US doughnut maker Krispy Kreme is facing allegations that it failed to disclose early enough that sales were slumping because of consumers adopting the low-carb diet trend.
New York law firm Milberg Weiss Bershad & Schulman LLP said in a news release that it had filed a class action lawsuit earlier this week on behalf of investors who purchased securities between 21 August 2003 and 7 May 2004, when Krispy Kreme issued a profit warning.
The action is pending in the US District Court for the Middle District of North Carolina against defendants Krispy Kreme and a number of officers at the company, Randy S. Casstevens, Scott A. Livengood, Michael C. Phalen and John W. Tate.
The complaint alleges that, during the named period, Krispy Kreme “touted its strong operational growth, reporting substantial increases in revenues, income and earnings per share and representing that the company would continue to grow”. The complaint further alleges that, unbeknownst to investors, defendants failed to disclose that, as a result of the trend toward low-fat, low carbohydrate diets, such as the South Beach and Atkins diets, Krispy Kreme had been suffering from increasingly poor sales performance.
The complaint goes on to allege other illegally withheld reasons for the company’s downturn in performance: “While the opening of new Krispy Kreme stores created initial consumer excitement and a corresponding surge in sales, sales at those newly-opened stores quickly tapered off. This was especially damaging to the company in smaller markets with a limited number of potential new customers. Rather than cultivate a base of steady customers, the company instead attempted to capitalise on Krispy Kreme’s “fad appeal” and adopted a business model and strategy for increasing sales that was predicated on the perpetual addition of new stores and the hyping of the company’s entry into new markets – a tactic that resulted in unsustainable surges in sales that fell off once the hype ceased and the novelty of the new store wore off”.
Krispy Kreme stock was hit hard by the profits warning last week, losing 29% in one day. The company said it would defend itself aggressively against the charges, which it described as “completely without merit”.