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News > Midsized Companies
SEC probes Krispy Kreme
Doughnut merchant discloses informal investigation into its reacquisitions, accounting; stock slumps
July 29, 2004: 12:03 PM EDT

NEW YORK (CNN/Money) - Krispy Kreme Doughnuts Inc. announced Thursday that the Securities and Exchange Commission was conducting an informal, non-public probe into the company's accounting.

Krispy Kreme (KKD: down $2.11 to $16.55, Research, Estimates) shares fell over 11 percent in morning trading on the New York Stock Exchange. The stock is down 50 percent this year.

The Winston-Salem, N.C.-based chain said that the investigation involves the company's franchise reacquisitions and its previously announced reduction in earnings guidance.

Krispy Kreme said it was cooperating with authorities on the matter.

"Krispy Kreme has no higher priority than the confidence of our shareholders, customers and employees. While we are confident in our practices, we understand and respect the SEC's responsibilities and will continue to cooperate fully throughout this process," Krispy Kreme chairman and CEO Scott Livengood, Chairman, said in a statement.

The SEC declined to comment on the matter.

In May, the company issued its first-ever profit warning, citing the adverse effect of the low-carb trend on its business. Krispy Kreme said it expected fiscal 2005 earnings of between $1.04 to $1.06 a share, or 10 percent lower than its previous guidance.

Analysts surveyed by First Call forecast a full-year profit in the range of 97 cents to $1 a share, with a consensus estimate of 99 cents a share.

The profit warning was followed subsequently by a number of shareholder lawsuits alleging that Krispy Kreme had misled investors about the direction its business was headed.

Bala Cynwyd, Pa.-based law firm Schiffrin & Barroway LLP, filed a lawsuit in May on behalf of all purchasers of Krispy Kreme shares from August 21, 2003 through May 7, 2004.

The complaint named members of Krispy Kreme's senior management as defendants, and charged that they disregarded signs that the company had expanded too quickly, that its wholesale business undermined sales at its retail stores, and that it faced stiff competition from rival doughnut chain Dunkin' Donuts.

"This is an era in which corporations want to be lily white because corporate governance is on the front burner," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York City-based retail consulting and investment banking firm.

"These issues have crushed the Krispy Kreme's stock. Investors have lost money, and now they're retaliating," he said.

Morningstar analyst Carl Sibiliski said he had not anticipated an SEC investigation. At the same time, he wasn't entirely surprised by the development.

According to Sibiliski, speculation about Krispy Kreme's bookkeeping regarding its franchise buybacks is old news. "The question going forward is whether this probe is just the tip of the iceberg," he said.

"Part of the problem is that this was a private company that went through a leveraged buyout and then went public four years ago. So there was a lot of baggage left over," added Sibiliski. "With Krispy Kreme, the biggest danger is that investors were paying too much money for it. The chances of overpaying for it now are very low after the stock's pullback."  Top of page

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