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April 1, 2005

USA: Krispy Kreme: plugging a hole (COMMENT)

Krispy Kreme has secured a new loan after failing to meet a deadline to file financial statements. Facing a default on a US$150m credit line, doughnut retailer Krispy Kreme has successfully found a new loan provider. With the company's financial struggles causing a precipitous stock price decline, analysts anticipate more troubles ahead. Krispy Kreme urgently needs to restore its financial health in order to regain credibility on Wall Street.

Krispy Kreme has secured a new loan after failing to meet a deadline to file financial statements. Facing a default on a US$150m credit line, doughnut retailer Krispy Kreme has successfully found a new loan provider. With the company’s financial struggles causing a precipitous stock price decline, analysts anticipate more troubles ahead. Krispy Kreme urgently needs to restore its financial health in order to regain credibility on Wall Street.

A former darling of Wall Street, Krispy Kreme has obtained a new line of credit from Credit Suisse First Boston and hedge fund Silver Point Capital. The new loan is timely relief for the company, which has been facing a potential default on its $150m loan with BB&T Capital Markets and Wachovia Securities after failing to file financial statements on time.

The retailer has faced difficult times over the last couple of years as a rapid expansion programme failed to translate into proportionally greater doughnut sales. On top of this came a US Securities and Exchange Commission accounting probe and several shareholder lawsuits. More recently, the company had to reissue a previously overstated earnings statement in February 2005. Shares in the company have now decreased by more than 82% from their all-time high of $49.74 in August 2003.

It is unclear yet whether Krispy Kreme has learnt its lesson: even its current store expansion plan seems somewhat over ambitious. The company is to open 120 new stores in 2005, while its larger competitor Dunkin’ Donuts, with over ten times the number of existing stores, plans to open just 125 stores over the next six years. Even disregarding Dunkin’ Donuts’ planned expansion, for a small retailer in such financial difficulties, Krispy Kreme is setting itself an extremely tough challenge.

Declining sales in 2004 initially had company officials blaming the Atkins diet and the low-carb phenomenon, which may indeed have been a contributing factor. As consumers head toward ever healthier lifestyles, they are looking for food options that support such goals. Yet the Atkins fad can hardly be blamed for the full plethora of Krispy Kreme’s woes.

The credit line extension allows for some much needed time to rethink company strategy. The next few months will be important for Krispy Kreme as it attempts to restore investor confidence, refocus growth efforts and adapt to new consumer consumption trends.

(c) 2005 Datamonitor. All rights reserved. Republication or redistribution, including by framing or similar means, is expressly prohibited without prior written consent. Datamonitor shall not be liable for errors or delays in the content, or for any actions taken in reliance thereon.

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