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Krispy Kreme: Diets hurt doughnuts
Chain operator says low-carb craze eats into demand, sees 2005 profit 10% below forecasts.
May 7, 2004: 3:20 PM EDT
By Andrew Stein, CNN/Money staff writer

NEW YORK (CNN/Money) - Is the Atkins diet craze driving a wedge between doughnuts and dieters?

Shares of Krispy Kreme Doughnuts Inc. (KKD: down $8.19 to $23.61, Research, Estimates) tumbled 18 percent Friday after the doughnut chain operator warned that its first-quarter and full-year profits will come in below Wall Street's estimates, saying low-carbohydrate diets such as Atkins hurts demand for doughnuts.

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Low-carb craze takes heavy toll on Krispy Kreme. CNNfn's Chris Huntington reports.

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"This [low-carb] phenomenon has affected us most heavily in our off-premises sales channels, in particular sales of packaged doughnuts to grocery store customers," CEO Scott Livengood said in a statement.

However, on a conference call Friday morning, some analysts were skeptical about how much the low-carb craze was to blame for the shortcoming.

When an analyst asked why the Atkins and South Beach inspired diets should affect demand now, when doughnuts have never been a part of any diet, the company said "our intention is to give you the facts as we know them...this is not an unraveling...the jury is out. This could be a new way of eating, even though it is not supported by nutritionists."

Krispy Kreme executives added they are comfortable with its reduced estimates based on current consumption "assuming trends will continue and will not worsen. A change in either direction would alter future guidance."

Following the company's release, Standard & Poor's equity analyst downgraded the stock to "hold" from "accumulate" and dropped the price target on the stock to $33 a share from $43, citing the increased risk with the stock.

But that may not be the end of analysts actions on the company. Morningstar's analyst Carl Sibilski said he placed the stock under review after the company's release.

"The Atkins thing surprised me," he said. "That's something I expected to hear last year. The Atkins diet won't be their downfall, it will be their strategy of trying to sell doughnuts wholesale."

Rise of doughnuts

Shares of Krispy Kreme soared after going public in early 2000, but they have dropped 13 percent this year as investors have become more skeptical about the company's long-term growth prospects.

Short interest in the stock in the stock has risen to 13.7 million shares, or about 24 percent of the outstanding shares, from 13 million the previous month.

In a short sale, investors borrow stock from a broker, promising to return it at a later date and pocketing the difference.

For the just-ended fiscal first quarter, the Winston-Salem, N.C.-based company said it now estimates earnings from continuing operations, excluding asset impairment charges, of about 23 cents per share.

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Analysts, on average, had been looking for 27 cents on that basis, according to First Call.

For 2005, the company now expects to earn between $1.04 and $1.06 a share. Wall Street had expected a profit of $1.17, according to First Call.

"Needless to say, we are disappointed that external forces have caused us to revise our first quarter and fiscal 2005 earnings guidance," Livengood added.

In addition, Krispy Kreme said it will dispose of its Montana Mills bread unit, close six factory stores and shut three underperforming coffee-and-doughnut shops.

The company said it will take charges of up to $48 million in the first quarter and restate prior and past financial results to reflect Montana Mills as a discontinued operation.  Top of page

-- Reuters contributed to this story.



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