NEW YORK (CNN/Money) -
Krispy Kreme is feeling the pinch of its reliance on a single product: the simple and lowly doughnut.
"Any time you're focusing on one product, you're putting all your eggs in one basket," said Ben Strom, retail analyst for Variant Research. "You have an elevated risk on future earnings."
Krispy Kreme, which touts itself as the producer and specialty retailer of more than 20 different types of doughnuts, announced Tuesday that it would restate its financial statements for its 2004 fiscal year, citing errors in how it accounted for the repurchase of franchises.
The company, which was already facing a Securities and Exchange Commission investigation into its accounting practices, said the move could cause it to default on its credit agreement.
As recently as last spring, Krispy Kreme (down $1.83 to $10.48, Research) was being hailed a stock market darling. But the company's shares began sliding in May, when the company announced that earnings were expected to drop 10 percent in 2005. They took another big hit after Tuesday's news, sliding nearly 15 percent in regular trading, and another 3 percent or so in after-hours trading.
Back in May, the company, which was founded in the 1930s in Winston-Salem, N.C., blamed consumers' newfound distaste for doughnuts on the low-carb craze, but that failed to reassure investors.
The problem then, and the problem now, is the company's focus on a single product, Wall Street analysts said.
Blaming the low-carb craze helped create a negative image of the company, said Donald Trott, a Jefferies & Co. analyst covering retail but not Krispy Kreme specifically. "They essentially said to the public that they were not healthy."
In its announcement Tuesday, the company said the restatement would cut net income for 2004 by $3.8 million to $4.9 million -- another piece of bad news for the doughnut maker, whose shares have tumbled nearly 75 percent from a six-month high last spring.
Strom of Variant Research said specialty retailers tend to perform well as a whole, though they are more vulnerable to sudden changes in the fickle tastes of consumers, and less prepared to handle those changes than more diversified companies.
"With health trends changing, everybody in the world is on an Atkins diet," said Strom. "Krispy Kreme is (facing) pretty significant headwind with this health-driven demand."
With specialty retailers like Krispy Kreme, "small changes can result in a lot of volatility," said Strom.
When the public began to lose its taste for doughnuts, Krispy Kreme had no other products to sell, because it had not diversified like Dunkin' Donuts and Starbucks, which offer a variety of products without losing their original mission, he and other analysts said.
Strom compared the diversification of product to owning a portfolio of stocks: When one stock goes down, there are other investments to balance the loss.
Krispy Kreme has also been hurt by its lack of an exclusive product -- and wide distribution of its donuts to other retail outlets hurt results at its own franchises, analysts noted.
"You can buy a doughnut anywhere," said Strom. The trick to succeeding, he said, is not to branch out too far from the original concept.
"You can't be McDonald's and get into apparel," said Strom. "Companies have to focus on what they're good at. They have to focus on their targeted market."
A Krispy Kreme spokesman declined to comment beyond the company's statement Tuesday.
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