Krispy Kreme Posts Loss on Slow Sales

Struggling doughnut shop chain Krispy Kreme Doughnuts Inc. (KKD) on Monday reported an unexpected quarterly loss, hurt by store closing costs and sluggish sales, and its stock fell 15 percent.

The company, which is facing a U.S. Securities and Exchange Commission (search) investigation into how it accounts for repurchased franchises, also withdrew its forecast calling for systemwide sales to rise 15 percent for its fiscal year, which ends in January.

The quarterly loss is the latest in a string of troubles for Krispy Kreme (search) that began in May, when it posted its first quarterly loss since going public and cut the number of planned new stores, blaming the low-carb diet craze for curbing appetite for doughnuts.

Some investors have also suggested the company expanded to quickly and the one-time darling of Wall-Street has lost 80 percent of its market value since its peak in August 2003.

For the fiscal third quarter ended Oct. 31, Krispy Kreme posted a net loss of $3 million, or 5 cents per share, compared with a profit of $14.5 million, or 23 cents per share, a year earlier.

The company said pretax impairment charges and store closing costs in the quarter were about $5.5 million, primarily related to closing four factory stores.

Excluding the charges and store-closing costs, Krispy Kreme said it earned 4 cents per share from continuing operations.

Wall Street analysts had expected the company to report earnings of 13 cents a share, according to Reuters Estimates.

The company said pretax impairment charges and store closing costs in the quarter were about $5.5 million, primarily related to closing four factory stores.

Systemwide sales during the third-quarter rose 4.7 percent, which included sales of company and franchise stores.

But systemwide sales at stores open at least 18 months, a key measure for the company, fell 6.4 percent.

Total revenue for the quarter, including sales from company stores, franchise operations and Krispy Kreme manufacturing and distribution, rose 1.4 percent to $170.1 million.

Company store sales rose 9.6 percent to $121.2 million but revenues from franchise operations fell 5.4 percent to $6.2 million and manufacturing and distribution revenues slumped 15.7 percent to $42.7 million.

Krispy Kreme said it incurred professional fees of about $3 million in the quarter in connection with a previously announced SEC formal investigation, pending litigation.

The chain appointed two new directors in October to lead an internal investigation of its accounting practices and other matters.

"The company expects that ongoing professional fees in connection with these matters will be material," it said.

Some accounting experts have said Krispy Kreme's failure to amortize, or reduce the value of repurchased franchises on its books over time, is not in keeping with industry trends.

The company has defended its practices, saying such assets have indefinite lives and are therefore not subject to amortization.

Krispy Kreme shares fell $1.86 to $9.64 at the close of trade on the New York Stock Exchange. The stock hit a 52-week low of $9.37 earlier in the session.