Tar Heel Tattler - August 2007

Krispy Kreme keeps cutting dough knot
By Mark Kemp

Things have gone from hot to healthier to cold and creamy to crumbly at Winston-Salem-based Krispy Kreme Doughnuts Inc. In early March, the brand long defined by its warm, glazed doughnuts unveiled a whole-wheat, lower-calorie version aimed at health-conscious customers. Then in June, it went the opposite direction, testing a line of ice-cream products. That may seem ironic for a company whose former chief executive three years ago blamed slumping sales on the low-carb diet craze. In July, it began selling a multigrain cake doughnut.

CEO Daryl Brewster, who joined Krispy Kreme in March 2006, says, “Doughnuts are the core of our business, but what we’re hearing from our customers today is that they also want healthier alternatives. At the same time, people love the treatlike experience of Krispy Kreme. So the idea of a Krispy Kremey milkshake just seems like a natural for us.”

The company has struggled since May 2004, when shares dropped 30% after it warned that profit would fall 10% that year. It had been expanding wildly. Shareholder lawsuits and a U.S. Securities and Exchange Commission investigation into accounting practices led to the departures of two top executives, including CEO Scott Livengood, who resigned in early 2005. By that October, the stock had tumbled to just $4.40 a share, down from $48.90 little more than two years earlier.

The company has since brought its financial statements up to date, but Brewster has plenty of work ahead. In first quarter of fiscal 2008, which ended April 9, Krispy Kreme lost $7.4 million, worse than the $6 million it lost in the quarter the previous year. Brewster blames the losses on refinancing and a write-down of assets, but sales for the quarter fell $8.5 million to $110.9 million. “If you look through the financials, we did generate cash. We’re not satisfied, but we’re encouraged. This is a turnaround.”

Maybe so, but its stock is still struggling. In early July, it was trading at $9.30, down from its 52-week high of $13.93. It started selling the seven-grain doughnut that same month. “We still have some cleaning up to do at Krispy Kreme, and it all starts with a great doughnut.” Maybe the roughage will help.٬

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