Krispy Kreme’d

Stocks are up again today. It looks like we’re headed to our sixth straight rally.
I noticed an article in Business Week on the turnaround of Krispy Kreme Doughnuts (KKD), or more accurately, the lack of a turnaround. This is a theme I’ve talked about before: Companies don’t turn around so easily.
There was a time when Krispy Kreme was one of the most popular stocks around. Quarter after quarter the doughnut shop reported fantastic results. Wall Street loved them and everyone wanted to what was the secret of their success?
Lying!
The company overstated earnings by $22 million (at first, they blamed the Atkins Diet). Once the glaze it the fan, the stock plunged from $50 to $5. So Krispy brought in Stephen F. Cooper, a well-known turnaround specialist, as their new CEO.
Things aren’t go so well. The company hasn’t filed a quarterly earnings report since last October. That’s really not a good thing. In fact, it can get you delisted.

What’s more, two franchisees have filed bankruptcy, and three others have sued. Worst of all, sales remain in a downward spiral. In an Aug. 10 filing, Krispy Kreme said that, for the fiscal quarters ended in April and July, average store sales fell 21% and 18%, respectively. Meanwhile, Krispy Kreme keeps closing stores. The chain, which earlier this year boasted 440 outlets, has shrunk to 349. Small wonder that its shares, which closed on Nov. 22 at $5.45 — 89% below its 2003 peak — remain among the more heavily shorted stocks on the Big Board.
Cooper remains upbeat about Krispy Kreme’s prospects. In his first interview since his arrival last January, Cooper told BusinessWeek on Nov. 18 that none of the company’s short-term challenges was insurmountable. He’s confident the current lenders, who stepped forward with $225 million in April, will grant him time to fix the problems even if his auditors can’t make enough headway on Krispy Kreme’s backlog of missed earnings reports by the December deadline.
“The lenders lent us the money without financials being available,” says Cooper. “That gives you a sense of the value they see in Krispy Kreme.”
PUSHING COFFEE. Longer term, Cooper remains sure that Krispy Kreme will be a growth stock again, so much so that he agreed to take his “success fee” not in cash, but in 1.2 million warrants, convertible into shares at $7.75 apiece. Cooper says Krispy Kreme has not scratched the surface of what it can achieve overseas. Even in the U.S., he sees plenty of room to expand. “We are by no stretch of the imagination approaching the saturation point for our retail outlets,” he says.
Still, it’s clear that Cooper has lowered Krispy Kreme’s once-lofty ambitions. Whereas previous Chief Executive Scott Livengood built expensive 4,000-square-foot “doughnut theaters,” as he called them, where patrons could view freshly glazed doughnuts rolling down an assembly line, Cooper’s ambitions are much more modest. Franchisees say that current management is looking to build more cost-efficient units that, at 1,500 to 2,000 sq. ft., are more akin to a small doughnut counter.
Franchisees also say that Cooper & Co. intend to promote the sale of coffee, a high-margin item that accounts for 50% of Dunkin’ Donuts’ revenues but just 10% at Krispy Kreme. “Things have finally started moving in the right direction,” says John C. Metz, a Pennsylvania franchisee and Cooper fan.

Shhh…don’t tell Starbucks (SBUX). So what’s the future for KKD?

More broadly, Harlan Platt, a professor at Northeastern University who studies corporate turnarounds, notes that most highfliers find it difficult to recreate their old growth rate after crashing back to earth. “I give it a 10% chance that Krispy Kreme will ever regain the luster it once had,” says Platt. “I put them in the same category as Hard Rock Cafe. They had their moment, but the lines are no longer out the door.”

Posted by on November 23rd, 2005 at 12:31 pm


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