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4. In light of your answer to question 3, what accounts for the firm’s recent share price decline?

Based on Exhibit 1, the share price for Krispy Kreme is not declining from 2003 to 2004, however the earnings per share is declining. The decline in earnings per share is based primarily on the increasing net income of the company. The adjustment toward real market value of the firm is also a factor. The $716MM of intangibles on the balance sheet is a serious problem. To put it in perspective, this amount is greater than accumulating the net income of the previous five years. Lastly, the financial reporting liberties Krispy Kreme took, which led to a formal investigation, also served as a primary driver for the share price decline. Additionally, future cash flows and the growth were contributors as well and the company’s strategy in both of these was not well managed. The company grew too quickly and saturated the market, diffusing the product market ability and when expansion plans had been eliminated, the company lost the majority of its capita. Combined with internal mismanagement and a formal investigation launched with analysts revealing poor capital spending, the market response to Krispy Kreme drastically decreased.

There was a decline in the share price because, firstly, the company said to expect fewer earnings because of the low-carbohydrate diet trend and also they had close down few underperforming shops, which was a result of their aggressive store expansion. The main cause of the recent share price decline is when the financial scandals became public. As a result, investors lost confidence in the company.

a. Lower than expected earnings due to low-carbohydrate diet trend in the United States.
b. Divest in Montana Mills
c. New hot doughnut and coffee shops were falling short of expectation, thus Krispy Kreme closed three stores
d. Misrepresentation of sales and earnings through channel stuffing.

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