Amid allegations of padded sales figures, Krispy Kreme yesterday restated its earnings for fiscal 2004, sending its shares tumbling more than 17 percent and threatening the once-trendy...
RALEIGH, N.C. — Amid allegations of padded sales figures, Krispy Kreme yesterday restated its earnings for fiscal 2004, sending its shares tumbling more than 17 percent and threatening the once-trendy doughnut maker with a cash and credit crunch.
In a statement, Krispy Kreme said its revised earnings place it in potential default of a $150 million credit line. While the company is negotiating with lenders to avoid being forced to immediately repay almost $91 million in loans, it warned “there can be no assurance that the lenders will accede.”
The company is unable to borrow additional money and has guaranteed $52.3 million in franchisee debt. Because some franchisees are not in compliance with their credit agreements, Krispy Kreme estimated it is on the hook for $16.7 million that could be subject to a demand for repayment.
Making matters worse, the North Carolina-based company said it is still reviewing its accounting practices and expects to make further revisions to past earnings reports.
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The company said the bulk of the earnings changes reported yesterday result from recording payments to former franchise owners in Michigan and Northern California as compensation, rather than as a purchase price in buying back their franchises.
Krispy Kreme, which is under investigation by the Securities and Exchange Commission (SEC), reported in October it had formed a special committee of independent directors to look into whether earnings should be restated.
Morningstar analyst Carl Sibilski said he views the warning of possible credit problems as more a worst-case scenario than a looming prospect.
“It’s a bad negotiating position to be in, but I don’t think it’s something that will cripple them,” Sibilski said. “It probably means their creditors will negotiate with tougher terms.”
The restated earnings came a day after new allegations surfaced in shareholder lawsuits that claim Krispy Kreme executives tried for more than a year to hide evidence of declining doughnut sales.
Two unidentified “confidential witnesses” who are former employees alleged Krispy Kreme routinely padded sales by doubling the number of doughnuts delivered to wholesale customers at the end of fiscal quarters. Unsold doughnuts were shipped back after the quarters ended.
The company did not immediately respond to a request for comment from CEO Scott Livengood.
The company said its board of directors concluded Dec. 28 that statements for the fiscal year ended Feb. 1, 2004, should be revised, as well as reports covering the last three quarters of that fiscal year.
The restatements are expected to reduce the company’s profit for 2004 — originally reported as $56.8 million — by between $3.8 million and $4.9 million. Earnings per share for fiscal 2004 would drop by 7 or 8 cents from their originally reported 66 cents.
Shares of Krispy Kreme fell $1.83 to $10.48 yesterday, then fell another 28 cents to $10.20 in after-hours trading. Its shares traded near $40 in March.
Shareholder lawsuits claim Krispy Kreme executives knew sales were slowing by at least January 2003 but issued “false and misleading statements” until May, when the company reported its first-ever quarterly loss.
The lawsuits also claim that three top officers — Livengood, former Chief Operating Officer John Tate and former Chief Financial Officer Randy Casstevens — unloaded more than 475,000 shares of Krispy Kreme stock during this same time for $19.8 million.
Krispy Kreme’s initial quarterly loss, which was followed by the revelation it was under investigation by the SEC, sent the company’s stock into a tailspin; it dropped 66 percent in 2004.
Krispy Kreme has blamed its problems, in part, on the popularity of low-carbohydrate diets. But critics say the company expanded too quickly and saturated its market by making its product available in grocery stores and convenience stores.
Sibilski, the Morningstar analyst, said his firm is not rating Krispy Kreme’s stock until questions about the company’s financial statements are resolved.
With the SEC investigation still pending, he said, “I think there’s probably more to come” in terms of bad news. “The brand still has value, so we don’t think the stock is going to go to zero,” Sibilski said. “We’re just not sure what the real value of the company is.”