Krispy Kreme

Krispy Kreme Doughnuts Inc. is the name of a popular doughnut chain that originated in Winston-Salem, North Carolina.

While Krispy Kreme serves up a variety of doughnuts, it is most famous for its traditional glazed doughnut, a very light, plain doughnut covered in glaze and often served warm. Many grocery stores, convenience stores, and some Wal-Marts in the United States and Canada also carry Krispy Kreme doughnuts. Although growth of the chain has been steady since the company went public, expansion and profits have recently decreased since low-carb diets have gained popularity.

Most stores are constructed with a long window between the customer area and the kitchen allowing the patrons to watch the operation of the doughnut making machines, which automatically produce rings of dough, bake, deep-fry, flip, and glaze the doughnuts. Each store has a neon 'HOT' sign to indicate when fresh hot doughnuts are available.

Krispy Kreme's competitors include Dunkin' Donuts, Winchell's Donuts, Southern Maid, and, in Canada, Tim Hortons.

Contents

1 History 2 Controversy 3 References 4 External links

History

The founder, Vernon Rudolph, purchased a secret recipe (although company mythology tells a story whereby Rudolph won the recipe from a New Orleans baker in a west Kentucky poker game) for yeast-raised doughnuts and began selling them to local grocery stores in Winston-Salem, North Carolina in 1937. Because of customer demand, he began selling them directly from his bakery to customers. The first Krispy Kreme store was located on South Main Street in Winston-Salem in what is now called historic Old Salem.

By the 1960s it was well known throughout the southeastern United States, and began to expand across the entire country.

In 1976, Krispy Kreme Doughnut Corporation became a wholly owned subsidiary of Beatrice Foods Company of Chicago, Illinois. The headquarters for Krispy Kreme remained in Winston-Salem, North Carolina.

A group of franchisees purchased back the corporation from Beatrice Foods in 1982.

Krispy Kreme began another phase of rapid expansion in the 1990s, opening stores outside the southeast United States where most of their stores were located. Then, in December 2001, Krispy Kreme opened its first store outside the U.S. in Mississauga, Ontario, Canada, just outside Toronto. As of 2005, Krispy Kreme has further expanded its international doughnut sales throughout Canada and to locations in Mexico, the United Kingdom, Australia, and South Korea.

On April 5, 2000, the corporation went public on the NASDAQ using the ticker symbol KREM. On May 17 2001, Krispy Kreme switched to the New York Stock Exchange, with the ticker symbol KKD, which is its current symbol.

On January 18 2005, Krispy Kreme announced Stephen Cooper, chairman of financial consulting group Kroll Zolfo Cooper LLC, as interim CEO. Cooper replaces Scott Livengood, who the company said has retired as chairman, president, CEO and a director. The company also named Steven Panagos, a managing director of Kroll Zolfo, as president and COO.

On June 3, 2005, National Doughnut Day in the US, participating franchises will be giving away free doughnuts. A free doughnut of a customer's choice will be given away free in recognition of the oft-ignored holiday.

Controversy

Krispy Kreme's accounting methods have come under considerable fire. Livengood, and former CFO and COO John Tate, as well as current CFO Michael Phalen, and former CFO Randy Casstevens, are currently embroiled in SEC and class action lawsuits about misreporting profits and failing to issue a profit warning as soon as they knew they would fall short of predictions. In addition, the corporation is accused of manipulating earnings through a practice known as "channel stuffing"—delivering more doughnuts to suppliers than ordered at the end of a reporting period, while still booking the increased revenue, then taking the unsold doughnuts back at the beginning of the next reporting period.

References

• Winston-Salem Journal, "Krispy Kreme Lawsuit Filed." December 31, 2004. (http://www.journalnow.com/servlet/Satellite?pagename=WSJ%2FMGArticle%2FWSJ_BasicArticle&c=MGArticle&cid=1031779947283&path=!business!areabusiness&s=1037645507705)
• Krispy Kreme Corporation, "Investor FAQ." (http://ir.thomsonfn.com/InvestorRelations/PubInvestorFAQ.aspx?partner=6012)
• Krispy Kreme Press Kit (http://www.krispykreme.com/presskit.pdf)

Krispy Kreme Doughnuts first sold its stock to the public in April, 2000. At that time, it was engaged in an active domestic franchising program, which later grew to include area developer franchisees in Canada, England, Australia, Mexico and South Korea. Of a total of approximately 380 Krispy Kreme stores, 250 are franchised and the balance owned and operated by the company. Much of the growth of the company since its public offering has occurred through the investment of franchisees and their purchase of doughnut mix, sugar, shortening, paper goods, and other products from the company. Krispy Kreme is also a supplier to the franchisees of proprietary equipment used in the manufacture of doughnuts. After the public offering, Krispy Kreme Doughnuts stock was sold on NASDAQ and then the New York Stock Exchange. Prices zoomed as new stores opened to long lines and stratospheric sales. The first store to open in California in La Habra, in the northern section of Orange County, achieved sales in its first year in excess of $8 million. Other stores opened in Denver, Seattle, Minneapolis and elsewhere with similar success. As sales from these stores began to decline, the company required its franchisees to sell doughnuts off premises to grocers and convenience stores and other retailers. As such sales increased, retail sales continued to decline, more than offsetting the increases in the wholesale channel. Krispy Kreme management, principally CEO Scott Livengood and COO John Tate, directed the company in acquisitions as the price of its stock increased from the opening in April 2000 through much of 2003. These acquisitions included a bread retailer known as Montana Mills and several buy-backs of franchisees, notably in Dallas, Kansas City, Michigan, and Northern California. The owners of several of these franchise operations were company insiders, including a former Chairman of the Board, Senior Vice President of Franchising, and the ex-wife of Mr. Livengood. These purchases came under scrutiny and were the subject of several Wall St. Journal articles. Accounting practices involving capitalizing the value of the development rights and compensation to the sellers were described as aggressive. In addition, one year after the acquisition of Montana Mills, the company wrote off the investment taking a loss of approximately $40 Million. These actions by Livengood and Tate are being reviewed by a special committee of the Board of Directors, which has yet to release a report. The SEC investigation, initially informal and then in the fall of 2004 declared formal, also concerns these activities.

External links

• Official web site (http://www.krispykreme.com/)
• Yahoo! - Krispy Kreme Doughnuts, Inc. Company Profile (http://finance.yahoo.com/q?s=kkd)

As of March, 2005, Kroll Zolfo Cooper of New York City, was selected by the Board of Directors of Krispy Kreme to manage the company. Steve Cooper and, on a daily basis, Steve Panagos assumed the positions of CEO and President. Cooper was still involved in the management of Enron when this new assignment was announced. First actions taken included immediate reduction in payroll and elimination of certain expenses, including one of two corporate jets. Krispy Kreme manufactures equipment used in its stores, as well as doughnut mix and other products. Each department was evaluated for financial performance, and equipment department personnel were terminated. Others followed. Cooper and Panagos also focused on joint ventures between the company and third parties, which jv's are franchisees of the company. In many of these cases, Krispy Kreme is a guarantor of leases or loans of the franchisee. The Canadian franchise, for instance, was a corporation known as KremeKo, Inc., in which Krispy Kreme had about a 40% interest. Krispy Kreme is a guarantor of certain obligations of KremeKo. In an effort to reduce company exposure to such risks, Cooper and Panagos moved to force the company into a CCAA (akin to a Chapter 11) proceeding. Bob Vaughn of Krispy Kreme was appointed the Chief Restructuring Officer and Roly Morris, KremeKo CEO was terminated.