Krispy Kreme's 2Q Earnings Fall Short

Thursday, August 26th 2004, 10:37 am

By: News On 6

CHARLOTTE, N.C. (AP) _ Once the darling of Wall Street, doughnut-maker Krispy Kreme reported second-quarter profits Thursday that were less than half what the company earned a year ago, widely missing analysts' expectations. Shares of Krispy Kreme fell 10 percent on the news.

In years past, meeting or surpassing Wall Street's expectations was nearly a foregone conclusion for the folks at Krispy Kreme, which went public amid much fanfare in 2000 and posted quarter after quarter of ever-increasing profits.

However, on Thursday the Winston-Salem-based company said it expects slower sales for the remainder of the year. And it declined to project its earnings for the third quarter or for 2005.

``Although we are disappointed with the second-quarter financial results, we are optimistic about the long-term growth potential of the business,'' said chief executive CEO Scott Livengood.

Speaking to analysts on a conference call, Livengood said the company was going to make drastic changes to its business model. The company lowered its estimate for new stores, saying it now plans to open about 75 new stores next year, down from about 100 stores planned in May.

``Our primary focus over the last six years was on growth,'' he said. ``Building stores and our brand overshadowed building profit. . . Now, our first priority will be to make our stores as profitable as they can be.''

He said management has not paid enough attention to fundamentals.

``We have not gotten the job done with new stores when comes to the bottom line,'' Livengood said. ``This will no longer be the case.''

Krispy Kreme earned $5.7 million, or 9 cents per share, in the three months ending Aug. 1, compared with $13 million, or 21 cents per share, a year earlier.

Excluding discontinued operations and other items, the company posted earnings of $7.3 million, or 12 cents per share, in the latest quarter. This widely missed analyst expectations of profits of 22 cents per share, according to Thomson First Call.

Total sales rose $177.4 million, up 11.5 percent, in the second quarter. On a comparable-store basis, systemwide sales were up 0.1 percent and company store sales rose 0.6 percent, the company said.

Krispy Kreme also said it was reducing its 2005 systemwide sales growth guidance to about 15 percent. It also said it would not provide earnings guidance for the third quarter and is no longer making a projection for the year.

Wall Street's judgment was swift and harsh in May, when Krispy Kreme's chief executive officer blamed lower sales and the company's first-ever quarterly loss on the low-carb diet craze that was sweeping the nation. Krispy Kreme said it lost $24.4 million in the first quarter.

Shares plummeted, stores were closed, shareholders sued and executives recently confirmed that Krispy Kreme is the subject of an ``informal, nonpublic inquiry'' by the Securities and Exchange Commission on its franchise reacquisitions and its future earnings guidance.

Also recently, the company announced the departure of chief operating officer John Tate.

Despite all the challenges, the company's shares haf risen over the past week, from a near four-year low of $12.80 on Aug. 17 to a close at $15.36 on Wednesday. On Thursday, they lost $1.52 to trade at $13.84 on the New York Stock Exchange.

Steven Clark, an assistant professor of finance at the Belk College of Business at the University of North Carolina at Charlotte, said the company has been a victim of its own rapid success.

``It's a situation in which after the IPO (initial public offering) there were projections of such extraordinary growth,'' he said. ``At some point, every company goes from goals that are much higher to more moderate.''

Krispy Kreme also has been hurt by the nation's ``lifestyle changes,'' in which more Americans are trying low-carb diets, Clark said.

``I think management has essentially done all they can to maintain the growth rate at high level,'' he said. ``In some extent, its a combination of a saturated market and demographics.''