Should Krispy Kreme get away with your money

This is another example of a company just lying and filling there own pockets

This has to stop as Krispy Kreme prepares for bankruptcy

Krispy Kreme seeks dough in bid for turnaround of chain's woesNew execs' staff cuts, sale of corporate jet would save millions

By Sarah E. LockyerWINSTON-SALEM, N.C. (Feb. 22) -

Krispy Kreme Doughnuts Inc., once a company concerned with serving hot glazed doughnuts, now is consumed with getting cold, hard cash to avoid potential financial collapse.

The operator or franchisor of 401 doughnut-and-coffee shops and a wholesale doughnut operation disclosed a pending cash crunch earlier this month as it outlined plans to save more than $10 million per year with staff cuts and the divestiture of a corporate jet.

The revelations by a newly installed team of turnaround managers caused some analysts to discuss the possibility of a bankruptcy for the longtime doughnut chain icon of the Southeast. Its status in recent years as a darling of stock investors and worldwide franchisees almost has vanished amid slumping sales, a regulatory investigation, shareholder lawsuits and a free-falling stock valuation.

Krispy Kreme, which boasted annual corporate revenues of $665.6 million and a share price near $40 at this time last year, saw its stock hit an all-time low Feb. 10 — $5.85 — that was the result of news that the company had agreed to pay $400,000 a month to the turnaround firm supplying its new top two executives.

To reduce other expenses, Winston-Salem-based Krispy Kreme also said it had shrunk the number of corporate employees by 25 percent, or about 125 people, which would save $7.4 million annually. It also sold the lease to a corporate jet to save $3 million each year. For those actions, restructuring charges totaling $900,000 will be logged in the current first quarter of Krispy Kreme's fiscal year 2006, the company said.

"Krispy Kreme is a great brand," Steven G. Panagos, Krispy Kreme's new president and chief operating officer, said in a statement, "and we are working very hard to help the company rediscover its potential."

But the cost-saving first move by Krispy Kreme's new turnaround leaders — Panagos and chief executive Stephen F. Cooper, who replaced former chief executive Scott A. Livengood last month — was not met with positive reviews from some analysts. Indeed, it was coupled with a warning that the company soon would need additional credit from lenders to fund operations and capital expenditures.

"We wonder if [aggressive cost cutting] will be enough given hemorrhaging sales in the past 12 weeks," John Glass at CIBC World Markets in Boston, wrote in a research note. "Given this scenario, bankruptcy and debtor-in-possession financing could be one possible option," he continued.

Executives Cooper and Panagos, chairman and managing director, respectively, at New York-based Kroll Zolfo Cooper LLC, are being paid a combined $1,455 per hour as part of Krispy Kreme's monthly payments of $400,000 for the services of the turnaround firm. Cooper concurrently is the interim chief executive at another embattled company, Enron Corp. Krispy Kreme also is paying the executives' out-of-pocket expenses and a $200,000 security retainer, a filing with the U.S. Securities and Exchange Commission said. In addition, a "success fee" for KZC that was under negotiation would be determined within 60 days of the Feb. 10 filing.
The day after Krispy Kreme announced its cost-cutting initiatives and admitted to its need for cash, company shares crashed as much as 10 percent. At market close on Feb. 9, Krispy Kreme shares were down 73 cents, or 9 percent, to $7.21. Shares fell an additional 16 percent on Feb. 10 to close at $6.06, after hitting the new all-time low earlier that day of $5.85.

Analysts contend the road ahead will be tough for Krispy Kreme, with a steep number of store closures an almost foregone conclusion and at least a few quarters of continued weak sales and expensive restructuring and regulatory efforts awaiting the chain. Krispy Kreme is facing a formal SEC investigation into its accounting practices and a pending class-action shareholder lawsuit against former company executives, including Livengood.

To accomplish a turnaround from two recent quarters of net losses and declining retail and wholesale sales, Krispy Kreme will need money fast, analysts contend.

"We believe the store base should be reduced from the current base of around 400 stores to about 330 with hopes of increasing average volumes and store profitability," analyst John Ivankoe of J.P. Morgan Securities Inc. in New York said in a note to clients. "These cuts are necessary in the near term but are only possible through cooperation from creditors and possibly with the assistance of outside financing."

Restaurant analyst Glenn Guard at Legg Mason Wood Walker Inc. in Baltimore contends that the cost of closures may hover around $1.4 million per doughnut shop. He called for Krispy Kreme to shed a total of 48 units systemwide in the current fiscal year, including 24 corporate locations, which would lead to expenses of $33.6 million.

Krispy Kreme currently cannot borrow additional money from its lenders without consent because of its failure to deliver finalized financial results for the quarter ended Oct. 31. The company has until March 25 to submit those quarterly results without defaulting on credit agreements.

The company said in a statement that it "presently is working on a business plan and intends to conduct discussions with its lending banks." Krispy Kreme, which holds a $150 million credit facility, had drawn $90.9 million as of last October.

Other cash obligations of the company are "substantial," according to analyst Glass at CIBC. He outlined about $380 million in fixed expenses, including $112 million in long-term debt, $155 million in lease obligations and $114 million in commodity purchase commitments.

The missing link, however, is whether Krispy Kreme holds substantial off-balance-sheet franchise obligations. Roger Lipton, president of Lipton Financial Services, a money management firm in New York, said such obligations could be the company's downfall, much like Boston Chicken Inc., which operated the Boston Market chain in the early 1990s. That chain buckled under loans to its franchisees and was forced to declare bankruptcy.

"We know [Krispy Kreme] invested in their franchisees," Lipton said. "But we don't know to what extent they might have guaranteed the debt of franchisees. If they avoided that, I don't think there is enough leverage here to put it into bankruptcy."

Lipton said the company should have enough cash flow, after a downsizing of both the chain and corporate expenses, to keep the brand afloat. "I see them closing stores that are too big, that require huge opening volumes to be sustained and a lot of wholesale business," he said. "The chain must be downsized; whether they chop it in half or not, it must be downsized and then rebuilt."

While Krispy Kreme continues its free fall — bankruptcy or not — other chains in the coffee-and-snack segment are forging ahead with increased sales and unit expansion. Canton, Mass.-based Dunkin' Donuts, the 6,000-unit chain owned by Britain's Allied Domecq PLC, said worldwide sales increased 13 percent to $3.6 billion in fiscal year 2004 ended last August. The company also said its same-store sales growth is up.

Tim Hortons, the 2,632-unit doughnut chain owned by Dublin, Ohio-based Wendy's International Inc., also boasted increased same-store sales of between 9.3 percent and 9.7 percent for January. Through the first nine months of fiscal year 2004, ended last Sept. 26, same-store sales jumped 10.1 percent over year-earlier results. The Wendy's subsidiary opened 38 Tim Hortons units in its most recently completed third quarter and has plans to reach the 500-store level in the United States over the next three years. The chain's third-quarter sales were $157.6 million, a 28-percent increase from sales of $123.1 million in the third quarter of 2003, and Hortons' operating income also grew almost 19 percent.

The largest player in the segment, Starbucks Corp., reported a 31-percent jump in first-quarter earnings on record revenues of $1.6 billion for the period ended Jan. 2. The Seattle-based operator and licensor of 8,994 Starbucks Coffee locations booked a 7-percent same-store sales increase at corporate units open at least 13 months for the four weeks ended Jan. 30.
Krispy Kreme, which has not filed a quarterly earnings report with the SEC since last September, last month said it would have to restate its financial results for fiscal 2004 and first two quarters of fiscal 2005.