Krispy Kreme's Canadian franchise KremeKo failed despite initial success. The franchise partnership with Krispy Kreme was flawed as they were not transparent about declining US sales and pushed an unsuccessful business model. Additionally, KremeKo grew too quickly without properly funding infrastructure. When Krispy Kreme fell into financial troubles, they abruptly terminated the entire KremeKo leadership without compensation, ending a five year project. The author learned important lessons about vetting partners, challenging franchisors, properly researching business models, thinking small initially, and having an emergency plan.

1. Saint Joseph’s University - Haub School of Business
Department of Management
Fall 2009
Krispy Kreme Assignment Questions
In two pages (double-spaced, 1 inch margins, 12 point font),
please answer the following questions.
1. Based on the information in the case, what is Krispy Kreme's
strategy?
2. Did Krispy Kreme execute their strategy successfully?
3. What are the strategic issues that Krispy Kreme must
address?
4. What 2 or 3 objectives would you recommend to Krispy
Kreme, and what strategies for achieving the objectives?
1
8
when I
the
Judi Richardson was KremeKo's
VP of marketing and business
development when lineups for
the doughnuts lined the block.
She was still there when the
crowds disappeared and the
party ended with a thud.

2. This is her story...
PAUL JOSEPH BCBusiness November 2005 3 1
It w a s Friday, April 1 5 , 2 0 0 5 when i got'the caU/it wasn't
imexpected, but it was the end of an adventure embarked upon
with the
enthusiasm of a child. On the other end ofthe speakerphone
were Jimmy
Strickland, senior W of Krispy Kreme Doughnuts; Roly Morris,
president and CEO of KremeKo, the main franchisee in Canada;
and Bob
Vaughn, Krispy Kreme VP and assigned chief restructuring
officer for
KremeKo. "Well,Judi," Roly began. "Do you watch The
Appmtice}"
"No," I responded, "I'm far too busy working to watch much
TV."
"Cute," Roly retorted. "Anyway, this is the call. Tĉ day is your
last day."
Shordy thereafter, Roly himself was gone.
T u r n the clock back four ye îrs to
December 11,2001. It's 5 a.m. and I'm parked
ill a Krispy Kreme P T Cruiser at the buck
entranc'e to the company '̂s 1 oronto PR finn.
In tlie bitter early morning air, boxes of
doughnuts for the day's media drops release a
sweet aroma. Krispy Kreme's first Canadian
and international store is set to open in
Mississauga in less than an hour and my heart
is pounding. Fve got my cellpiione in my hand
but I'm afii-aid to call the store for fear no one's

3. waiting in line. As YP of marketing and
business development, I'd been challenged hy
Robert Fisher, KremeKo's chairman, to
attract record-breaking lines and hit all-dme
sales records. It is in my nature to take the
challenge literally and seriously, and I have. If
no one is in line that means all the plannijig
over the past two years has failed. I slip the
phone back in i7iv' pocket.
At 5:30 a.m., official opening time, I call the
store and to my slight relief, there are rrjughiy
70 people in line. O i e couple, diehard fans of
this crazy phenomenon, have waited the
length of a umter night to buy dozeas of these
200-calorie sugar treats. We have a chance.
Over the course ofthe next day, the crowds
gathered and the line grew to more than two
hours in length. Some fans had driven five
hours and they continued to flock to the store
for weeks, dictating the need for traffic cops
on Mavis Road and staff in the parking lot
directing cars. Media coverage, sparked by
strategic PR campaigns, plus the unheard-of
crowds, was unprecedented. The store was a
zoo ajid we were riding on some major, silver-
lined clouds. W e did break the record -
$70,000-plus our first day and $465,000 in
the first week. W e were off and nmning.
In between tliat highly successful open-
ing and April 15,2005, however, something
went seriously wrong. W e had assembled a
skilled and experienced leadership team.
W ĉ had fomied a company with an entre-

4. preneurial spirit, and the talent and enthu-
siasm to really want to create what we called
'the ultimate Krispy Kreme doughnut-
making theatre experience.' VV
̂ e did a lot of
things well. But we also made some key
mistakes.
looking for an equity opportunity and the
chance to be one of a handflil of people to
build a company. 'I'his was it.
By April 2000, I was on my way to
southern California with Rt)ly and PR exec
Mat Wilcox to scout out Krispy Kreme
stores. We'd written the business plan for the
rights to Krispy Kreme Doughnuts in
Canada and were now ready for a 'pitch'
presentation to Scott Livengood (fonner
CEO of KKD) and the senior executive team.
W e finally made the presentation that
September and were awarded the rights -
eventually to all provinces
except B.C. - in December
2000.
I could write a book on
the lessons 1 learned on that
wild ride between 2000 and
2005; this is just the Coks
I^'otes version. Lesson No. 1:
know thy partners. If you're
entering into a franchise,
licensing or partnership
agreement, such as an area
development agreement like

5. ours, make sure you either
trust die other party or keep
the back d o o r open. W ê
didn't. W e signed a seven-
year agreement that dictated
the number of hot tioughnut
factor)^ stores we had to open
and when. T h e agreement
also outlined the business
model that had to be
followed: 1) open retail hot
doughnut factory stores,
2) launch the fundraising
pn)grain within 60 to 90 days
and ?•) start the off-premises
(wholesale) business 12 to
Not only had we climbed into bed with a group of
individuals more concerned about hitting outrageous
Wall Street growth objectives than building lasting enter-
prises, we didn't stand up and say, This isn't working'
Roly Morris and I had pr
worked together at Starbucks, and during the
three years I ran my consulting finn,
Richardson Management, we pitched some
business together and wrote plans for two
businesses - a candle company and Krispv
Kreme. U l i e n Roly first approached me
about the doughnuts, my initial resjxjnse was
"Are you nuts? T studied nutrition in univer-
sitŷ and skied on the national ski team. Me
and doughnuts?" T h e n I researched the
brand, saw the enormous potential, shelved
the misgivings and got on hoard. I had been

6. 18 months after opening a new market.
Techniailly, if we didn't meet the openings
in terms of number of units and dming, or we
didn't follow' the model, we were in breach of
the agreement and Krispy Kreme could take
control of our private Canadian company.
Lesson No. 2: Ije prepared to challenge
your fi-anchisor or venture partner with your
market knowledge. Fsscndally we were kept in
the dark about declining sales trends in other
U.S. marketji and never got a straight answer
alxjut the impact wholesale business had on
retail. W e were forced to learn from our
3 2 BCBusiness November 2005 PAULJOSEPH
Canadian experienres, which meant that by the
time we saw the negadve impact that whole-
sale sales (through Wal-Mart, Loblaws and
P e t r o - C a n a d a ) had on retail sales and
profitability, we were liehind the plan. W e had
to weigh early learning against the need for
speed in (jpiening new sites and achieving sales
;md unit targets. Sjx^d can Idll. W e ojiened too
many stores, which generated over-capacity
and caused us to chase wholesale sales, setting
a downward sales and profitability spiral in
motion. As a side 'benefit,' we severely
damaged the brand by making the tinique
'hot-oft-the-line, doughnut-maJdng theatre
exjx^rience' inside our stores a secondary'
factor. Tliis eliminated the novelty of Krispy
Kreme through widespread accessibility.

7. Lesson N o . 3: research your business
model aggressively. T b e Krispy Kreme
business model was fundamentally flawed.
T h e 4,500-square-foot stores with a $2.5-
niillion price tag were too big and too
expensive. W e , along with virtually every
other area developer, were struggling to
make the model work. A smaller footprint
with smaller, less costly equipment and
more branded retail distriburion points
might have allowed the cult-like following
to sustain itself with a focus on the fresh,
hot, in-store experience.
Nevertheless, KremeKo's pmhiems were
just part ofthe sdcky mess in which Krispy
Kreme found itself. In August 2003, KKD
had been trading at nearly USS50 on the
XYSK, up from its inidal public offering of
US$21 in 2000. Foitiuic trumpeted Krispy
Kreme as the "hottest brand in the land." By
May 2004, however, then-CEO Scott
I-ivengood was holding low-carb diets
responsible for Krispy Kreme's first loss as a
public company - a good six montKs after tbe
fact, I might add. U.S. Securides and
Exchange C!!ommission inquiries followed,
stock prices plunged and shareholders filed
suit. Throughout tliese unsettling events,
KKD condnued o}iening stores, a record 99
in 2(X)4 alone. In February 2(X)5, the company
announced that the U.S. Attorney's Office in
New York was also getdng involved.
Livengood was gone. By xMay 2005, Krispy
Kreme shares were trading around USS6.

8. So, not only had we climbed into bed with
a group of individuals more concerned alxjut
bitdng outrageous Wall Street growth objec-
dves than building lasting enterprises based on
sound strategic growth, we also didn't stand
up and say, "This isn't w<jrking." VJit did xxy,
but in hindsight we didn't yell loud enough.
We strategically sought wholesale partners
iind set up a great network, but we knew in our
hearts - at least I knew - that we were sound-
ing the death knell for the brand once we
exiiaiided too fer. At our peak, we had 15 hot
doughnut factory stores in Ontario, Quebec
FRASER MILNER C A S G R A I N U P
MONTREAL • OTTAWA • TORONTO • EDMONTON •
OALGARY • VANCOUVER • NEW YORK
BCBusiness November 2005 3 3
and Alberta, three 'fresh shops' (small stores
selling Iresh doughnuts made at a nearby
factory store) in downtown Toronto pliLS 400
off-premises wholesale accounts.
Sdll, we made our own mistakes at
KremeKo, which brings us to a fourth key
entrepreneurial lesson: think big but act
small. W e created a private C a n a d i a n
company and financed our growth through
private investors. T h e n we set ourselves up
as if we were public with an impressive baard

9. of directors and advisory board complete
with audit and governance committees.
U n f o r t u n a t e l y , we u n d e r f u n d e d the
enterprise and eventually had to raise three
Rounds of capital. Private investment is a great
way to finance, but each round cost us tens
of thousands of dolhirs, diluted our equity and
business - as have Air Canada and others -
we would have been in control. W e would
have taken care of our people and our partner
suppliers. W e bad the funds in the bank at
the dme and in hindsight, willing financial
partners in Scodabank and G E Capital.
Unfortunately, we put our trust in KKD
instead and believed beyond hope that all
would be well.
But all was not well and I had known 'the
call' was coming for several weeks. As a mem-
ber of the KremeKo leadership team, I
received not only our sales but also regular
cash-flow information. T h e night before,
Krispy Kreme had stated their intendon to
force our company, KremeKo, into CXl̂ A.
They had been to the Ontario Superior Court
earlier that day and had axed the rest ofthe
Three minutes were all it took to wipe out five years
of exhausting work and a personal investment of hundreds
of thousands of dollars without so much as an
acknowledgement ofthe effort or accomplishments
icfocusetl limited resources on financing
rather than growth and operadons. My take:
a first blush at financial needs ought to be 50

10. per cent bighcr than what your business plan
calls for.
Impressive as a board may be in terms of
individuals - and ours was - unless your plans
are to go public, I'd advise against a Imard of
directors. Instead, tap ijito the exjjerdse and
resources of a solid advisory board. ITiink big
but act small - especially when you truly are
a start-up. This also applies to organizadonal
structure. We built a solid team, but we
ended up having to carry out two layoffs
bef<ire the CCAA (Companies' Creditors
Arrangement Act) restructuring. W e ought
to have delayed some of the infrastructure
and pared back our objccdvcs by building
during or after the growth curve rather than
before it. This doesn't mean that's the opti-
mum approach for all situadons, but it should
be given due consideration. Each layoff was
a blow to the confidence of the young and
enthusiasdc company we'd worked hard to
create from tbe incepdon of KremeKo.
One of the toughest lessons of all
pertained to CCAA itself. Our VP of finance,
Jeff Sarfin, first uttered the Act's name in late
2004 and again early in 2005. At the dme, our
leadership team knew litde about CCAA. W e
ought to have given it significandy more air-
dme. Big warning: identify your nearest
emergency exit. If we'd put ourselves into
CCAA by asking the Ontario Superior Court
for protecdon against creditors while we
restructured what was still a salvageable

11. KremeKo leadership team. I had been to a
local lawyer and knew enough to ask two ques-
dons: did KKD ask the ajurt to pay statutory
terminadon pay and could I see the court
order? Bob Vaughn, KKD's VP and chief
restructuring officer for KremeKo, ans-wered
the quesdons. "No" and "Yes, the order will
be available on the Emst & Young weljsite on
Monday." Roly, who remained my comrade
and ally through the entire ordeal, came back
on and asked if I had any other quesdons. "No
... it was a helluva ride" was all I had to say.
T h e endre call took three minutes.
Krispy Kreme Doughnuts is currendy
being run by Kroll Zolfo Cooper (KZC) -
corporate restructuring specialists also dealing
with Enron. They are ruthless. Thttse three
minutes were all it took to wipe out more than
five years of exhaasdng work antl a personal
investment of hundreds of thousands of dollars
without s<3 much as an acknowledgement of
the effort or the accomplishments. With
BCrispy Kreme/KZC in control, we didn't even
get statutory tenninadon pay let alone
severance. What a lesson that was.
Would I do this again? In a heartiieat. Oh,
I'd do it differendy all right, but it was like
a downhill racing course and I wouldn't have
missed the thrill of that ride. It was an
exhilarating experience during which I
learned an enormous amount, worked with
some fantasdc people, successflilly latinched
and grew a brand, ncgodated some solid deals
and helped create a company from the

12. ground up. I'm lighter in the wallet but older,
wiser and better prepared for the next ride. •
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Abstract (Summary)
In an interview, Mr. [Stephen F. Cooper] blamed Krispy
Kreme's problems, in part, on revenue shortfalls and on
"explosive growth" that had outstripped the company's support
structures. But, he said that if distressed situations at
companies were ranked on a 1-to-10 scale with 10 as "horrible,"
Krispy Kreme "is nowhere near a 10." He said
Krispy Kreme has positive free cash flow, and tremendous
brand equity.

13. Mr. [Scott A. Livengood] couldn't be reached for comment.
Though he has given up even his board seat, he is to be
paid $45,833 a month for at least six months as a Krispy Kreme
consultant. In a memo distributed to employees, Mr.
Livengood called his tenure at Krispy Kreme "an incredible
business and life experience," but said he had "decided
the time has come to explore new possibilities." He added, "I
believe I can best serve Krispy Kreme as an advisor,
consultant and cheerleader."
In recent years, Mr. Livengood cashed in on Krispy Kreme's
expansion, disposing of about 853,000 shares for $32
million, according to Thomson Financial. He still had options
on 1.4 million shares as of yesterday, according to a
securities filing. Mr. Livengood sold 235,500 shares in August
2003, a week after the company's shares hit their all-
time high, despite having said nine months earlier he wouldn't
sell more stock "for at least a year." He has said the
sale was "totally consistent" with the "spirit" of his pledge.
Full Text (1523 words)
Copyright (c) 2005, Dow Jones & Company Inc. Reproduced
with permission of copyright owner. Further
reproduction or distribution is prohibited without permission.
The man who transformed Krispy Kreme Doughnuts Inc. from a
sleepy regional company to a highflying and
growth-hungry national phenomenon was pushed out by
directors amid slumping sales, accounting woes and a
federal probe.
To succeed Chairman and Chief Executive Scott A. Livengood,
who started at Krispy Kreme as a personnel trainee
and became CEO in 1998, the company hired Stephen F.
Cooper, a restructuring expert at turnaround firm Kroll

14. Zolfo Cooper LLC. Mr. Cooper will split his time between
Krispy Kreme and the other troubled company where he is
currently working as an interim CEO: Enron Corp.
With the switch came more bad news, as Krispy Kreme reported
that average weekly sales at its factory stores,
which make doughnuts for retail and wholesale customers,
tumbled 18% in the eight weeks ended Dec. 26 from a
year earlier. The company warned the results could result in a
loss for the current quarter.
Shares of the onetime stock-market darling jumped 10%, or 89
cents, to $9.61 in 4 p.m. trading on the New York
Stock Exchange yesterday. But they closed at an all-time low of
$8.72 just last week. Just 18 months ago, shares
of the doughnut maker, which went public at a price of $5.25
apiece in 2000, were nearing $50 at their all-time high.
In an interview, Mr. Cooper blamed Krispy Kreme's problems,
in part, on revenue shortfalls and on "explosive
growth" that had outstripped the company's support structures.
But, he said that if distressed situations at
companies were ranked on a 1-to-10 scale with 10 as "horrible,"
Krispy Kreme "is nowhere near a 10." He said
Krispy Kreme has positive free cash flow, and tremendous
brand equity.
Yesterday's announcements were the climax of months of
mounting woes for the Winston-Salem, N.C., company.
The regional favorite, founded in 1937, had fewer than 100
stores in 1996 when it opened its first store in
Manhattan, a marketing move that helped its glazed doughnuts
win cult status and fueled torrid growth. Today, it
operates 435 stores in 45 U.S. states and four other countries,
and sells doughnuts in some 20,000 supermarkets,
convenience stores, truck stops and other outside locations.

15. Databases selected: Wall Street Journal
Once-Hot Krispy Kreme Ousts Its CEO Amid Accounting Woes
Mark Maremont and Rick Brooks. Wall Street Journal. (Eastern
edition). New York, N.Y.: Jan 19, 2005. pg. A.1
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But as Krispy Kreme doughnuts became more widely available,
their popularity frittered away. With its sales
dropping, and facing accounting probes from the Securities and
Exchange Commission and a special board
committee, Krispy Kreme warned two weeks ago that it would
restate results for its fiscal year 2004 because of
accounting errors.
Mr. Livengood's exit, decided during a Monday night board
meeting that stretched past midnight, came as the
company negotiated an extension until Jan. 24 on a $150 million
bank credit facility that has been in technical
default since Friday.
While making it clear that the board had acted, Krispy Kreme
said in a statement that Mr. Livengood, 52 years old,
had "retired" as part of a "number of important actions to
address the company's current situation." It also said it
might close some additional stores to stem the bleeding, causing
charges that it said would "largely" be noncash.

16. Mr. Livengood couldn't be reached for comment. Though he has
given up even his board seat, he is to be paid
$45,833 a month for at least six months as a Krispy Kreme
consultant. In a memo distributed to employees, Mr.
Livengood called his tenure at Krispy Kreme "an incredible
business and life experience," but said he had "decided
the time has come to explore new possibilities." He added, "I
believe I can best serve Krispy Kreme as an advisor,
consultant and cheerleader."
Mr. Cooper, 58, said he planned to produce a detailed
turnaround blueprint within 90 days, and expects to have his
first meeting with Krispy Kreme's bankers today. He said he
expects the banks, led by Wachovia Corp., to be
"reasonable" in extending the company's credit line, and argued
that it's in their best interest to do so.
While declining to offer specific actions he might take, Mr.
Cooper said the board's announcement that stores might
need to be closed seemed sensible. "The real issue, if you've got
stores that are marginal . . . is how much effort do
you have to put into them, to fix them," he said. "You have to
separate the good from the not-so-good."
In Mr. Cooper, Krispy Kreme is getting a high-profile
turnaround executive. Besides Enron, Mr. Cooper has worked
on the bankruptcy proceedings of Laidlaw Inc., Morrison
Knudsen Corp., Sunbeam Corp. and Federated
Department Stores Inc., among others.
Mr. Cooper is chairman of Kroll Zolfo Cooper, a unit of risk
consultant Kroll Inc., which was bought last year by
insurance broker Marsh & McLennan Cos. He became Enron's
CEO in early 2002, not long after the energy firm
filed for Chapter 11 bankruptcy protection. He has generally

17. won praise for calming panicky employees, soothing
angry creditors and eventually formulating a plan to split the
company into three smaller parts. Enron officially came
out of bankruptcy in November, but still is cleaning up past
issues and hasn't finished distributing assets.
Mr. Cooper plans to remain interim CEO of Enron as the
restructuring job winds down while running Krispy Kreme.
An Enron spokeswoman declined to comment on his new role. A
spokeswoman for Kroll Zolfo Cooper said it is not
uncommon for one of its executives to juggle two assignments
simultaneously. At the time Mr. Cooper started at
Enron, she noted, he was still vice chairman of Laidlaw, a
transportation company and owner of bus company
Greyhound, which was near to emerging from bankruptcy.
However, Mr. Cooper's dual role later caused a minor stir, when
the SEC objected to the contract that spelled out
what Enron would be paying him and his firm. Among the SEC's
concerns was that Mr. Cooper was a "part-time
acting CEO at a salary of over $1.3 million" while having the
power to hire many of his own associates at high
salaries. The dispute was resolved after Kroll Zolfo Cooper
accepted a less lucrative deal, which the spokeswoman
said was common in bankruptcy cases.
Another Kroll Zolfo Cooper executive, Steven Panagos, will
become Krispy Kreme's president and chief operating
officer, and plans to spend about 80% of his time on the
doughnut retailer.
Krispy Kreme declined to comment on the fee being paid to
Kroll Zolfo Cooper. But in the company's press release,
board member James H. Morgan, who was elected chairman
after Mr. Livengood's departure, said employees,
franchisees, vendors and shareholders "will be excited with the

18. energy, experience and vision which Mr. Cooper
and the KZC team will bring to the company."
Executing a turnaround at Krispy Kreme will be a challenge.
Even if the company buys breathing room by
renegotiating its bank lines, it faces declining average sales at
its own stores and an unhappy and financially
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stressed group of franchisees. Despite its suggestions that it
might close some weak stores, landlords aren't likely
to let the company out of high-priced leases without the
payment of cash, which is not in great supply at Krispy
Kreme.
As of August, Krispy Kreme reported it had $19 million in cash
on hand and $130 million in debt and long-term
obligations. Earlier this month, the company said it may require
additional cash if it is called upon to honor
guarantees of franchisee debt, and revealed it is on the hook for
$52.3 million of franchisee debt, including $16.7
million owed by franchisees whom it said "are not in
compliance" with their debt covenants.
For his part, Mr. Livengood had been distracted in recent
months by the company's brewing legal problems. He
also had been without a chief operating officer since last
summer, when John W. Tate left the company to take the
same position at retailer Restoration Hardware Inc.

19. As CEO, Mr. Livengood had declared himself a Krispy Kreme
believer long before lines started forming outside
stores where neon "Hot Doughnuts Now" signs blaze to
announce a fresh batch. In the past he has said he chose a
plate of Krispy Kreme doughnuts instead of cake for his 16th-
birthday party. His 2002 wedding included a cake
made out of 720 doughnuts.
In recent years, Mr. Livengood cashed in on Krispy Kreme's
expansion, disposing of about 853,000 shares for $32
million, according to Thomson Financial. He still had options
on 1.4 million shares as of yesterday, according to a
securities filing. Mr. Livengood sold 235,500 shares in August
2003, a week after the company's shares hit their all-
time high, despite having said nine months earlier he wouldn't
sell more stock "for at least a year." He has said the
sale was "totally consistent" with the "spirit" of his pledge.
As Krispy Kreme's growth began to slow early last year, Mr.
Livengood initially blamed the popularity of low-
carbohydrate diets. But his credibility was strained with
investors over his failure to disclose that one seller of the
company's Northern California franchise, which it bought in
2004, was his ex-wife, whose share was valued at
about $1.5 million. Questions about that transaction, and about
how Krispy Kreme accounted for its acquisition of
another franchise in Michigan, were raised in a May article in
The Wall Street Journal.
Indexing (document details)
Subjects: Chief executive officers, Accounting, Stock prices,
Terminations
Classification Codes 2120, 8380, 9190

20. People: Livengood, Scott
Companies: Krispy Kreme Doughnut Corp (NAICS: 311811,
533110, 722213 )
Author(s): Mark Maremont and Rick Brooks
Document types: News
Publication title: Wall Street Journal. (Eastern edition). New
York, N.Y.: Jan 19, 2005. pg. A.1
Source type: Newspaper
ISSN: 00999660
ProQuest document ID: 780653351
Text Word Count 1523
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The Hole Story: How Krispy Kreme became the hottest brand in

21. America.
If you've never sampled a Krispy Kreme, we should get one
thing straight: These doughnuts—particularly the original
glazed served hot—are amazingly good. They are loved equally
by 5-year-olds and 75-year-olds; by whites, blacks, Asians, and
Hispanics; by New Englanders and Southerners; by Californians
and New Yorkers.
Sure, Krispy Kreme is still relatively small compared to Dunkin'
Donuts. But, boy, does it have oomph. There's the power of the
Krispy Kreme brand. No, it's not as recognizable as Coke or
McDonald's—yet. Still, despite the fact that it is a fraction of
the size of those icons and spends zilch on national advertising,
the company's retro red, white, and green logo is rapidly
becoming part of American popular culture.
No question that Krispy Kreme is hot, but is the company for
real? Is it a great American growth story or merely a culinary
flash in the pan? Those are not idle questions. Not for the many
folks who have been hired by the company over the past three
years, nor for the companies that supply Krispy Kreme, nor for
those who have invested in its yeasty stock. But the question of
Krispy Kreme's viability touches on something more significant
than all that. It has to do with the American dream. It may seem
grimly amusing that in a time of economic pain, corporate
scandals, and troubles overseas, this company should be
growing so explosively. But the Krispy Kreme story is about far
more than comfort food—the company's wild success in this
hard environment is a tale of shrewdness and original thinking.
The man behind Krispy Kreme's dramatic ascent is its CEO,
Scott Livengood (pronounced Saturday Night Live-ngood).
Livengood, 50, has seen just about everything. Yes, he's at the
helm of a high-end growth company, but to hear him tell it, his
job is actually easier now. "Running a public company growing
like this—that's nothing," he says. "I'm enjoying myself." The

22. Krispy Kreme faithful have gathered for the company's annual
meeting in the Adam's Mark Hotel. Before long, Livengood
marches through the company's financial vitals. Then the fun
begins. Livengood gives a year's supply of doughnuts to the
oldest and to the youngest attending shareholders, and to the
shareholder who has traveled the farthest (from Finland). But he
spends even more time talking about the company's charitable
works and, in long citations, singles out six employees who've
helped their churches, Little Leagues, and communities. To the
folks at Krispy Kreme, this isn't just about doughnuts; it's a
calling.
Krispy Kreme brings in money three ways. It makes 65% of its
revenue selling doughnuts directly to the public through its
company-owned stores. Another 31% of its sales come from
selling flour mix, doughnut-making machines, and sundry
doughnut supplies to its 186 franchised stores. And it gets about
4% of its revenue from franchisee licenses and fees. The
company also provides millions of doughnuts at a discount to
charitable organizations, which then sell them for fundraising.
It's hard to think of a brand that's been in more movies and TV
shows—How to Lose a Guy in Ten Days, Bruce Almighty, The
Sopranos, Will & Grace—than Krispy Kreme this decade. "This
is a marketing company," says Bowles. "Scott Livengood once
told me if a finance guy ever gets a hold of Krispy Kreme, sell
every share."
Krispy Kreme's IPO in April 2000—right at the peak of the tech
boom—has been a sweet success. The stock ended the first day
of trading at $9.25, split adjusted, and today sells for $37 and
change. That's up four times, while the market is off some 30%
during the same period. Not that there haven't been a few bumps
in the road. The company got major grief for entering into a $35
million lease to fund the new Illinois mixing plant back in 2001.
This off-balance-sheet financing raised eyebrows during the
days of Enronitis, and the company terminated the lease a year

23. later. There have also been governance problems, like
partnerships that allowed company management to invest in its
stores, not enough outside directors, and loans to managers.
(Those issues have since been rectified.) And Livengood has
been criticized for selling some $15 million of company stock
since the IPO.
Whether you think Krispy Kreme is a buy or a sell at $27 or $37
or $57, here's the thing: unless the fat police run riot across this
land, Krispy Kreme is here to stay. It isn't some fly-by-night
dot-com. There's 66 years of history here. It's a product that
people not only love but understand. The world is always filled
with unknowns, never more so than right now. With all that's
wrong out there, sometimes it's easy to lose focus on the big
picture. So take a second and ask yourself: Is the American
dream still alive? Is Krispy Kreme for real?
KRISPY KREME DOUGHNUTS INC
1998
1999
2000
2001
2002
1998
1999
2000
2001
2002
Sales
180.880
220.243
300.715
394.354
491.549
100.0%
100.0%

24. 100.0%
100.0%
100.0%
Cost of Goods Sold
157.641
188.903
250.690
316.946
381.489
87.2%
85.8%
83.4%
80.4%
77.6%
Gross Profit
23.239
31.340
50.025
77.408
110.060
12.8%
14.2%
16.6%
19.6%
22.4%
SG&A
10.897
14.856
20.061
27.562
28.897
6.0%
6.7%
6.7%
7.0%
5.9%

25. Operating Income Before Depreciation
12.342
16.484
29.964
49.846
81.163
6.8%
7.5%
10.0%
12.6%
16.5%
Depreciation & Amortization
4.278
4.546
6.457
7.959
12.271
2.4%
2.1%
2.1%
2.0%
2.5%
Operating Profit
8.064
11.938
23.507
41.887
68.892
4.5%
5.4%
7.8%
10.6%
14.0%
Interest Expense
1.507
1.525

26. 0.607
0.337
1.781
0.8%
0.7%
0.2%
0.1%
0.4%
Non-Operating Income/Expense
-11.836
-0.807
0.883
0.996
-12.338
-0.065
-0.004
0.008
0.008
-0.016
Pretax Income
-5.279
9.606
23.783
42.546
54.773
-2.9%
4.4%
8.1%
11.1%
11.6%
Total Income Taxes
-2.112
3.650
9.058
16.168
21.295

27. -1.2%
1.7%
3.0%
4.1%
4.3%
Net Income
-3.167
5.956
14.725
26.378
33.478
-1.8%
2.7%
4.9%
6.7%
6.8%
KRISPY KREME DOUGHNUTS INC
ASSETS
1998
1999
2000
2001
2002
1998
1999
2000

28. 2001
2002
Cash & Equivalents
4.313
3.183
25.129
37.196
55.179
4.6%
3.0%
14.7%
14.6%
13.4%
Net Receivables
15.607
21.228
24.733
41.216
48.282
16.7%
20.2%
14.4%
16.1%
11.8%
Inventories
9.886
9.979
12.031
16.159
24.365
10.6%
9.5%
7.0%
6.3%
5.9%
Prepaid Expenses

29. 1.529
3.148
1.909
2.591
3.478
1.6%
3.0%
1.1%
1.0%
0.8%
Other Current Assets
2.445
3.500
3.809
4.607
9.824
2.6%
3.3%
2.2%
1.8%
2.4%
Total Current Assets
33.780
41.038
67.611
101.769
141.128
36.2%
39.1%
39.4%
39.9%
34.4%
Gross Plant, Property & Equipment
82.353
93.243
116.896

30. 156.484
252.770
88.3%
88.8%
68.2%
61.3%
61.6%
Accumulated Depreciation
28.778
32.659
38.556
43.907
50.212
30.8%
31.1%
22.5%
17.2%
12.2%
Net Plant, Property & Equipment
53.575
60.584
78.340
112.577
202.558
57.4%
57.7%
45.7%
44.1%
49.3%
Long Term Investments
0.000
0.000
22.572
16.100
11.215
0.0%

31. 0.0%
13.2%
6.3%
2.7%
Intangibles
0.000
0.000
0.000
16.621
48.703
0.0%
0.0%
0.0%
6.5%
11.9%
Other Assets
5.957
3.336
2.970
8.309
6.883
6.4%
3.2%
1.7%
3.3%
1.7%
TOTAL ASSETS
93.312
104.958
171.493
255.376
410.487
100.0%
100.0%
100.0%
100.0%

32. 100.0%
LIABILITIES
Current Portion of Long term Debt
2.400
2.400
0.000
0.731
3.301
2.6%
2.3%
0.0%
0.3%
0.8%
Notes Payable
0.000
0.000
3.526
12.978
12.275
0.0%
0.0%
2.1%
5.1%
3.0%
Accounts Payable
11.536

33. 13.106
14.697
12.095
14.055
12.4%
12.5%
8.6%
4.7%
3.4%
Taxes Payable
1.155
0.000
0.041
0.000
0.000
1.2%
0.0%
0.0%
0.0%
0.0%
Accrued Expenses
8.784
14.080
17.862
24.647
19.496
9.4%
13.4%
10.4%
9.7%
4.7%
Other Current Liabilities
1.518
0.000
2.042
2.082

34. 10.560
1.6%
0.0%
1.2%
0.8%
2.6%
Total Current Liabilities
25.393
29.586
38.168
52.533
59.687
27.2%
28.2%
22.3%
20.6%
14.5%
Long Term Debt
18.620
20.502
0.000
3.912
57.188
20.0%
19.5%
0.0%
1.5%
13.9%
Other Long term Liabilities
25.672
27.617
7.646
15.176
77.448
27.5%
26.3%

35. 4.5%
5.9%
18.9%
EQUITY
Common Stock
4.670
4.670
85.060
121.052
173.112
5.0%
4.4%
49.6%
47.4%
42.2%
Capital Surplus
8.706
8.258
0.000
-0.186
-0.119
9.3%
7.9%
0.0%
-0.1%
-0.0%

36. Retained Earnings
28.871
34.827
40.619
66.801
100.359
30.9%
33.2%
23.7%
26.2%
24.4%
Common Equity
42.247
47.755
125.679
187.667
273.352
45.3%
45.5%
73.3%
73.5%
66.6%
TOTAL EQUITY
42.247
47.755
125.679
187.667
273.352
45.3%
45.5%
73.3%
73.5%
66.6%
TOTAL LIABILITIES & EQUITY
93.312
104.958

37. 171.493
255.376
410.487
100.0%
100.0%
100.0%
100.0%
100.0%
Total Employees (000)
@NA
3,016
3,200
3,632
3,913
COMMON SHARES OUTSTANDING
1.868
1.868
51.832
54.271
56.295