Anti-Carb Craze Slims Krispy Kreme's Profits

Krispy Kreme, former darling of Wall Street and still first-class maker of doughnuts, had to report a downturn in its sales and earnings. CEO Scott Livengood called the second-quarter results "disappointing." That's one way to describe a 50% decline in profits since last year's second quarter. However, the company's situation is largely the result of the low/no carb diets that obese America has adopted. Like most fads, this too shall pass, and Krispy Kreme needs merely to hold itself together until it does.

Krispy Kreme has been a success despite its name (marketing misspelling isn't cute, and cream shouldn't be cripsy, let alone krispy), but in the life of every company, the growth rate shifts from youthful to mature. That is, doubling revenues and earnings is not sustainable year after year. That is not to say that mature companies are poor investments, quite the contrary -- a company that generates regular, predictable profits that it returns to investors by means of dividends is a genuine find. Krispy Kreme was heading in this direction long before Dr. Atkins made a splash among the love-handle crew.

Total sales were $177.4 million for the second quarter of 2004, up 11.5% from the second quarter of 2003. This means the company is still selling a ton of doughnuts everyday. But because of the rapid expansion the company has undergone since its 2000 IPO, and before, its earnings were just 9 cents a share in the second quarter 2004, down from 21 cents a share from the same period of 2003. Cost cutting is the key for the rest of the year.

There are a few other issues in addition to a sudden fad among the fat, including an “informal, nonpublic inquiry” by the SEC into some franchise buy-backs and the departure of CFO John Tate. However, there is no reason to believe these matters will cause a crisis in the future. Indeed, the stock may have bottomed on August 17 at $12.80 a share; Wednesday, it closed at $15.36 a share.

The good news is that the Atkins Diet has had its 15 minutes of fame. Those who wanted to try it have done so, either succeeding or failing. No one can say they haven't had time to try it. And now, it's time for a new diet book, and this one may recommend Krispy Kreme doughnuts instead of beef and cheese for all anyone knows.

Until then, the company's management appears to be doing the right things: withdrawing guidance for the year and pulling in its horns. Capitalism isn't fair when a fad like this arises, but with proper stewardship of investors' funds, it needn't be lethal.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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