Krispy Kreme Can't Glaze Over Bad News

December 1, 2004
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Krispy Kreme Can’t Glaze Over Bad News
Once one of the hottest stocks on Wall Street, Krispy Kreme Doughnuts, is receiving a winter-like reception from investors who are growing weary of the donut company’s slumping sales, ongoing accounting investigations, store closings and questionable practices involving its franchisees.
In addition to posting losses for the third quarter in a row, the beleaguered donut maker’s top executives declined to take impromptu questions from analysts during a recent conference call because of pending government investigations and a flurry of pending lawsuits facing the company from disgruntled investors. Rather, the executives asked analysts to submit written questions, to which the company posted answers, more or less, on its Web site.
In unaudited financial results, the Charlotte, N.C.-based donut chain and wholesaler reported $3 million in losses for the third quarter ending Oct. 31, compared with net income of $14.5 million for the same quarter year ago.
Total sales for the quarter rose only 1.4% to $170.1 million, well below its historic double-digit growth in the past few years. Total sales include revenue from company stores, franchise operations and Krispy Kreme Manufacturing and Distribution (KKM&D), which supplies the store chain with mixes for making donuts.
Revenue from its franchise operations decreased 5.4% to $6.2 million while KKM&D sales 15.7% to $42.7 million.
Systemwide sales, which include revenue from both company and franchise stores, rose 4.7%. However, the picture is much different if new store revenues are excluded. In fact, sales at existing stores indicate that Krispy Kreme may have lost some of its mystique with consumers. The company noted systemwide sales for stores opened at least one year declined 6.4% while it tumbled 6.2% at those company-owned stores that have been open at least 12 months.
Another sign that the once fast-growing company has come down to reality, Krispy Kreme opened 15 new stores during the quarter, but it closed nine others. Across its entire system, the company and its franchises operate 429 stores, including 393 factory stores and 36 satellites.
Overall, the off-premise business of Krispy Kreme Doughnuts accounts for about 50% of its sales. In response to an analyst’s question, the company defended the amount of off-premise sales, stating that they were “synergistic” to factory store operations.
“Based on research conducted in the fall of 2003, nearly 60% of our factory store customers only buy Krispy Kreme [donuts] in factory stores. For them, the experience of watching the [donut] theater and enjoying a hot [donut] with family and friends are why they visit our factory stores,” the company noted in written comments.
Convenience is the main driver for the remaining 40% of customers who buy Krispy Kreme donuts in grocery stores and other off-premise locations, the company stated.
In news impacting its bottom line, Krispy Kreme reported that it had to spend $3 million in fees during the quarter because of a Security Exchange Commission investigation into its accounting practices and similar matters, including pending lawsuits, an audit committee investigation, a special committee investigation and related work by independent auditors. The company expects ongoing charges against earnings in subsequent quarters until many of the matters are resolved.
Moreover, the chain noted it had set aside $2 million in possible expenses related into accounting issues involving two franchises. The company has declined to name the franchises that are involved in the audit matter and refused to comment on any number of ongoing investigations.
The SEC probe and the subsequent collapse in its stock price in 2004 has prompted class-action lawsuits from disgruntled investors who were caught by surprise earlier in the year by the sudden turn of events for the one-time darling of Wall Street. Since it had become a public company, Krispy Kreme reported its first loss during the first quarter of this fiscal year.
Meanwhile, for the first nine months of its fiscal year, the donut maker reported a net loss of $21.7 million on sales of $531.9 million compared with a profit of $40.7 million for the same period last year.
Company officials say they’re trying to turn around current negative trends by cutting expenses, adding new mini-stores with hot-donut capabilities and rolling out new products, such as a chocolate-glazed donut and donut holes.
“Clearly, we are disappointed with our third quarter results. We are focused on addressing the challenges facing the company and regaining our business momentum,” said Scott Livengood, chairman, president and CEO.
White Flour Products Dent Weston’s Earnings
New products, aggressive promotions and the increasing popularity of whole-grain, premium products boosted top-line sales for the third quarter at Weston Foods, the producer of Thomas’ muffins, Entenmann’s sweet goods and breads sold under such brands as Arnold, Brownberry and Stroehmann’s,
On the other hand, operating income declined for the quarter partly because of declining sales in traditional white flour-based bakery products and because of charges affiliated with the closing of several bakeries, the company reported.
Weston Foods, the Toronto-based division of George Weston Ltd., noted that the company continues to undertake a series of cost-reduction initiatives to ensure a low-cost operating structure.
During the third quarter of 2004, the company closed its Northlake, Ill., and Buffalo, N.Y., bakeries and consolidated two bakery facilities into one in Ontario, Canada. Although Weston abandoned its fresh-waffle business in the United States, the company expanded its presence in Canada with the purchase of Boulangerie Gadoua based in Napierville, Quebec.
Sales growth during the quarter, which included volume and price improvements, positively impacted operating income and margins. Nevertheless, profits were hurt by the negative impact of higher ingredient, energy and employee-related benefit costs as well as increased spending in consumer spending.
The company is in the process of adjusting its overall product mix toward more premium, whole-grain and high-fiber breads that command a higher price and could eventually increase the bottom line in the long run.
However, officials say the company still has too much exposure to the white bread category, and the cost of ingredients and complexity of producing its higher-priced whole-grain breads are negatively impacting the company in the near term. Like many baked sweet good producers, Weston is also experiencing disappointing sales in its Entenmann’s brand as consumers shift away from knife-and-fork products, such as coffee cakes and sheet cakes, toward more single-serve foods, the company reported.
Harty, Keebler Elves’ Creator, Passes Away
William Harty, former vice president of sales and marketing who created the Keebler Elves campaign in 1967, passed away in November. He was 75.
A graduate of the University of Notre Dame, Harty received a Master’s degree in marketing from Northwestern University. The diehard Irish fan worked for Armour and Co. as a marketing director in the food products division. Later, at Keebler, he worked with an advertising agency to develop the campaign that Keebler cookies were baked by elves in a hollow tree.
Survivors include his wife Patricia, two daughters, three sons and four grandchildren.
Voortman wins SIAL Award
Vortmann Cookies received two awards for its trans fat-free cookies at the recent 2004 SIAL International Food Exposition. It was one of the first cookie producers to eliminate trans fat from its cookie line.
The Burlington, Ont.-based company won first prize in the cookie category and another first place for achieving the most points of any product category from Canada.
“We are very pleased to achieve these awards,” said Harry Voortman, co-founder and president. “Removing trans fats from all of our products has been an important goal for us, and we’re grateful the product is appreciated by our customers and now our industry peers.”
The awards were for genuinely innovative products that are commercially successful, the company noted. SIAL is a food show held every two years in France.
IBC to Close Another Aging Production Facility
In the first of what is expected to be many changes by the nation’s largest wholesale-baking company, Interstate Bakeries Corp. will close its 85-year-old plant in Florence, S.C., in February and shift production to company plants in Charlotte and Rocky Mount, N.C. The closing will affect about 200 production employees.
The Florence plant produces breads and rolls sold under several IBC names, including the Wonder and Merita brands. Distribution of IBC products to food stores in throughout South Carolina will not be affected.
“Closing a bakery is a decision we never take lightly. Our employees in Florence have been solid contributors, and we are grateful for their hard work,” said Tony Alvarez, IBC’s chief executive officer. “However, IBC must continue to seek production efficiencies on a national scale. Our entire management team is committed to making IBC more nimble and competitive, and consistent with the best interest of the company and its stakeholders.”
Interstate voluntarily filed for bankruptcy under Chapter 11 of the Bankruptcy Code in September. The company employs about 32,000 people and operates 53 bakeries.
ASB Encourages Bakers To Empower Themselves
The American Society of Baking is urging, “Empower Your People-Empower Yourself” at its annual technical conference, which runs from March 6-9, in Chicago.
In addition to technical papers on emerging technology, food safety and formulating for new products, the conference will host a leadership forum that will focus entirely on health and convenience.
Headlining the forum will be Bruce Peterson, vice president of perishables from Wal-Mart. Peterson will address the mass-merchandiser channel and how Wal-Mart has changed the future of retailing.
In addition, the forum will include a review of current market consumer research, discussions of market trends by two bakery “wizards” and highlights of emerging technologies that offer great potential for delivering what America wants. For example, Lallamand will present a report on “Delivering Health in Unconventional Ways—Using Probiotics and Mineral Enhanced Yeast.”
For more information on the conference, call 866-920-9885 or visit www.asbe.org.

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