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CFA Institute Research Challenge
hosted by
CFA Society North Carolina
C
2. Highlights
We issue a sell recommendation with a target price of USD 12.65. Krispy Kreme is trading at
nearly 5 times its book value and issues no dividends. The company is climbing out of recov-
ery mode and is highly scrutinized under the analysis spotlight which makes them more vola-
tile towards market forces and news updates. KKD is one of the biggest signature brand
doughnut providers recognized around the world. Since the stock price is above our intrinsic
value we recommend to sell KKD until they solidify themselves as a strong growth stock.
Main price growth drivers: 1) Total revenues are estimated to grow by 9.31% in FY 2014.
Company same store sales grew 8.4% through Q3 of FY 2014 while domestic franchise grew
11.2% and international stores fell by 6.4%. Revenues are a main determinant in area devel-
opment and future growth potential. 2) Franchise agreements will drive KKD’s expansion
domestic and internationally. The company’s goal is to have 1300 total stores by 2017. Suc-
cess or failure of the company leans heavily on international franchisees who plan to own 900
stores worldwide by 2017, which represents 69% of total store count.
Retrenchment and recovery: In 2004, KKD experienced a financial crisis due to rapid expan-
sion that oversaturated the market and a domestic franchising strategy that focused on short-
term profits instead of long-term growth. From 2004–2009 over 240 stores closed, resulting
in USD 300 million in impairment charges, loss of revenues and a plummeting share price.
Since then, new management and strategic changes have to led to stronger fundamentals,
improved investor confidence, and accelerated store growth.
Main risk issues: 1) Cannibalism resulting from overexpansion is one of the biggest risks
moving forward. If the company allows the market for their signature doughnuts to become
diluted, they could see loss of profits and store closings. It is important for KKD to not make
the same mistakes again. 2) Macroeconomic issues greatly affect KKD now that they have a
global brand. Consumer confidence, employment and the disposable income of consumers
can influence sales as well as the overall health of sovereign economies in countries that KKD
operates in. 3) Competition amongst fast food restaurants is fierce as they all attempt to
offer their products for the best deal for consumers. KKD has to compete not only with fast
food and bakeries, but also with wholesale markets and international markets where their
brand name is not as strong.
Krispy Kreme Doughnuts Inc.
[Quick Service Restaurant Industry, Consumer Discretionary Sector]
This report is published for educational purposes only by
students competing in The CFA Institute Research Challenge.
University of North Carolina in Wilmington Student Research
Date: 24 January 2014 Current Price: USD 18.13 Recommendation: SELL
Ticker: KKD Exchange: NYSE Target Price: USD 12.65
Market Profile
52-week price range 12.32 - 26.63
Market Cap 1.25 B
Shares outstanding 66 M
200-day SMAVG 1.41 M
Revenues 435.80 M
EBTDA 47.926 M
Net income 20.78 M
P/E 50.68
P/BV 4.59
ROA 6.05%
ROE 8.43%
Dividend yield 0.00%
Current ratio 2.89%
Institutional holdings 81.42%
Insider holdings 1.01%
Number of employees 4,300
Fiscal Year 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F
Revenues 362.0 403.2 435.8 483.0 527.8 577.2 632.5 688.9 747.5
EBITDA 26.6 34.6 47.9 57.4 62.9 69.0 75.8 82.8 90.0
Net Income 7.6 166.3 20.8 28.4 33.2 38.6 43.0 45.1 48.9
Earnings per share 0.11 0.45 0.31 0.42 0.49 0.58 .066 0.70 0.76
Dividends per share 0.00 0.00 0.00 0.00 0.00 0.00 0.20 0.25 0.30
Return on Assets 4.5% 49.6% 6.1% 8.2% 8.5% 9.1% 9.3% 8.9% 8.8%
Return on Equity 9.9% 66.7% 8.4% 10.6% 10.9% 11.6% 11.8% 11.4% 11.2%
0
5
10
15
20
25
30
KKD daily stock prices
Last Price
Target Price
Valuation DCF Multipliers
Estimated Price 10.30 15.00
Weights 50% 50%
Target Price 12.65
Sources: Company Data
Sources: Company Data
Sources: Bloomberg
Change in forecast level of FCFE
Change in
WACC -10% -5% 0% 5% 10%
-10% 11.24 11.87 12.49 13.12 13.74
-5% 10.17 10.73 11.3 11.86 12.43
0% 9.27 9.79 10.3 10.82 11.33
5% 8.51 8.98 9.45 9.92 10.4
10% 7.85 8.29 8.72 9.16 9.59
Sources: Team Analyses
Sources: Team Analyses
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Business Description
Krispy Kreme is a unique doughnut shop that is famous for its signature Original
Glazed doughnuts and other Southeast American delectable treats. Established on
13 July 1937 in Winston Salem North Carolina, Krispy Kreme has touched and en-
hanced lives of consumers through the taste and joy of high quality doughnuts for
76 years.
Krispy Kreme uses a secret yeast-raised recipe and their own doughnut-making
equipment to produce goods for consumers via walk-in, drive thru, and through
wholesale distribution channels. Krispy Kreme is recognized as a 20th
century
American icon and was inducted into the Smithsonian Institution’s National Muse-
um of American History in 1997.
Krispy Kreme issued an initial public offering in 2000 under the ticker KKD and now
operates 812 stores in 38 states and 21 other countries through company owned
stores and franchisees. Their goal is to have 1300 stores by the end of fiscal 2017.
KKD went through retrenchment from 2004 through 2009 due to 240 domestic
store closings from unsustainable sale volumes resulting from over expansion
which saturated the market, USD 300 million in impairment costs and lease termi-
nation costs plus an accounting scandal. KKD has since rebounded and growth has
returned powered by strong franchising efforts, new management, international
growth, the hub and spoke distribution system and their original one-of-a-kind
brand experience.
Company Stores. This segment comprises doughnut shops operated by the Com-
pany. They sell doughnuts and complementary products through on-premise and
wholesale channels. They come in two formats: Factory stores and satellite shops.
Factory Stores have a doughnut making production line which serves on-premises
and wholesale customers as well as satellite shops. Satellite shops only serve on-
premises customers and include the hot shop and fresh shop formats. As of 3 No-
vember 2013, KKD operated 94 Company shops in 19 states + D.C., primarily in the
southeastern United States, of which 75 are factory and 19 are satellite. Eighty-
eight percent of total retail sales resulted from doughnuts. The rest came from
beverage sales. Company stores represented 68.03% of total revenues in FY 2013.
Domestic Franchise. KKD’s franchise segment offers the same products in the
same formats as company stores. As of 11/3/2013, there were 155 franchise oper-
ations in 30 states consisting of 106 factory stores and 49 satellite shops. KKD plans
to open 400 new domestic shops by 2017 mainly in the southeast. Franchise agree-
ments are signed for 15 year renewable contracts. This segment stimulates reve-
nues from store startups and franchise fees ranging USD 25,000 to 50,000 as well
as 4.5% royalties of on-premise sales and 1.5% of wholesale sales. Royalty reve-
nues recognized by the company totaled approximately USD 2.68 million in Q3
2013. Domestic franchises accounted for 2.37% of total revenues in FY 2013.
International Franchise. As of 11/3/2103, there were 563 Krispy Kreme stores
operated outside of the United States, 123 factory and 440 satellite. The interna-
tional franchise pioneered the transformation to smaller format stores through the
hub-and-spoke distribution system. The international segment represents 68% of
KKD’s total store count, all of which are operated by franchisees. Franchisees pay
annual royalties and a one-time development fee ranging between USD 20,000
and 50,000. Royalties are based on 6% of total net sales generated by international
stores as well as 0.25% contributable to the KKD brand fund. Total Royalties paid
to the company totaled USD 5.81 million in Q3 2013. Royalties payable to KKD by
international franchisees are based on a conversion of local currencies to U.S. dol-
lars using the prevailing exchange rate. The international segment has been the
strongest source of growth fueled by expansion mainly in the Middle East, Asia and
South America. Their goal is to have 900 international stores by 2017. International
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stores represented 5.72% of total revenue in FY 2013.
KKD Supply Chain: Krispy Kreme operates its own supply system primarily in
Winston Salem, North Carolina. KKD supplies ingredients, equipment, doughnut
mix, packaging and other operation materials to its domestic and international
stores. Management believes this maintains consistency and quality across the
board. They have 100% outsourced shipment of supplies through independent
distributor contractors in order to increase profitability and reduce export risks.
Domestic stores purchase everything from the KKD supply chain while the interna-
tional stores mainly purchase the product mix and add with local ingredients. As
the Krispy Kreme brand grows domestically and internationally, revenues from
increasing sales volumes should rise substantially. KKD Supply Chain accounted for
23.88% of total revenues in FY 2013.
Current Strategy
Hub and spoke model: KKD has been transforming their shop distribution sys-
tem by building small satellite shops that surround large factory shops. These
smaller shops do not produce doughnuts onsite. They rely on the factory to
bring in doughnuts by trucks daily. These smaller hot shops keep doughnuts
warm and fresh while cutting the fixed costs of manufacturing equipment.
Innovation and technology: KKD is implementing a new POS system to more
effectively support business operations through improved cash controls, en-
hanced sales visibility and centralized data management. The new system is
scheduled for completion by the end of FYE 2014. KKD has also deployed new
handheld software and devices to cut back paper costs and reduce transaction
time with wholesalers.
Broader menu of one-of-a-kind products: Besides their signature original glazed
doughnuts, KKD has been expanding its menu of products to now over 16
different varieties. Seasonal offerings have become more popular with the in-
troduction of the pumpkin spice doughnut and other limited time offerings.
KKD also offers complementary products such as coffee and other beverages as
well as baked creations which are a special international segment that offers
exclusive sweets favored by local consumers in order to penetrate markets
around the world.
Domestic expansion and continued international development: KKD has seen
significant expansion in markets across the globe. Their goal of 1300 stores by
2017 will require a strong push of capital investment and franchise efforts. Do-
mestic expansion will focus mainly in the southeast and primarily through fran-
chise developments. Internationally, KKD plans to expand in Asia markets and
South America. Successes in these markets are critical for future growth.
Management
KKD went into a complete management overhaul during the retrenchment period.
James Morgan, Jr. took over as Chairman in 2005 and later became CEO in 2012.
Jeffrey Welch is the President of International Operations and Douglas Muir is the
Executive Vice President and CFO. Cynthia Bay is the Senior Vice President of U.S.
franchises and Michael Wall is the Senior Vice President of the supply chain. The
team’s initiative is to spread joy to their consumers and add value for their share-
holders and they are very active with maintaining a positive image. This manage-
ment team has nearly extracted KKD from retrenchment mode and has sent the
enterprise through a remarkable recovery that has the potential to keep growing.
The share price of KKD has rebounded from a low of USD 1.08 in 2009 to 19.25
today, a grand 1,682% turnaround.
Industry Overview and Competitive Positioning
One-of-a-Kind Taste
The most significant factor Krispy Kreme has in their favor is the delicious taste of
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their original glazed doughnuts. The secret yeast-raised recipe is unique and in
a league of its own. These doughnuts have a documented “addictability” that
consumers crave for beyond any other restaurant chain. This one-of-a-kind
taste builds brand loyalty because consumers know they can only satisfy their
craving at Krispy Kreme.
Doughnut Theater
Krispy Kreme has solidified their brand with the implementation of the dough-
nut theatre in most factory shops. Behind glass walls, consumers can watch
the production process first hand as employees mix ingredients and create the
doughnuts which then are placed on a conveyor belt that moves the product
through an oven and through a waterfall of icing to finish off the perfect
doughnut. The doughnut theatre is a wonderful attraction for consumers of all
ages to see the production process and know without a doubt that the dough-
nuts are hot and fresh. These factories can roll out 150 to 230 doughnuts per
hour and also supply satellite shops with fresh products.
Hot Krispy Kreme Original Glazed Now® Sign.
The hot and ready now sign glows bright when the original glazed doughnuts
are hot and fresh. This signature trademark advertises KKD’s most popular
product which management says is an impulse purchase generator. In 2012,
KKD created the Hot Light app for smartphones to automatically notify con-
sumers when and where a Hot Light sign is activated. Implementing this fea-
ture shows KKD is taking steps to invest in technology in order to reach out to
its consumers in new and efficient ways. Over 300,000 people have download-
ed the Hot Light app.
Sharing and Connecting
KKD holds a rich heritage for being a leader in bringing joy to the community.
The melt-in-your-mouth taste of a hot original glazed doughnut is most en-
joyed with others. Approximately 70% of purchases are for sharing occasions
and approximately 55% of transactions are for sales of one or more dozen
doughnuts. KKD also supports local communities through supplying fundrais-
ing opportunities for charities and schools. Stable community involvement
strengthens KKD’s brand name and serves as a sales driver.
Sugar price
Futures contract prices on sugar have declined 20% between October 2013
and January 2014, due to a global increase in supply. Global production out-
look improves as excess supply builds up which drives down the price. Brazil is
the largest producer of sugar in the world followed by India and China. De-
mand has increased strongly from ethanol production for biofuel. Brazil’s pro-
duction is at full capacity which has improved to 83.7 tons of sugar cane per
hectare from 75.9 tons in 2012 due to technology improvements. The low cost
of sugar, one of KKD’s main ingredients, makes doughnut production cheaper.
Coffee Sales
KKD has broadened its product mix with the addition of their own signature
coffee brand that is offered in many styles, hot and cold. KKD started to offer
40-ounce packages in 100 Sam’s Club throughout southeast as a test program
with royalties paid to KKD. Management hopes to provide consumers with the
joy of Krispy Kreme in the comfort of their own home. Coffee sales are up 15%
from a year ago. The cost of coffee beans can affect their input price. A supply
glut decreased the price by 20% last year bringing the C-contract future price
at USD 120 marking a 3-year consecutive decrease. The surplus in supply is
expected to continue due to solid crop conditions in Brazil and Colombia.
Emerging markets
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KKD has launched an international franchise expansion that has been globally
gaining ground. KKD plans to open 114 stores in India, the world’s second larg-
est country by population, between 2 franchisees. Thirty five stores will be
operated by Bedrock Foods Co. in the capital of Delhi and other cities in north-
ern India. Bedrock is rolling out eggless doughnuts to cater to Indian consum-
ers who don’t eat eggs due to faith-based dietary restrictions. India has strong
growth, urbanization and disposable income. Sixty percent of raw materials
will come from the domestic market, the rest will be imported from the U.S.
KKD is also opening 15 shops in Singapore and 25 shops in Colombia, which
marks KKD’s first entrance into South America. They also just signed a develop-
ment contract for 23 new stores in China. KKD plans to meet their 900 interna-
tional shop goal by January 2017.
Domestic market
KKD is primarily focusing on small freestanding factory shops for company
stores. They have opened seven so far this year, including two in Q3 2013 in
metro Atlanta and plan to open two additional shops in the fourth quarter.
Their goal is to reduce operating cost without sacrificing customer experience
as well as lower investment cost. The majority of growth will be through fran-
chise. KKD set a franchise agreement to develop four shops in Alaska over the
next three years, 10 stores in Houston and a 15 store development agreement
for Dallas, Texas. KKD’s goal of 400 domestic stores by January 2017 was made
two years ago and development has been slower than forecasted, but the
slower speed may permit the company to improve store locations and as such,
limit cannibalized sales.
Competitors
Krispy Kreme operates within the quick service restaurant, or QSR, segment of
the restaurant industry. KKD competes with other QSR bakeries and coffee
shops as well as wholesalers. Dunkin Doughnuts (DNKN), Starbucks (SBUX) and
Panera Bread (PNRA) are KKD’s biggest competitors. They all compete for con-
sumer’s snack time by offering baked goods and coffee. They globally posi-
tioned themselves to compete with each other worldwide.
Investment Risks
Interest Rate Risk
Krispy Kreme is exposed to market risk from increases in interest rates on its
outstanding debt. On 3 March, 2011 the company entered into an interest rate
derivative contract having an aggregate notional principal of USD 17.5 million.
The contract entitles Krispy Kreme to receive from the counterparty the ex-
cess, if any, of 3 month LIBOR over 3% for each of the calendar quarters ending
December 2015. The company is accounting for this derivative contract as a
cash flow hedge. Mitigation: As of 4th
quarter 2013, Krispy Kreme had only USD
1.632 million remaining in debt outstanding.
Currency Risk
The majority of the company’s revenue, expense, and capital purchasing activi-
ties are transacted in U.S. dollars. Royalties from international franchises are
computed based on local currency sales and changed in the rate of exchange
between US dollars and the foreign country’s currency. During FY 2013, inter-
national franchisees had sales of approximately USD 243 million, mainly from
India and South Korea, and the company’s related royalty revenues were ap-
proximately USD 23 million. (A 10% change in the average rate of exchange
between the US and foreign currencies would affect royalty revenues by USD
2.3 million)
Macro Risks
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High unemployment, low consumer confidence, tightened credit and other fac-
tors have taken their toll on consumers and their ability to increase spending,
resulting in fewer visits to restaurants and related dollar growth of sales. As a
result, QSR sales may continue to be adversely impacted by the weak economic
environment or by sharp increases in commodity or energy prices. The Company
believes increased prices of agricultural products and energy are more likely to
significantly affect its business than are economic conditions generally, because
the Company believes its products are affordable indulgences that appeal to con-
sumers in all economic environments.
Glaze Flavoring Risk
Krispy Kreme has only one supplier of glaze flavoring and any interruption in the
supply could affect the ability to produce their signature hot Original Glazed
doughnut.
Commodity Price Risk
The risk of unexpected fluctuations in the price of commodity production inputs
for Krispy Kreme (Main Ingredients: flour, shortening, sugar, gasoline) can reduce
the company’s profit margins. Factors that can affect commodity prices include
political and regulatory changes, seasonal variations, weather, technology and
market conditions. Mitigation: Krispy Kreme routinely enters into forward pur-
chase contracts, future contracts and options on such contracts, ranging from 1
month to 2 years depending on the ingredient (But do not fully mitigate com-
modity price risk).
Disruption of Supply Chain
This arises from any incidents that may affect the main distribution center of
Krispy Kreme in Winston Salem, such as damages due to natural disasters. Miti-
gation: The Company has decreased risk of over dependence on a single distri-
bution center by establishing more distribution centers across the United States
in Mira Loma, California and Effingham, Illinois.
Technology Risk
Technology systems are vital to the efficiency of Krispy Kreme’s operations and
distributions. Mitigation: In fiscal 2012, the company purchased new point-of-
sale hardware for all Company shops and established a new standard hardware
configuration for Company and domestic franchisee locations. In fiscal 2013,
Krispy Kreme tested new front-of-house and back-of-house point-of- sale soft-
ware to more effectively support the business through improved cash controls,
enhanced sales visibility and centralized data management. In early fiscal 2014,
the company began deployment of the new POS software to Company shops,
and expects to complete that deployment, together with deployment to certain
domestic franchise shops, in fiscal 2014. In fiscal 2015, Krispy Kreme plans on
leveraging the new software to launch a domestic system-wide loyalty program,
improve inventory management and centralize national promotions for Company
and domestic franchisee locations.
Political/Regulatory Risks
As a franchisor, Krispy Kreme is subject to regulation by the FTC and by domestic
and foreign laws regulating the offer and sale of franchises. The company’s abil-
ity to develop new franchised stores and to enforce contractual rights against
franchisees may be adversely affected by these laws and regulations, which
could cause franchise revenues to decline (especially since the company plans to
grow primarily through franchising).
Trademark Risk
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Krispy Kreme’s trademarks and other intellectual property rights are important
to their success and competitive position. The company owns certain common-
law trademark rights and have a system in place that is designed to detect po-
tential infringement of their trademarks, but may not be sufficient in some juris-
dictions outside the U.S. (specifically Costa Rica, Guatemala, India, Indonesia,
Nigeria, Peru, the Philippines and Venezuela). Such uses could adversely affect
the value of Krispy Kreme’s trademarks.
Healthcare Legislation Risk
Federal legislation regarding government-mandated health benefits is expected
to increase Krispy Kreme’s franchisee costs. The company’s results of operations,
financial position and cash flows could be adversely affected.
Conflicts with Franchisees
A portion (approximately 9%) of Krispy Kreme’s revenues comes from the sales
of franchisees, who account for more than 87% of the total Krispy Kreme stores.
Franchisees will also serve a primary means of future expansion domestically
and internationally. Any conflict of interest with them will adversely affect Krispy
Kreme’s brand name and growth. Mitigation: Krispy Kreme is committed to de-
voting additional resources and providing an even higher level of support to both
domestic and international franchisees in beginning FY 2014. Krispy Kreme Uni-
versity, the company’s training operation, is available to franchisee assistant
managers and general managers, and International Franchise personnel also
provide training to franchisees around the world.
Corporate Social Responsibility
It is important for Krispy Kreme to maintain its corporate image and brand value
by taking initiative to asses and take responsibility for the company’s effects on
the environment and impact on social welfare. The company complies with the
Corporate Governance Guidelines and the Code of Business Conduct and Ethics.
Krispy Kreme also sponsors several fundraising events such as “doughnut day”
that can earn schools thousands of dollars. Another way that the company dis-
plays CSR is switching to cage-free eggs.
In 2012 the Company's shareholders approved the Krispy Kreme Doughnuts, Inc. 2012
Stock Incentive Plan (named "2012 Plan"). This Plan, which expires in 2022, limits issuance
of shares of Company common stock to approximately 3,550,000 shares. Another portion
was a tax asset protection plan intended to preserve the company's federal net operating
loss and other tax carryforwards, which currently represent the largest asset to the Com-
pany. In order to protect these assets the Company will limit common shares held to no
more than 5% owned by any one shareholder. According the this plan, the Company de-
clared a dividend of one preferred share purchase right for each outstanding share of its
common stock payable. In order to execute any future share buybacks, the Company
must have the leverage ratio not greater than 2.0 and the fixed charge coverage ratio not
less than 1.5. Which is will maintain over the forecasted years.
Investment Summary
Volatile Stock with Potential for High Growth
DuPont Analysis
This analysis provides a deeper understanding of KKD’s ROE and breaks it down
into operating efficiency, asset utilization and financial leverage. Each of these
components influence a company’s ROE. Net profit margin is seen to grow to
and remain stable at 6.5% through 2019. Asset utilization is forecasted to in-
crease to 6.38% by 2019. The equity multiplier is decreasing due to KKD becom-
ing unlevered. ROE is projected to rise to 11.16% by 2019, which shows the first
two components overpower the decrease in the equity multiplier.
Valuation Methods
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We have derived our final target price by equally weighting the DCF valuation and
multiple pricing. In our opinion, we feel there are no discrepancies to cause une-
qual weighting of the two valuation methods. The selection was our peer group
was carefully chosen in respect to competition, products, and market share. Out of
all of the comparables KKD represent the highest risk as reflected in the beta.
New Growth Model
KKD has decided to take advantage of lower operating costs by switching the com-
pany owned store model to building new smaller factory stores. With an anticipat-
ed 7-10 new stores each year is the main driver of growth in company revenues.
The company has substantial contracts in place for international growth which may
be the main driver behind the company sales growth over all in the future, after
adjusting for the current decline in same store sales. Steps have been taken to out-
source transportation and some mix formulation to reduce operating costs in the
supply chain.
Consumer Discretionary Trends
Last year the convenience store doughnut market contracted more than 2% while
Krispy Kreme’s revenues rose 7.4%. The outlook for consumer spending is improv-
ing although growth is weakening in some large emerging economies and slowing
the sales for large companies. Several trends are boosting consumer spending in
developed countries: Inflation is low, enabling consumers to stretch their money.
In the United States, Morgan Stanley economists forecast that consumer spending
rose in the final three months of the year at its fastest pace in three years.. Accord-
ing to the Thomson Reuters/University of Michigan sentiment index consumer con-
fidence is currently at its highest since July 2013 showing consumer are even more
positive about the economic outlook. The S&P/Case-Shiller index also highlights
consumers are more willing to spend money as it reached the largest year-over-
year it has seen since 2006. With more consumers willing to open their wallets,
businesses will also likely start spending more on machinery, computers and other
equipment, providing an additional spark to growth. In international concerns, In-
dia and Brazil have been raising interest rates to battle high inflation. Both high
rates and rising prices are weighing on consumer spending in those countries.
Valuation
We evaluated KKD using two techniques: Discounted Cash Flow (DCF) and Multiple
Analysis.
Discounted Cash Flow Model : Free Cash Flow to Equity (FCFE)
We found the FCFE approach to be appropriate since the company is essentially
debt-free. Revenues were projected on a per-store per-year basis until FY2019.
The four key inputs for the DCF model to FCFE are revenue projections for: 1) Com-
pany Stores 2) Domestic Franchise 3) International Franchise 4) KK Supply Chain.
Sales Forecast
Cash flows projected from FY14-19 are based on the KKD’s aggressive international
expansion plans, an intensified focus on domestic expansion, and increased do-
mestic same store sales. Management’s current goal is to have 900 international
and 400 domestic system-wide stores by fiscal 2017. As of 3 Nov 2013, KKD had
249 domestic stores and 563 international stores in operation.
New Small Factory Store Format
The company has identified their new small factory store format as the driver of
their domestic company store growth. This new model was designed to be more
efficient, with decreased production capacity, lower fixed costs, and a lower break-
-30
-20
-10
0
10
20
2009 2010 2011 2012 2013 2014Company Domestic Franchise
Sources: Company Data
Table 1 : Same Store Sales Growth (Decline) by
Business Segment FY2009-2014
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even point. As of 3 November 2013, the company had 7 of these new stores in
operation. Management estimates that 10-15 free-standing company shops will
be built in fiscal 2015.
Same Store Sales
Domestic same store sales exhibited strong increases over the last four years,
while international same store sales have weakened. We projected that this trend
would continue domestically over the forecasted years. International same store
sales are projected to continue to decline initially, with the assumption that they
would eventually grow over time as a result of KKD’s growing global presence.
CAPEX
Due to the company’s plan to accelerate domestic company store growth, capital
expenditures for fiscal 2014—2017 are projected to be elevated from previous
years, averaging at USD 23.5 million per year .
Cost of Equity
The cost of equity was calculated using the CAPM Model. We used the 10-year
government bond risk-free rate of 2.82% and a market risk premium of 6.43%. We
calculated the 2013 beta (KKD USD price regressed against the S&P SmallCap 600)
relevered for decreased long-term debt, then adjusted for forecasting. This result-
ed in an adjusted beta of 1.65 and Cost of Equity of 13.43%.
Risks to target price
The DCF is mostly reliant on the Terminal Value, which is heavily dependent on
the assumed perpetual growth rate.
Peer Group Pricing
Three competitors were chosen as the appropriate peer group for which we con-
ducted multipliers pricing using benchmark P/E and EV/EBITDA ratios, both based
on four two-year forward medians. We estimated that KKD’s market value was
priced at a premium relative to its peers for a period of five observed years.
We noted the following factors supporting this premium in previous years:
Investors have stayed positive during company recovery and have focused on
new growth prospects.
Earnings per share have remained low in comparison to KKD’s peer group.
The average historical P/E premium above the peer group is 27%. We normalized
EPS for FY 2012 to adjust for the recognition of USD 139 million of deferred tax
assets. In FY 2013, KKD experienced a substantial increase in P/E compared to its
competitors, largely driven by positive investor reactions to a USD 20 million
share buyback, 8% growth in revenues, and 19% increase in EBT. It is predicted
that this increase will not be sustained at this high level. We forecasted that the
P/E will fall between 35.0 to 38.0 over the next two years.
Cost of Equity Assumptions
Adjusted Beta 1.65
Risk-free rate 2.82%
Market risk premium 6.43%
Equity risk premium 10.61%
Cost of Equity 13.43%
Sources: Team Analyses
Fiscal 2014E 2015E 2016E 2017E 2018E 2019E
Net Income 20.78 28.42 33.24 38.55 43 45.06
Cash flow from operations 52.09 60.83 68.88 76.51 83.57 96.77
Fixed capital investment -25 -25 -23 -21 -13 -11
Net borrowings 1.6
- - - - -
FCFE $28.69 $35.83 $45.88 $55.51 $70.57 $85.77
Terminal Growth Rate 5%
Perpetuity WACC 13.43%
Residual Value 1,067.99
PV of Residual Value 501.34
PV of FCF 195.94
Enterprise Value 697.29
Net Debt 0
Value of Equity 697.29
Number of Shares (mn) 67,692
Share Price end FY 2014 $ 10.30
11. CFA Institute Research Challenge Jan 24, 2013
11
In respect to EV/EBITDA, KKD is trading at a very small discount of less than 1% to
its peer group. KKD’s EV/EBITDA has experienced high volatility over the historical
five years in relationship to the peer group average. Given that the P/E multiples
of KKD and its comparables have demonstrated a more stable trend, we have de-
cided to attribute 75% weight toward this multiple price and the remaining 25%
to the EV/EBITDA multiple price. The result was a final multiple valuation price of
USD 15.00.
It is important to note that there are only two years of historical data on Dunkin
Donuts. Given that, we feel their multiples fall right in line with the comparables
average, and we do not predict huge fluctuations from the trend as, even though
newly public, the company has been well established for over six decades.
Weighting of the Models
Financial Analysis
Earnings
For KKD, FY 2012 demonstrated an enormous increase of net income which result-
ed mainly from a recognition of USD 139 million in deferred tax assets. That year
pretax income did see a 243% growth, much of this was driven by an 11% increase
in sales, while cutting back on cost of revenue, and significantly decreases oper-
ating costs down to a 3% growth. This success in management is a positive sign of
the company’s ability to become more efficient during its period of recovery and
entering back into a strong growth strategy.
In addition to efficiency, the company has also relied on its exclusion to tax ex-
penses to maintain a steady earnings throughout the recovery stage. According to
forecasting, the company will maintain a strong growth of net income during the
next two years which will increase at a decreasing rate as the company once again
begins to pay more normalized tax expenses. In addition to taxes, a USD 5 million
expense predicted by the company has also been factored in each year for the
newly instated Affordable Care Act.
Level of Margins
Over the next few years we can expect to see increases in revenues as the compa-
ny continues to attempt to return international same store sales growth to a posi-
tive level after which it will also increase as a decreasing rate as concentration risk
begins to effect expansion rate. Revenue growth stays fairly stable at an increase
of nearly 9% each year over the forecasted time period. The increases in gross
profit margins and operating margins will also increase at a decreasing rate as the
company maxes out efficiency in cost management.
18. CFA Institute Research Challenge Jan 24, 2013
18
Appendix 8: Multipliers pricing
2014E 2015E 2014E 2015E
Median P/E for each year 30.14 28.19 EV/EBITDA Peers 15.00 11.47
Applied Discount 27% 27% Applied Discount -0.01 -0.01
Target P/E 38.29 35.81 Target EV/EBITDA 14.90 11.39
EPS 0.42 0.49 EBIT 46.92 51.74
Cash 84.09 119.88
ST Investments 0.00 0.00
Debt 0.00 0.00
Shares Outstanding 67.35 67.35
Value of Equity 699.27 589.49
Price From P/E 16.08 17.54 Price From EV/EBITDA 10.38 8.75
Weight for Years 50% 50% 50% 50%
Weight for Multipliers 75% 25%
Price from Relative Valuation $ 15.00
Weight of Relative Valuation 50%
Price from DCF $10.30
Weight from DCF 50%
Price Per share $12.63
P/E Multiple 2009 2010 2011 2012 2013E 2014E 2015E
PNRA 24.00 27.82 29.40 26.88 29.31 30.14 28.19
DNKN 37.64 27.43 58.05 56.86 57.30
SBUX 20.10 24.25 28.64 32.75 25.82 28.46 28.03
Average P/E for each year 22.05 26.04 31.89 29.02 37.73
KKD P/E 39.32 33.20 17.00 43.94 47.00
Historical Discount 78.3% 27.5% -46.7% 51.4% 24.6%
Average of Historical Premium (2009-2013E) 27%
EV/EBITDA Multiple 2009 2010 2011 2012 2013E 2014E 2015E
PNRA 9.24 11.33 13.19 11.74 13.45 12.43 11.47
DNKN 0.00 0.00 16.04 18.38 29.60 26.91 26.97
SBUX 9.85 12.66 16.42 19.58 14.53 15.00 10.77
Average EV/EBIT each year 9.24 11.33 15.22 16.57 19.19
KKD EV/EBITDA 8.25 16.72 14.45 16.85 12.15
Historical Discount -10.7% 47.6% -5.0% 1.7% -36.7%
Average of Historical Discount (2009-2013E) -0.6%
19. CFA Institute Research Challenge Jan 24, 2013
19
Appendix 9: Business Structure
Business Segment Store Format Operations
Sources: Company Data
20. CFA Institute Research Challenge Jan 24, 2013
20
Appendix 10: Franchise Development Agreements
Table 1 : Licensing Terms
Associates Area Developers Recent Franchisees International
Origination
Associates typically have
many years of experience
operating KK stores and
selling KK products both at
retail and wholesale in
defined territories.
In the mid-1990's, the compa-
ny franchised territories in the
US, pursuant to area develop-
ment agreements.
Since fiscal 2009, the Company
has signed several new franchise
agreements. This includes re-
newal agreements resulting
from contract expirations,
agreements for new stores with
existing franchisees and agree-
ments with new franchisees who
acquired existing KK franchise
and company shops. In addi-
tion, several agreements arose
from the conveyance of Compa-
ny markets to franchisees.
Location
Mostly in the
Southeast US
Territories in the US, usually
defined by metropolitan sta-
tistical areas
Territories are typi-
cally country or re-
gion-wide. For large
countries, the devel-
opment territory
may encompass only
a portion of a coun-
try.
Operations
On-premises &
Wholesale
On-premises &
Wholesale
On-premises
On-premises
(except wholesale
Canada, Australia,
and UK)
Growth
Concentrate on growing
sales within the current
base of stores rather than
new store development.
Specified under terms of the
agreement
Specified under terms of the
agreement
Specified under
terms of the agree-
ment
Licensing
Agreement
Possess exclusive right to
open new stores in their
geographic territories, but
no obligation to develop
additional stores.
Agreement specifies the num-
ber of stores to be developed
in an area. Related franchise
agreements govern the opera-
tion of each store.
Some of the recent franchisees
have signed development
agreements, requiring them to
build a specified number of
stores in an exclusive geogra-
phy within a specified time
period, usually five years or
less.
Restrictions
Company cannot grant new
franchises or sell any KK
branded products within an
associate's territory during
the term.
Possess the exclusive right to
sell KK branded products
within a 1-mile radius of their
stores and in wholesale ac-
counts that they have ser-
viced in the last 12 months.
These agreements generally
allow the Company to sell KK
branded products in close
geographic proximity to the
franchisees' stores.
Expiration
Most current agreements
expire in 2020.
Most of these agreements
have expired, been terminat-
ed or renewed with territorial
and store-count (build out)
modifications.
Term
15 years
Renewable
15 years
Renewable provided the
franchisee meets specified
criteria
15 years
Renewable
Sources: Company Data
21. CFA Institute Research Challenge Jan 24, 2013
21
Table 2: Royalty Structure and Fees
Associates Area Developers Recent Franchisees International
On-premises
Sales
3% 4.50% Same as Area Developer 6%
All Other Sales 1%
4.5%
In recent years, the Compa-
ny has elected to reduce the
royalty rate on wholesale
sales. The Company current-
ly charges Area Developers a
royalty rate of 1.5% whole-
sale sales.
Same as Area Developer 0.25%
Contribution to
Brand Fund
1% 1% 1% 1%
Fees
Generally permitted to
open KK shops within
their geographic territo-
ries without the pay-
ment of any develop-
ment fee or initial fran-
chise fee.
Recent domestic develop-
ment agreements generally
provide for the payment of
one-time initial development
and franchise fees ranging
from USD 25,000 - 50,000
per store.
Recent domestic develop-
ment agreements generally
provide for the payment of
one-time initial development
and franchise fees ranging
from USD 25,000 - 50,000
per store.
One-time development
& franchise fees from
USD 20,000 - 50,000
per store
% of USD 281
million
Domestic
Franchisee
FY2013 Sales
Approx. USD 84 million
or 30%
Approx. USD 197 million or
70%
N/A
FY2013
Aggregate
Royalty
Revenue
Approx.
USD 2 million
Approx.
USD 7.7 m
Sources: Company Data
22. CFA Institute Research Challenge Jan 24, 2013
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Appendix 11: Methods for Forecasting Company Revenues
Phase 1: Forecasting Store Growth
When forecasting the number of future stores that would be built for each year from FY14-19, we began by averaging the number
of future commitments over the number of years left before the contract expired and assigning them to each year accordingly.
Cells A1:F8 show the number of additional stores (average) that we expect to be built in each state per fiscal year.
Column G shows the change in actual store count observed from FY12-13.
Column H shows the increase or decrease in future store commitments reported in FY13 versus FY12.
Column I shows the estimated additional amount contracted during FY13, based on observations in Columns G and H.
Table 1: Domestic Franchise Future Store Commitments Distributed Over Agreement Life
A B C D E F G H I
Fiscal Year 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E
Change in
Store Count
Change in
Commitments
Additional
Contracted
1 Arizona 1 3 1 1 2 -2
Agreement Amount
By Fiscal Expiration Year
2013 2
2012 4
2 California 17 20 3.67 3.67 3.67 3 6 9
Agreement Amount
By Fiscal Expiration Year
2013 11
2012 5
3 Colorado 2 2 2.6 2.6 2.6 2.6 2.6 0 13 13
Agreement Amount
By Fiscal Expiration Year
2013 13
2012 0
4 New Mexico 2 3 1 1 1 -1 0
Agreement Amount
By Fiscal Expiration Year
2013 2
2012 3
5 North Carolina 8 8 1 1 1 0 0 0
Agreement Amount
By Fiscal Expiration Year
2013 3
2012 3
6 Pennsylvania 8 8 3.4 3.4 3.4 3.4 3.4 0 0 0
Agreement Amount
By Fiscal Expiration Yr
2013 17
2012 17
7 South Carolina 9 9 2 0 0 0
Agreement Amount
By Fiscal Expiration Year
2013 2
2012 2
8 Texas 9 9 1.3 1.3 1.3 0 4 4
2013 4Agreement Amount
By Fiscal Expiration Year 2012 0
Total 26Sources: Company Data, Team Analyses
23. CFA Institute Research Challenge Jan 24, 2013
23
Cells A1:F12 show the number of additional stores (average) that we expect to be built in each country per fiscal year.
Column G shows the change in actual store count observed from FY12-13.
Column H shows the increase or decrease in future store commitments reported in FY13 versus FY12.
Column I shows the estimated additional amount contracted during FY13, based on observations in Columns G and H.
Table 2: International Franchise Future Store Commitments Distributed Over Agreement Life
A B C D E F G H I
Fiscal Year 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E
Change in
Store Count
Change in
Commitments
Additional
Contracted
1 Australia 23 18 2.5 2.5 2.5 2.5 2.5 2.5 -5 0 0
Agreement Amount
By Fiscal Expiration Year
2013 15
2012 15
2 Dom. Rep. 1 3 5.5 5.5 2 -2 0
Agreement Amount
By Fiscal Expiration Year
2013 11
2012 13
3 India 0 1 22.8 22.8 22.8 22.8 22.8 1 114 114
Agreement Amount
By Fiscal Expiration Year
2013 114
2012 0
4 Japan 34 42 18.5 18.5 18.5 18.5 8 -11 0
Agreement Amount
By Fiscal Expiration Year
2013 74
2012 85
5 Malaysia 6 8 12 2 -2 0
Agreement Amount
By Fiscal Expiration Year
2013 12
2012 14
6 Mexico 71 91 6 6 6 6 6 6 20 -22 0
Agreement Amount
By Fiscal Expiration Year
2013 36
2012 58
7 Philippines 26 41 15 -14 1
Agreement Amount
By Fiscal Expiration Year
2013 0
2012 14
8 Puerto Rico 5 5 2 0 2 2
Agreement Amount
By Fiscal Expiration Year
2013 2
2012 0
9 Russia 0 0 7 7 7 7 7 0 35 35
Agreement Amount
By Fiscal Expiration Year
2013 35
2012 0
10 Singapore 0 0 3.75 3.75 3.75 3.75 0 15 15
Agreement Amount
By Fiscal Expiration Year
2013 15
2012 0
11 Thailand 4 8 6.5 6.5 4 -3 1
Agreement Amount
By Fiscal Expiration Year
2013 13
2012 16
12 UK 48 55 5.2 5.2 5.2 5.2 5.2 7 8 0
Agreement Amount
By Fiscal Expiration Year
2013 26
2012 34
Total 168
Sources: Company Data, Team Analyses
24. CFA Institute Research Challenge Jan 24, 2013
24
Actual Stores Future Store Commitments
Fiscal Year 2012 2013 2014 2015 2016 2017 2018 2019
Australia 23 18 2.5 2.5 2.5 2.5 2.5 2.5
China 2 2
Dom. Rep. 1 3 5.5 5.5
India 1 22.8 22.8 22.8 22.8 22.8
Japan 34 42 18.5 18.5 18.5 18.5
Malaysia 6 8 12
Mexico 71 91 6 6 6 6 6 6
Philippines 26 41
Puerto Rico 5 5 2
Russia 7 7 7 7 7
Singapore 3.75 3.75 3.75 3.75
Thailand 4 8 6.5 6.5
UK 48 55 5.2 5.2 5.2 5.2 5.2
Other 240 248
Forecasted
Additional
Store
Commitments
(+168 per year)
33.6 33.6 33.6 33.6 33.6
33.6 33.6 33.6 33.6 33.6
33.6 33.6 33.6 33.6
33.6 33.6 33.6
33.6 33.6
33.6
Store Closings 0.0 -6.3 -6.8 -7.4 -7.9 -8.6
Net Store Count 460 522 575 643 737 863 1017 1155
Table 4: Domestic Franchise
Forecasted Store Growth
Additional store commitments are dis-
tributed forward over 5 years, with the
assumption that an equal amount
would be built each year.
Table 5: International Franchise
Forecasted Store Growth
Actual Stores Future Store Commitments
Fiscal Year 2012 2013 2014 2015 2016 2017 2018 2019
Arizona 1 3 1 1
California 17 20 3.67 3.67 3.67
Colorado 2 2 2.6 2.6 2.6 2.6 2.6
New Mexico 2 3 1 1
North Carolina 8 8 1 1 1
Pennsylvania 8 8 3.4 3.4 3.4 3.4 3.4
South Carolina 9 9 2
Texas 9 9 1.3 1.3 1.3
Other 86 80
Forecasted
Additional
Store
Commitments
(+26 per year)
5.2 5.2 5.2 5.2 5.2
5.2 5.2 5.2 5.2 5.2
5.2 5.2 5.2 5.2
5.2 5.2 5.2
5.2 5.2
5.2
Store Closings 0.0 -6.3 -6.8 -7.4 -7.9 -8.6
Net Store Count 142.0 142.0 156.9 175.0 195.8 215.2 239.3 256.7 Sources: Company Data, Team Analyses
Sources: Company Data, Team Analyses
25. CFA Institute Research Challenge Jan 24, 2013
25
Table 6: Forecasted Total Number of Stores Per Business Segment by Fiscal Year
Phase 2 : Forecasting Revenues
We forecasted revenues by multiplying the number of projected stores by the forecasted average weekly sales
(annualized) per store type for each fiscal year. This method was used to project revenues for the Company, Do-
mestic Franchise, and International Franchise segments.
Table 7: Average Weekly Sales per Store Type
Fiscal Year 2014E 2015E 2016E 2017E 2018E 2019E
Company
Factory stores
Commissaries 203.3 215 228 242 254 267
Dual-channel stores
On-premises 37.6 39.9 42.2 44.8 47.0 49.4
Wholesale 50 53.0 56.2 59.6 62.5 65.7
Total 87.6 92.9 98.4 104.3 109.5 115.0
On-premises only stores 37.3 39.5 41.9 44.4 46.6 49.0
New small factory stores 31.8 33.7 35.7 37.5 38.6 39.8
Satellite stores 21.5 22.8 24.2 25.6 26.9 28.2
`
Domestic Franchise
Factory stores 52 55.1 58.4 61.9 65.0 68.3
Satellite stores 18.1 19.2 20.3 21.6 22.6 23.8
International Franchise
Factory stores 39.8 37.8 37.8 38.8 40.7 43.1
Satellite stores 9.9 9.4 9.4 9.6 10.1 10.7
Sources: Team Analyses
26. CFA Institute Research Challenge Jan 24, 2013
26
Royalty & Fee Structure
Domestic
Associates 30% Estimated %
On Premise Sales 3% 75%
Wholesale 1% 25%
Brand Fund Contribution 1%
Area Developers 70% Estimated %
On Premise Sales 4.5% 75%
Wholesale 1.5% 25%
Brand Fund Contribution 1%
One-Time Development Fee $25,000 - $50,000
International
All Sales 6%
Brand Fund Contribution 0.25%
One-Time Development Fee $20,000 - $50,000
Table 5 : Royalty Fee Structure
We calculated royalties to the company from the revenue forecast using the current Royalty & Fee schedule.
Notes:
All domestic franchises sell products to on-premises customers, and most, but not all, also sell products to wholesale cus-
tomers.
Sales to wholesale customers generally constitute a smaller % of a domestic franchisee’s total sales than do the Company’s
sales to wholesale customers.
Sales to wholesale customers comprised approximately 25% of domestic franchisee’s total sales in fiscal 2013.
28. CFA Institute Research Challenge Jan 24, 2013
28
Appendix 12: Porters Five Forces Model
Bargaining Power
of Suppliers
Competition in the
Industry
Threat of New
Entrants
Threat of Substitute
Products
Final Rating: 3.4
Bargaining Power 5
4
3
2
1
0
**This model identifies and analyzes 5 competitive forces that shape every industry, and helps determine
an industry’s strengths and weaknesses.
Threat of New Entrants - Average
1. Large capital requirements required to build a chain of stores/brand name
2. Favorable locations are already occupied
3. Economies of scale in distribution and raw ingredients
4. Product and brand differentiation
Competition in the Industry - High
1. High Concentration of rivals and local chains. (Dunkin Donuts, Starbucks, McDonalds, etc)
2. Static Market Growth
3. High Fixed Costs
4. Perishable Products
Threat of Substitute Products – Very High
1. Large choice of alternatives with similar products (Other kinds of desserts, pastries, or drinks)
2. No switching costs
Bargaining Power of Suppliers - Low
1. Vertically integrated business with only commoditized raw ingredients
2. Large number of suppliers to choose from and low switching cost
Bargaining Power of Customers - Average
1. Numerous kinds of buyers in the industry
2. Products are “craveable” in any economic circumstance
Scale of Interaction:
0 No Interaction
1 Insignificant
2 Low
3 Average
4 High
5 Very High
Sources: www.harbott.com, Team Analyses
29. CFA Institute Research Challenge Jan 24, 2013
29
ROE
9.94% 66.74% 8.43%
10.58% 10.86% 11.59%
11.82% 11.36% 11.16%
ROA
4.47% 49.64% 6.05%
8.18% 8.50% 9.07%
9.27% 8.92% 8.81%
Net Profit Margin
2.10% 41.24% 4.77%
5.88% 6.30% 6.68%
6.80% 6.54% 6.54%
Equity Multiplier
2.22% 1.34% 1.39%
1.29% 1.28% 1.28%
1.28% 1.27% 1.26%
Total Asset Turnover
5.09% 5.34% 5.59%
5.78% 5.91% 6.04%
6.18% 6.30% 6.38%
Legend
2011 2012 2013
2014E 2015E 2016E
2017E 2018E 2019E
X
X
Net Income
7.6 166.27 20.78
28.42 33.24 38.55
43 45.06 48.87
EBIT
19.22 26.36 38.04
46.92 51.74 57.05
63 69.06 75.36
EBT/EBIT
46% 115% 95%
1 1 1
1 1 1
Net Income/EBT
85.8% 547.7% 57.2%
60.6% 64.2% 67.6%
68.3% 65.2% 64.8%
= X X
Sources: Company Data, Team Analyses
30. CFA Institute Research Challenge Jan 24, 2013
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National Restaurant Association Restaurant Performance Index vs Krispy Kreme Doughnuts, Inc.
The National Restaurant Association’s Restaurant Performance Index (RPI) is a monthly index tracking the per-
formance of the restaurant industry and is calculated based on answers given in response to a survey sent out to
restaurateurs nationwide each month. The survey gauges answers in key areas such as same-store sales, traffic,
labor, CAPEX, and others.
Using a regression analysis between NRARPI versus KKD proved that the relationship between NRAPI and KKD
are very significant.
Correlation Adjusted R2 t-stat p-value
KKD vs NRARPI .593 .346 7.964 .0000000012
Sources: Bloomberg, Team Analyses
31. CFA Institute Research Challenge Jan 24, 2013
31
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might
bias the content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject
company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the
author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or
completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This
information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This
report should not be considered to be a recommendation by any individual affiliated with CFA societies Florida, CFA Institute or
the CFA Institute Research Challenge with regard to this company’s stock.
CFA Institute Research Challenge
![Highlights
We issue a sell recommendation with a target price of USD 12.65. Krispy Kreme is trading at
nearly 5 times its book value and issues no dividends. The company is climbing out of recov-
ery mode and is highly scrutinized under the analysis spotlight which makes them more vola-
tile towards market forces and news updates. KKD is one of the biggest signature brand
doughnut providers recognized around the world. Since the stock price is above our intrinsic
value we recommend to sell KKD until they solidify themselves as a strong growth stock.
Main price growth drivers: 1) Total revenues are estimated to grow by 9.31% in FY 2014.
Company same store sales grew 8.4% through Q3 of FY 2014 while domestic franchise grew
11.2% and international stores fell by 6.4%. Revenues are a main determinant in area devel-
opment and future growth potential. 2) Franchise agreements will drive KKD’s expansion
domestic and internationally. The company’s goal is to have 1300 total stores by 2017. Suc-
cess or failure of the company leans heavily on international franchisees who plan to own 900
stores worldwide by 2017, which represents 69% of total store count.
Retrenchment and recovery: In 2004, KKD experienced a financial crisis due to rapid expan-
sion that oversaturated the market and a domestic franchising strategy that focused on short-
term profits instead of long-term growth. From 2004–2009 over 240 stores closed, resulting
in USD 300 million in impairment charges, loss of revenues and a plummeting share price.
Since then, new management and strategic changes have to led to stronger fundamentals,
improved investor confidence, and accelerated store growth.
Main risk issues: 1) Cannibalism resulting from overexpansion is one of the biggest risks
moving forward. If the company allows the market for their signature doughnuts to become
diluted, they could see loss of profits and store closings. It is important for KKD to not make
the same mistakes again. 2) Macroeconomic issues greatly affect KKD now that they have a
global brand. Consumer confidence, employment and the disposable income of consumers
can influence sales as well as the overall health of sovereign economies in countries that KKD
operates in. 3) Competition amongst fast food restaurants is fierce as they all attempt to
offer their products for the best deal for consumers. KKD has to compete not only with fast
food and bakeries, but also with wholesale markets and international markets where their
brand name is not as strong.
Krispy Kreme Doughnuts Inc.
[Quick Service Restaurant Industry, Consumer Discretionary Sector]
This report is published for educational purposes only by
students competing in The CFA Institute Research Challenge.
University of North Carolina in Wilmington Student Research
Date: 24 January 2014 Current Price: USD 18.13 Recommendation: SELL
Ticker: KKD Exchange: NYSE Target Price: USD 12.65
Market Profile
52-week price range 12.32 - 26.63
Market Cap 1.25 B
Shares outstanding 66 M
200-day SMAVG 1.41 M
Revenues 435.80 M
EBTDA 47.926 M
Net income 20.78 M
P/E 50.68
P/BV 4.59
ROA 6.05%
ROE 8.43%
Dividend yield 0.00%
Current ratio 2.89%
Institutional holdings 81.42%
Insider holdings 1.01%
Number of employees 4,300
Fiscal Year 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F
Revenues 362.0 403.2 435.8 483.0 527.8 577.2 632.5 688.9 747.5
EBITDA 26.6 34.6 47.9 57.4 62.9 69.0 75.8 82.8 90.0
Net Income 7.6 166.3 20.8 28.4 33.2 38.6 43.0 45.1 48.9
Earnings per share 0.11 0.45 0.31 0.42 0.49 0.58 .066 0.70 0.76
Dividends per share 0.00 0.00 0.00 0.00 0.00 0.00 0.20 0.25 0.30
Return on Assets 4.5% 49.6% 6.1% 8.2% 8.5% 9.1% 9.3% 8.9% 8.8%
Return on Equity 9.9% 66.7% 8.4% 10.6% 10.9% 11.6% 11.8% 11.4% 11.2%
0
5
10
15
20
25
30
KKD daily stock prices
Last Price
Target Price
Valuation DCF Multipliers
Estimated Price 10.30 15.00
Weights 50% 50%
Target Price 12.65
Sources: Company Data
Sources: Company Data
Sources: Bloomberg
Change in forecast level of FCFE
Change in
WACC -10% -5% 0% 5% 10%
-10% 11.24 11.87 12.49 13.12 13.74
-5% 10.17 10.73 11.3 11.86 12.43
0% 9.27 9.79 10.3 10.82 11.33
5% 8.51 8.98 9.45 9.92 10.4
10% 7.85 8.29 8.72 9.16 9.59
Sources: Team Analyses
Sources: Team Analyses](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)