Share prices of Krispy Kreme Doughnuts Inc. fell almost 16 percent Thursday after the former Wall Street darling announced that it is the subject of an informal inquiry by the Securities and Exchange Commission.
Krispy Kreme, famous for its sticky glazed bakery products, said in a statement that the SEC inquiry "generally concerns" the Winston-Salem, N.C., company's repurchasing of franchises and its announcement in May that it was cutting its earnings forecasts sharply. The company also announced in May that it had posted its first loss since going public in 2000.
Executives said then that the craze for low-carbohydrate diets was cutting into demand for its products. They predicted that same-store sales would grow only a few percentage points this year, instead of the mid- to high-single-digit growth they had been predicting as recently as March. The firm, which has 387 factory stores, including locations in Alexandria, Rockville and Columbia, also scaled back expansion plans. Executives now plan to open 100 new stores in its current fiscal year instead of 120.
Krispy Kreme shares closed at $15.71 on Thursday, down $2.95, or 15.8 percent. The stock has fallen nearly 70 percent since hitting its all-time high of $49.74 last August, including a 29 percent single-day decline on May 7, after the company changed its earnings forecast. Neither the company nor the SEC would give much detail about the inquiry Thursday, but the sharply changed earnings guidance in May raised red flags among investors who were concerned Krispy Kreme might be falling prey to problems stemming from too-rapid expansion, analysts said.
On May 25, the company reported a loss of $24.4 million for the first quarter of its fiscal year and revenue of $184.4 million, compared with profit of $13.1 million and revenue of $148.7 million in the same period of the preceding fiscal year.
"We believe many fundamental problems persist, exclusive of any 'low carb' impact. Declining new store volumes are indicative of a worsening investment model," J.P. Morgan Chase & Co. analysts John W. Ivankoe and Steven Rees wrote to investors Thursday. They have been predicting the stock would under-perform its sector since last summer.
The Wall Street Journal reported earlier this year that some accountants believed Krispy Kreme had been extremely aggressive in the way it accounted for the buyback of a Michigan franchise and had failed to disclose that one of the people who sold a Northern California franchise back to the company was the ex-wife of chairman and chief executive Scott A. Livengood.
Livengood said in a statement Thursday: "Krispy Kreme has no higher priority than the confidence of our shareholders, customers and employees. While we are confident in our practices, we understand and respect the SEC's responsibilities and will continue to cooperate fully throughout this process."
Krispy Kreme bought back the rights to the Michigan market and part of the Northern California market from franchisees that were struggling. The company said it has also embarked on a broader plan to close unprofitable stores. Livengood defended the Michigan deal during a May conference call with analysts, saying it was handled "in accordance with generally accepted accounting principles."
Company spokeswoman Amy Hughes declined to comment further on the inquiry.
SEC spokesman John Nester said the commission never comments on informal inquiries, during which it depends on the company's cooperation. The enforcement staff then decides whether to close the matter without taking further action or to seek subpoena power and open a formal investigation of suspected wrongdoing.