Krispy Kreme Stores

Overview

With 181 Krispy Kreme stores in 28 states, Krispy Kreme Doughnuts in 2001 was rapidly building something of a cult following for its light,warm, melt-in-your-mouth doughnuts. Sales were on an impressive

climb, exceeding 3.5 million doughnuts a day. The company's business

model called for 20 percent annual revenue growth, mid-single digit

comparable store sales growth, and 25 percent annual growth in

earnings per share.

Krispy Kreme had created a flurry of excitement with its expansion

into metropolitan markets outside the Southeast--its grand openings in

newly entered markets attracted long lines of customers and created

traffic jams around its store sites. The first new store in San Diego

racked up $365,000 in sales the first week, with 5 TV crews covering

the opening day event. The first store in Denver produced first-week

revenues of $369,000, drew 50,000 visitors, and had $1,000,000 in

sales the first 22 days; the crowds were so large that three off-duty

deputy sheriffs were hired to direct traffic from 5 a.m. to 11 p.m.

during the Tuesday-Saturday period of grand opening week--one

night there were 150 cars in line at the drive-thru window at 1:30 a.m.

But despite the enthusiastic reception that Krispy Kreme stores were

getting, a number of securities analysts were dubious whether the

company's strategy and growth potential merited a stock price nearly

70 times projected 2002 earnings per share of $0.69 and 85 times

actual 2001 earnings of $0.55 per share. The company's stock, which

was trading in the $46-$50 range and had been as high as $54, had

been a favorite of short sellers for several months--the 2.5 million

shorted shares in May 2001 represented nearly 10 percent of the

company's outstanding shares.

While there are legions of loyal doughnut-lovers (sales in the U.S. alone amount to an estimated 10

billion annually), the doughnut industry has been growing rather slowly, partly because the product is

not "nutritionally correct." Yet several doughnut chains had rather ambitious objectives and strategies

to grow revenues and profits. Krispy Kreme believed that its product had global appeal and was laying

plans