Krispy Kreme Issues Profit Warning, Shares Down 29 Percent

NEW YORK – Krispy Kreme Doughnuts Inc. (KKD) Friday cut its earnings forecast and set plans to overhaul operations as doughnut and bread sales get battered by consumer fascination with low-carbohydrate diets.

Shares of Krispy Kreme, whose profit margins are also being hurt by its move to sell more doughnuts through grocery stores, fell more than 29 percent after the profit warning, its first since going public four years ago.

The stock, which hit a life-time high just last August, has become a favorite target of short sellers, who make bets that a stock will fall. They have said for months that Krispy Kreme shares were priced too high.

In the face of growing consumer distaste for high-carb foods like bread and pasta, Krispy Kreme cut its full-year earnings forecast by 10 percent and said it would shut down or sell off operations of Montana Mills Bread Co. (search) , a gourmet bread and pastry chain it bought last year.

The company also said that it will restate prior and current financial statements to recategorize Montana Mills as a discontinued operation.

The Winston-Salem, North Carolina, company also plans to close six less-profitable stores and is working to make its delivery operations more efficient due to weakened sales at grocery stores and other retailers.

The popularity of such low-carb diets (search) as Atkins and South Beach has taken a bite out of food companies in recent months, including Kraft Foods Inc. (KFT) and Interstate Bakeries Corp. (IBC).

But analysts were skeptical of Krispy Kreme's efforts to blame a diet for such a broad shift in strategy.

"We believe many issues are internal," J.P. Morgan analyst John Ivankoe said in a note.

Krispy Kreme's "fad appeal" appears to be waning, Ivankoe said, and the company has become increasingly dependent on selling doughnuts in grocery stores and other retailers.

But on a conference call with investors, Krispy Kreme Chief Executive Scott Livengood insisted the low-carb diet trend was to blame for the company's woes.

"We have used the word phenomenal multiple times, but that's what it is," Livengood said. "It is the primary variable that is different from anything we have experienced since being a public company."

U.S. doughnut sales volume fell 0.4 percent industrywide in the 12 weeks ended April 18 from a year earlier, Krispy Kreme said. In the previous 12 weeks it had risen 7.4 percent.

One food industry expert said the low-carb trend was likely a factor for Krispy Kreme, but added most Americans had not changed the way they eat.

"It's not as if a majority of Americans are changing their diets," said Harry Balzer, vice-president of market research firm The NPD Group. "About 6 to 7 percent of the population are on a low-carb diet."

Krispy Kreme expects to report higher sales in the first quarter, mostly because of new outlets. But profit margins will be hurt by the cost of delivering doughnuts to more stores, the company said.

The company forecast first-quarter earnings from continuing operations, excluding asset impairment charges associated with Montana Mills, of about 23 cents per share. Analysts' average forecast was 27 cents, according to Reuters Research.

For the full year, Krispy Kreme forecast earnings from continuing operations, before asset impairment and other charges, of $1.04 to $1.06 per share, down from an earlier estimate of $1.16 to $1.18 per share.

Including charges, earnings per share from continuing operations are estimated to be about 16 cents per share for the first quarter and between 93 cents and 95 cents per share for fiscal 2005.

The company had net income of 22 cents a share in the year ago first quarter and 92 cents per share for the year.

Krispy Kreme shares fell $9.29, or 29.2 percent, to close at $22.51 Friday on the New York Stock Exchange, where they were the biggest loser of the session. The stock has lost more than half of its value since hitting an all-time high of $49.74 last August.

More than 22 percent of Krispy Kreme shares were sold short as of April 15, according to Reuters data.

Short sellers profit by borrowing shares and selling them in the hope that the shares will drop. They buy back the shares at the lower price, return them to the original holder, and profit on the difference.