The Rise And Fall of Krispy Kreme, At Least Temporarily

You haven't seen much from me lately on Krispy Kreme, when, in fact, I used to post quite a bit about my favorite sweet with a NC origin. The reason for the lack of postings on Krispy Kreme is that there has been little that could be said about KK that was positive. Developments over the last week offer some hope for a turnaround, but it won't be overnight and one Tar Heel alum has lost his job over negative developments with the company which began last fall.

So there is no confusion, we are not talking about the product here. Reports indicate that KK continues to generate excitement everywhere it goes. and reports indicate that the number of doughnuts produced has continued to rise even though the financial status of the company has nosedived.

It all began last fall when the KK company announced that earnings and profits for the third quarter would be lower than originally expected. It hit like a blockbuster because in its most recent annual report, there was nothing to indicate that the future for KK was anything but positive. Wes Livengood, a UNC grad, tried to blame the expected drop in earnings on the "carbohydrate" thing, but it didn't take long for rumors to begin that the problems were deeper than what might amount to just a diet fad. There was a shareowner's lawsuit, then a SEC investigation and lastly, a connection between Livengood's wife (former?) and a buy back of a franchise. KK had gone from $21 a share when it went public in April of 2000 and had peaked at $49.37 in August of 2003. Even Ramfanatic had gotten into the action, primarily for nostalgic reasons, but also because he thought KK had the potential to make it big time. I bought the maximum number of shares my broker could deliver and felt like I was on my way to having made a sound financial investment. I'm still learning about stock investing, but one thing I have had difficulty with. I do pretty well on knowing when to "get in" but have less of a feel for when to "get out." Fortunately, this time my intuition was a little better than usual and I sold almost all of my stock in KK. I sold it before the announcement by Mr. Livengood so financially I have come out of the deal in pretty good shape. Good thing I did sell because the last time I looked, the stock was somewhere around $9.00 a share. I retained a few shares, again for nostalgic reasons, and hopefully the new management team will turn things around in relatively short order.

Last week, Scott Livengood was relieved of his duties as the Chief Executive Officer of KK. He will be retained as a consultant for several months but no golden parachute. Before the drop off, Mr. Livengood earned $1,000,000 annually according to filings with the SEC.

A turnaround specialist has been employed, one who was given the assignment of straightening out the mess at Enron. There has already been a reduction in the number of stores scheduled to be opened in the foreseeable future, and there have been some store closings. The one in Charlottesville closed several months ago.

So what caused this dramatic turnaround in the fortunes of the KK company. Most analysts think the company was just trying to expand too rapidly. Shops had been opened in the United Kingdom and Australia and there were plans to open others all over the world. Some shareholders say that KK's accounting procedures were not reflective of the real financial situation, and that seems to be the basis for their lawsuit. In addition to the numbers filed with the SEC, it was divulged that one of the individuals involved in a franchise buyback, was/is the wife of Mr. Livengood. Now, that in itself is not indicative of any wrong doing, but it certainly isn't the way to inspire trust among stockholders. Reminds me of the time I told my wife who, at the time, was an employee at the Duke University Medical Center, that she would probably get less from me as the Personnel Director than any other employee. It never became an issue, but I wanted to communicate my personal philosophy about the appearance of possible wrong doing when husband and wife are both involved with the same employer or financial entity.

Of course, the problem is much worse now because parties living together frequently are not legally married. I could really tell you some stories about that, but time and space won't allow me to do so.

So, for the foreseeable future, I will not expect my KK stock to do much for me even though it did go up 10% on the day Mr. Livengood was replaced. I may even go by a shop and have one for old times sake. One writer went by recently and ordered several when the "hot" sign was on and when they were delivered, they were not hot. When he asked the clerk about it, she said her manager told her to keep the "hot" light on all the time. The writer said he felt like a dagger had been plunged into his heart when she told him. Maybe that kind of thing and the fact that KKs can now be bought in almost every super market has removed some of the mystique for many people. If so, KK may have to return to its Southern roots where at least us old timers will welcome them back with open arms. Maybe the simple explanation for KK's reversal of fortune is they got a little too big for their britches. There's a lot of difference between Winston-Salem, N.C. and New York City, thank goodness.