations and now these corporate entities have found themselves on the descending curve of the business growth graph and more appropriately on the road of corporate demise. The remedies the two firms employed to curb each of their unique situations had involved borrowing funds from lenders, selling off securities, re-issuing stock, repurchase of stock, or offering up their businesses to acquisition and exploitation to any organization with deep pockets. Of course, the problems facing Lawrence does not exactly mimic the problems arising at American Woodmark or Krispy Kreme; however, the one similarity the three do share, is the failure in financial management and an inability to compensate or adjust to changing economic environments. The following will briefly describe each company and indicate what could be the underlying cause to their predicament.

Krispy Kreme Donuts

Krispy Kreme Donuts has become a household name on the East coast during the 1950’s and a nationally recognized icon of the donut industry throughout the eighties and early nineties. Krispy Kreme as a commercial entity has been around longer than approximately 50% of the citizens of these United States. Additionally, demand for the deep fried pastry has grown in leaps and bounds, which created an extraordinary opportunity for the organization to begin opening new stores across the continental United States and expanding their markets territories. Inexplicably and without warning, the donut chain hit a brick wall and appeared to stop expanding, point of fact, Krispy Kreme stores began closing nearly as fast as they could cut the ribbon and open. Some of the significant factors that were the causation for the failures were the quality of financing and declining cash flows.

Today, Krispy Kreme's outstanding debt consists entirely of bank loans that came due in 2007; the company had failed to hedge and had not issued any debt securities. Bank debt is callable pending the debtor's failure to meet certain covenants and Krispy Kreme’s failure in filing appropriate financials with the SEC, has left Krispy Kreme at the mercy of these banks: Wachovia (NYSE: WB) and BB&T (NYSE: BBT). The lenders have granted the company waivers on the reimbursement deadline in order to allow the firm to comply with the covenants of the loans. Given the amount of exposure, these two banks have to Krispy Kreme; it goes against logic that the lenders would be first in line to adjust the company's financing terms if they felt that the company's condition was anything less than dire.

The lenders could attach Krispy Kreme assets; however, in forcing the organization into liquidation, what do you suppose the fair-market value for used doughnut-making equipment would be? The estimated book value of Krispy Kreme assets ($130 million in equipment and leasehold improvements), which overstates the actual value of what the fixed assets would be worth should the company close stores and attempt to liquidate. As for the cash flows, remember that Krispy Kreme's economic condition will change as a function of its cutting back on opening franchises. It would be possible for Krispy Kreme to sell any idle doughnut-making equipment to new franchises and pocket the fee as a windfall of selling older franchises. The revenue streams will decline and possibly