1. Group: Tammy Cheung, Shelly Khindri, Parm Marway, Hari Stirbet KRISPY KREME DOUGHNUTS FORECASTING

2. AGENDA  Background (Shelly)  Industry Analysis (Shelly)  Current Financials (Parm)  Forecasting (Hari)  Forecasting Verification (Tammy)  Reality Check (Tammy)

3. HISTORY 196020021937 Vernon Rudolph purchased “secret recipe” from French chef in New Orleans Krispy Kreme gained a reputation in U.S. for making high quality, tasty donuts 222 stores in 34 states, produced 5 million donuts a day, 2 billion donuts a year

4. INDUSTRY ANALYSIS Rivalry Among Existing Firms (HIGH) Highly fragmented Largest donut retailer Large competitors and regional players Threat of New Entrants (MODERATE) High startup costs Franchise costs high Strong Brand Identity Bargaining Power of Buyers (HIGH) Quality & Price Taste Alternative products Threat of Substitutes (HIGH) Geographical presence Bargaining Power of Suppliers (LOW) Vertical Integration

5. INDUSTRY ANALYSIS  CONCLUSIONS:  Highly competitive environment with exception of supply chain  To continue growth levels, high investments in long-term assets and working capital would be needed  Profitability outlook relies heavily on ability to carry forth expansion plans (outside of U.S)

6. REVENUE SOURCE (1) Owned and operated doughnut stores (2) Royalties from franchise associates and area developers (3) Sale of doughnut mixes and doughnut- making equipment to franchise associates and area developers

7. GROWTH STRATEGY  Mid 1990’s: grew geographically through franchising  2003: 62 new stores (mostly franchise)  2003 to 2006: open 200 new stores  LONG TERM: Exploring growth in Japan, South Korea, Australia, Spain and UK

8. PROBLEM IDENTIFICATION  CIBC World Markets has to forecast the company’s financial performance for the next few years. Items to consider:  Ability to sustain revenue & earnings growth  Forecasting number of stores in the system  Ensure forecast is consistent with corporate trends

9. CIBC ANALYST FORECAST  Reflective of corporate expansion;  January 2003  $0.64 Earnings per share  Projected earnings growth of 42%  January 2004  $0.83 Earnings per share  Projected earnings growth of 33%

10. CIBC ANALYST FORECAST CONDENSED INCOME STATEMENT20032004 REVENUE (SALES)494,818606,197 COST OF GOODS SOLD390,249473,864 GROSS PROFIT104,569132,333 SELLING, GEN. AND ADM. EXPENSES44,08052,999 EARNINGS BEFORE INTR. AND TAXES60,48979,334 NET INTEREST EXPENSE141,000 EARNINGS BEFORE TAXES60,47578,334 INCOME TAX22,99130,527 NET INCOME37,51249,807

11. THINGS TO CONSIDER  CIBC forecast  What elements did you consider in their forecast?  What assumptions would you make regarding store expansion & sales per store?

12. CONDENSED BALANCE SHEET 200020012002 ASSETS: CASH3.187.0321.90 NON CASH CURRENT ASSETS37.8660.5879.87 LONG-TERM ASSETS63.92103.88153.60 TOTAL ASSETS104.96171.49255.37 LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES29.6038.1752.53 LONG-TERM LIABILITIES27.626.5312.69 STOCKHOLDERS' EQUITY47.74126.79190.15 TOTAL LIB. AND STOCKHLDRS' EQUITY104.96171.49255.37

13. CONDENSED INCOME STMT 200020012002 REVENUE (SALES)220.24300.72394.35 COST OF GOODS SOLD190.00250.69316.95 GROSS PROFIT30.2450.0377.40 SELLING, GEN. AND ADM. EXPENSES19.4127.9537.27 EARNINGS BEFORE INTR. AND TAXES10.8322.0840.13 NET INTEREST EXPENSE1.23-1.70-2.40 EARNINGS BEFORE TAXES9.6023.7842.53 INCOME TAX3.659.0616.17 NET INCOME5.9514.7226.36

14. RATIO ANALYSIS 200020012002 Sales growth 36.54%31.14% NOPAT Margin2.97%4.52%6.65% After-tax net interest rate on debt11.32%-7.71%-5.78% Net operating working capital/sales3.73%7.44%6.95% Net operating long-term assets/sales29.05%34.49%38.98% Net debt/net capital33.84%-0.63%-5.14% Shareholders' equity/net capital66.14%100.40%105.09%

15. KEY FORECASTING TOOLS  Ratio Analysis  Publicly available information about:  Growth plans (new stores)  Profitability (per store)  Industry/environment assessment

16. FORECASTING KKD’s REVENUES  What do we know about KKD’s plans?  What is the Net Profit per Area Developer store?  What is the average number of stores in the system? Could you project this for the next 2 years?

17. FORECASTING SALES EXERCISE Are the Developer Store profitable? 2002 Revenues Gross Profit Royalties Markup of KK purchases Capital Costs Net Income per store

18. KKD’s EXPANSION PLANS?  200 new stores from 2003-2006  62 to open in 2003  Store opening forecast: 2003200420052006 Company Store Openings?? ? ? Developer Area Store Openings62???

19. # OF STORES IN SYSTEM 2001200220032004 ActualForecast Company owned63758085 Franchised111143200262 System wide 174218280347 Average# of company stores 6977.582.5 Average# of franchise stores 127171.5233.5

20. PROFITABILTY: FRANCHISE 2002 weekly averages:  23K per “old franchised”  72K per “area developer store” and company store Average per franchise? 200220032004 ActualForecast Company weekly sales 72K75K78K Growth4% Franchise weekly sales 53K63.8K73.5K Growth20%15%

21. SYSTEM SALES FORECAST (Annual Sales = Average# of Stores * Weekly Sales per Store * 52) 200220032004 ActualForecast Company Sales258,336302,250330,330 Franchise Sales350,012535,080739,230 Total System Sales608,348837,3301,119,560 Growth rate37.6%33.7%

22. KKD’s REVENUE GROWTH INCOME STATEMENT FOR THE YEAR20032004 Sales504,768615,817 Net operating profits after tax40,38149,265 Net interest expense after tax464,386566,551 Net income39,91748,698 Basic Earnings Per Share0.750.91

23. FORECAST VERIFICATION 2001200220032004 ActualForecast D+A0.02 0.0195 G+A0.0660.06980.0680.067 Taxes0.030.040.0460.05 Margins0.1660.1960.210.22

24. DUPONT: ACTUAL vs. FORECAST 20002001200220032004200520062007 Actual Forecast Net Income/ Sales0.030.050.070.08 0.060.05 Sales/Assets3.052.382.181.781.891.982.03 Assets/Stockholders' Equity1.511.000.951.05 ROE0.12 0.140.150.16 0.130.10

25. CHANGE IN DUPONT RATIOS  Why do we see the change in Dupont ratios?  Class Exercise: Discussion about efficiency

26. ADDITIONAL DISCUSSION  What would impact sales other then expanding stores?  Mini Plants  Product line expansion  Change in Strategy  International Opportunity

27. RECALL KKD’s GROWTH STRATEGY  Open 200 new stores from 2003-2006  Expand to Japan, South Korea, Australia, Spain and the U.K

28. WAS CIBC RIGHT? Income Statement CIBCReality 2003200420032004 REVENUE (SALES)494,818606,197 491,549665,592 COST OF GOODS SOLD390,249473,864 381,489507,396 GROSS PROFIT104,569132,333 110,060158,196 SELLING, GEN. AND ADM.44,08052,999 50,24356,110 EBITA60,48979,334 59,817102,086 NET INTEREST EXPENSE141,000 5,0447,409 EBT60,47578,334 54,77394,677 INCOME TAX22,99130,527 21,29537,590 NET INCOME37,51249,807 33,47857,087

29. CHECK IT OUT Back in 2002By 2004  222 stores in 34 states  360 stores in 48 states  75 company owned  53 franchised  94 area developer  144 company owned  57 franchised  159 area developer  1 store in Canada  12 in Canada  3 in Australia  2 in the U.K  2 in Mexico  5 million doughnuts a day  2 billion doughnuts a year  7.5 million per day  2.7 billion per year

30. SUMMARY  Diet Trends: Low fat/Carb hype  Competition with regional brands (i.e. Mary-Ann Donuts)  Beverage sales not favorable  Forecasting is an art not a science

31. QUESTIONS