Krispy Kreme to Restate 2004 Earnings; Shares Plummet

Shares of Krispy Kreme Doughnuts fell almost 15% yesterday on news that the company will restate its 2004 earnings amid a federal investigation into its accounting, and that it may default on a $150 million credit line.“The company’s balance sheet is under great stress,” said David Rocker, managing partner at Rocker Partners LLC in Millburn, N.J., who has a short position on the shares. “It’s questionable how they will be able to handle their guaranteed obligations given their current inability to borrow.”The restatement, which follows a Securities and Exchange Commission probe of the company’s repurchase of franchise stores, will trim fiscal 2004 net income of 91 cents a share by as much as 8 cents, Krispy Kreme said in a statement yesterday.The company, whose shares fell 66% last year, said that without a waiver from lenders it will default on a credit line for failing to report third-quarter financial statements on time.A shareholder lawsuit amended in December alleges that the company, which has posted losses in two of the last three quarters, expanded at a rate not justified by the demand for its doughnuts, according to court papers.The company’s chief financial officer, Mike Phalen, didn’t immediately return a call seeking comment.Shares of the Winston-Salem, N.C.-based company closed down $1.83, or 14.87%, to $10.48 in New York Stock Exchange composite trading. Krispy Kreme shares rose more than nine fold after its April 2000 initial public offering, to a peak of $49.74 on August 19, 2003.Krispy Kreme, the no. 2 American doughnut maker, said results for the last three quarters of the year ended February 1 also will be restated and further adjustments are possible.The latest filing in a shareholder suit alleges that the company knowingly shipped more doughnuts than necessary to meet earnings expectations and “obscured the same-store sales statistics reported to investors.”The plaintiffs also allege that the defendants caused Krispy Kreme to issue false financial statements overstating the value of acquisitions, according to the filing in the U.S. District Court for the Middle District of North Carolina, Greensboro. Investors first filed a lawsuit against the company in May.Krispy Kreme’s chief executive officer, Scott Livengood, has been scaling back expansion plans and developing smaller stores to try to cut costs.Last month, the company said it would miss an extended deadline for filing a financial statement for the third quarter ended October 31.The doughnut maker had a thirdquarter loss of $3 million, or 5 cents a share, compared with net income of $14.5 million, or 23 cents, a year earlier. Revenue increased 1.4% while sales at stores open at least a year fell 6.4% in the quarter ended October 31.The company said it won’t meet a January 14 deadline for filing its thirdquarter results with the SEC and will wait until investigations are completed before doing so.Krispy Kreme also said it may be unable to file its fiscal 2005 annual report in a timely manner.Krispy Kreme pulled profit and revenue forecasts following losses this year.The SEC investigation of accounting practices, which cost $3 million in fees in the third quarter, spurred some investors, including Hodges Capital Management Incorporated’s Donald Hodges in Dallas, to sell their shares just months after buying them.“It all boils down to too rapid of an expansion,” said Brad Dunn, one of three partners in Houston-based Pin Oak Investment Advisors, with about $200 million in assets. In the third quarter, it sold its 69,700 Krispy Kreme shares. “There are issues as to how honest the accounting is.”Operating expenses rose 13% to $143.6 million from a year earlier, the company said in announcing thirdquarter results. Debt jumped 14% to $133.6 million from the end of the second quarter.Mr. Livengood, whose publicity stunts include passing out doughnuts in front of the New York Stock Exchange in 2001, told analysts in November he wasn’t going to answers questions during a conference call because of the “legal environment the company is navigating through,” including the SEC investigation and shareholder lawsuits.“It seems like they are more interested in managing the CEO’s personal legal liabilities than being upfront and communicate with shareholders at a time when it’s absolutely essential,” said Glenn Surowiec, who helps manage about $75 million at Eugene, Ore.-based Alsin Capital Management LLC, including the Turnaround Fund , which sold 24,000 Krispy Kreme shares in the third quarter. “At some point, there has to be some accountability at the highest level. Right now I don’t see that.”

Krispy Kreme to Restate 2004 Earnings; Shares Plummet

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