Archive for Thursday, May 13, 2004

Krispy Kreme losing its glaze

Analysts: Low-carb fad isn’t solely to blame for hole in profits

May 13, 2004

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— In the land where Krispy Kreme doughnuts are an institution, Matt Hollowell walked out of a Dunkin' Donuts store with a large coffee in one hand and a sack of doughnuts in the other.

If Hollowell felt like a traitor to the "Hot Now" doughnut, he showed no guilt.

"I'm from Charlotte, so I've eaten plenty of Krispy Kremes," the construction worker said when asked why he had abandoned the local favorite for the Yankee invader. Now, he said, "I just think the glazed Krispy Kremes leave you with a greasy feeling."

Those are harsh but telling words for the company founded in nearby Winston-Salem, N.C., in the late 1930s.

Since going public four years ago, Krispy Kreme has been a standout on Wall Street, where its stock price climbed in lockstep with soaring profits. That abruptly changed Friday, when shares plunged nearly 30 percent after Krispy Kreme warned that profits were expected to fall 10 percent this year.

Company executives blamed the popularity of low-carb diets like Atkins and South Beach for driving down sales of its deep-fried, high-carb treats. But analysts say there's more than just a diet trend to blame for the hole-in-the-middle feeling plaguing Krispy Kreme investors.

One problem may be the fact that the novelty of Krispy Kreme -- particularly its signature glazed doughnut -- is wearing off. J.P. Morgan analyst John Ivankoe cited "waning fad appeal" as one of the company's problems in a letter to clients last week. He said Krispy Kreme's increased reliance on sales in grocery stores and other retail outlets, which makes the doughnuts more available and therefore less unique, also was hurting business.

The company, which operates more than 360 stores, also may have grown too fast.

"The low-carb fad is certainly having an impact but there are a number of other things, such as its rapid store expansion and the (low) productivity in its new stores," said John Glass of CIBC World Markets. "The silver lining is that the company agreed to slow down growth and close down some of its underperforming stores."

Krispy Kreme said last week it would shut stores in Charlotte, N.C., Atlanta, and Winston-Salem, N.C., that are smaller than its usual "factory" stores, where the doughnuts are made on site and sold hot out of the oven.

Competition from the more ubiquitous Dunkin' Donuts also may be a problem for Krispy Kreme. Dunkin' Donuts, which touts the quality of its coffee in its advertising, sells a more diverse line of breakfast foods than Krispy Kreme, with bagels, muffins and breakfast sandwiches in addition to its own doughnuts.

Randolph, Mass.-based Dunkin' Donuts said it hadn't seen any low-carb effect on sales at its 4,000 stores in 39 states.

Employees of Krispy Kreme box dozens of glazed doughnuts for
customers during the store's grand opening Feb. 17 in Little Rock,
Ark. The company announced last week that profits were expected to
drop 10 percent this year. It blamed the decrease on the low-carb
diet craze, but analysts say the firm's rapid expansion also has
hurt business.

Employees of Krispy Kreme box dozens of glazed doughnuts for customers during the store's grand opening Feb. 17 in Little Rock, Ark. The company announced last week that profits were expected to drop 10 percent this year. It blamed the decrease on the low-carb diet craze, but analysts say the firm's rapid expansion also has hurt business.

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