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Second-Quarter Dough Fell at Krispy Kreme

By Lauren Bayne Anderson
Washington Post Staff Writer
Friday, August 27, 2004; Page E01

Krispy Kreme Doughnuts Inc., an investor favorite whose fortunes have soured in recent months, reported disappointing second-quarter earnings yesterday and saw its stock price drop by 10 percent.

Company officials said they would adjust their strategy, cutting back on plans for opening new stores. They declined to offer projections for future earnings.


The company plans to introduce more products this fall, including a chocolate glazed doughnut, glazed doughnut holes and a reloadable spending card. (Lawrence Jackson -- AP)

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North Carolina-based Krispy Kreme reported net income of $5.8 million, or 9 cents a share, compared with $13 million, or 21 cents a share, in the same period a year ago. Sales rose 11.5 percent, to $177.4 million from $159.2 million last year, the company said.

The stock price fell $1.59 to close at $13.77 yesterday, far off its all-time high of $49.74 a year ago.

After going public in 2000, the doughnut maker -- known for its warm, glazed confections -- posted steady earnings and its stock price climbed. But in May, the company reported a first-quarter loss of $24.4 million, blaming sales on the low-carb diet craze.

And the stock price took a sharp hit in July after the company announced that it is the subject of an informal Securities and Exchange Commission inquiry. The Wall Street Journal reported that some accountants thought Krispy Kreme had been extremely aggressive in the way it accounted for the buyback of a Michigan franchise. The company recently announced the departure of its chief operating officer, John W. Tate.

Chief executive Scott A. Livengood said in a conference call yesterday that the low-carbohydrate diet craze "is and remains a significant issue."

High fuel prices also contributed to poorer-than-expected profit, he said. "The spiraling cost of fuel affects our company in a number of ways," Livengood said, adding that lower discretionary income meant customers were doing less driving to Krispy Kreme stores. "Also, our fuel cost had a direct impact on our costs of distribution."

Livengood said the company has historically been able to offset these factors by opening new stores, but this is no longer the case, he said. In May, the company had estimated it would open 100 new stores next year, but it now says it plans to open about 75 stores and close some underperforming locations.

"There's no point in opening stores if we aren't able to achieve the full measure of their potential," Livengood said.

Livengood said the company will step up sales by rolling out several products this fall, including a chocolate glazed doughnut, glazed doughnut holes and a reloadable Krispy Kreme spending card.

Additionally, the company will intensify efforts to build its beverage sales.

"We don't know if low-carb and broader dietary issues will exist, but we're assuming they will as we formulate our plan," Livengood said.

John S. Glass and Jeffrey D. Farmer, at CIBC World Markets, told clients yesterday that the company's lack of future earnings projections was not a good sign.

"With few fundamental positives on the horizon, an unclear turnaround strategy, an ongoing SEC investigation and management departures, we're compelled to lower our opinion," they wrote. The second-quarter results "showed alarming erosion in margins . . . far greater than anticipated," they wrote.

But Glenn M. Guard, an analyst with Legg Mason, said the company's decision to scale back the number of stores it will open, and even closing a few, will help in the long run.

The closings indicate "management is unwilling to let underperforming assets linger -- a good sign," he wrote in a report to clients.


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