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Krispy Kreme looking soggy
Doughnut retailer posts a sharp drop in earnings, again strips down its expansion plans.
August 26, 2004: 12:16 PM EDT

NEW YORK (CNN/Money) - Krispy Kreme Doughnuts' unexpected big quarterly miss Thursday prompted CEO Steve Livengood to say the results were disappointing enough for the company to take a step back and reevaluate its fast growth strategy.

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Krispy Kreme Doughnuts Incorporated

"Obviously, we are disappointed with our earnings and sales in the quarter," Livengood said in a conference call with analysts. "Our primary focus over the last six years has been on growth. That has overshadowed building profits."

"But the two are not mutually exclusive. Now, our first priority will be to make our stores as profitable as they can be."

Winston-Salem, N.C.-based Krispy Kreme reported a steep drop in fiscal second-quarter earnings and once again scaled back expansion plans.

In the period ended Aug. 1, the company said it earned $7.3 million, or 12 cents a share, from continuing operations excluding special charges, down from $13.4 million, or 22 cents a year earlier.

Analysts surveyed by earnings tracker First Call were forecasting earnings per share of 22 cents.

Shares of Krispy Kreme (KKD: down $1.63 to $13.73, Research, Estimates) tumbled as much as 17 percent, about 71 percent below the 52-week high set a year ago.

Including discontinued operations but excluding special items, the company reported income of $6.8 million, or 11 cents a share. Including both discontinued operations and a charge for store closings, it earned $5.8 million, or 9 cents a share, down from net income of $13 million, or 21 cents, a year earlier.

Krispy Kreme said it would not give guidance for its third quarter or fiscal 2005 as it reviews its business strategy and looks for ways to cut costs and improve profitability.

Moreover, the company said it now expects to open about 75 new stores systemwide, including approximately 60 factory and 15 satellite stores, in the year ending in February.

That's down from the target 100 new stores systemwide it was aiming for stated when the company reported first-quarter results three months ago. Six months ago, it was looking at opening 120 new stores systemwide.

"The slowing growth temporarily sets the stage for reviewing our strategy," said Livengood. "While we were growing sales, we have not gotten the job done with new stores when comes to the bottom line. There's no point in opening stores when we're not able to get a full measure of their potential."

"The slowdown gives us the opportunity to digest the growth we've had and learn how to get the most possible stores in the country and around the world." He also indicated that the company going forward plans to build smaller stores in terms of square footage.

Sales suspect

Industry watchers have been suspect of its comparable sales, pointing out that while the company was able to pull off impressive sales at new stores, sales at its older stores were sagging.

Livengood said a "confluence" of factors adversely affected its recent performance.

"The spiraling cost of fuel hurt discretionary income of our customers," Livengood said, pointing out that households with incomes of less than $50,000 a year constitute a majority of its customers.

Livengood also said consumer preference for low-carb food continued to be a challenge to its business. And while it expands its relationship with discounter Wal-Mart (WMT: Research, Estimates), Livengood said the No. 1 retailer's expanding share of the grocery business was hurting Krispy Kreme sales at other grocery stores.

Systemwide sales in the second quarter rose 14.8 percent, while revenue was up 11.5 percent to $177.4 million, but that was less than the $189 million forecast by First Call.

Systemwide sales at stores open at least a year, a closely watched retail measure known as same-store sales, was up only 0.1 percent. Same-store sales at company-owned locations was up 0.6 percent.

At the same time, operating expenses rose more than 20 percent compared to last year. The company said systemwide sales, including company stores and franchise operations, will grow approximately 15 percent in the fiscal year, with only 10 percent growth in the second half of the year.

Besides the weak sales and disappointing earnings, Krispy Kreme's other outstanding issues involve a Securities and Exchange Commission investigation into its accounting. Last week it announced that Chief Operating Officer John Tate was leaving the company to take the same post at home furnishings retailer Restoration Hardware Inc.

And the retailer also faces a number of shareholder lawsuits alleging that Krispy Kreme had misled investors about the direction its business was headed.

Livengood addressed both matters, saying that the company intended to defend itself vigorously against the class-action suits. "I want to say clearly that we remain steadfast to be worthy of our shareholders' trust and confidence," he said. He added that the company would cooperated fully with the SEC probe.

Going forward, Livengood said cost-cutting, achieving operational efficiencies, and introducing new products, including sugar-free and non-fat products were key objectives. "We're not going to roll back prices but look for year-long price promotions with our partners," he said.  Top of page

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