US doughnut maker and retailer Krispy Kreme has issued a profit warning due to the increased popularity of low-carbohydrate diets, and said it plans to close or sell off its Montana Mills operations.

The company said it expects fiscal 2005 diluted earnings per share from continuing operations, excluding certain charges, to be 10% lower than previously announced guidance.

“For several months, there has been increasing consumer interest in low-carbohydrate diets, which has adversely impacted several flour-based food categories, including bread, cereal and pasta,” said CEO Scott Livengood.

“This trend had little discernable effect on our business last year. However, recent market data suggests consumer interest in reduced carbohydrate consumption has heightened significantly following the beginning of the year and has accelerated in the last two to three months. This phenomenon has affected us most heavily in our off-premises sales channels, in particular sales of packaged doughnuts to grocery store customers,” he added.

Krispy Kreme said it now expects fiscal 2005 diluted earnings per share from continuing operations, excluding asset impairment and other charges, to be between $1.04 and $1.06, which is approximately 10% lower than prior guidance. Including the charges, diluted earnings per share from continuing operations are estimated to be approximately 16 cents for the first quarter and between 93 and 95 cents for fiscal 2005.

“These new industry dynamics present challenges in estimating earnings for the remainder of the year. Our current guidance assumes a continuation of the low-carb phenomenon that is affecting the industry. Needless to say, we are disappointed that external forces have caused us to revise our first quarter and fiscal 2005 earnings guidance. We are taking aggressive and sensible measures, including implementing several operational initiatives, to address the current situation. These initiatives are designed around two themes – a relentless focus on the core business and enhanced store-level productivity and profitability,” Livengood added.

The company said that in order to focus on its core business and to avoid additional exposure to flour-based products in the current environment, it plans to divest the existing Montana Mills operation. Krispy Kreme plans to close the majority of the existing Montana Mills locations, which are underperforming, and will pursue a sale of the remaining Montana Mills stores.