Krispy Kreme Doughnuts in 2005:Are the Glory Days over

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8. Krispy Kreme Doughnuts in 2005: Are the Glory Days Over?

Overview

In early 2004, Krispy Kreme’s prospects appeared bright. With 357 Krispy Kreme stores in 45 states, Canada, Great Britain, Australia, and Mexico, the company was riding the crest of customer enthusiasm for its light, warm, melt-in-your-mouth doughnuts. During the past 4 years, consumer purchases of Krispy Kreme’s doughnut products had taken off, with sales reaching 7.5 million doughnuts a day. Considerable customer excitement—approaching frenzy and cult status—often surrounded the opening of the first store in an area. For instance, when a new Krispy Kreme opened in Rochester, N.Y. in 2000, more than 100 people lined up in a snowstorm before 5 a.m. to get some of the first hot doughnuts coming off the conveyor line; within an hour there were 75 cars in the drive-through lane. Three TV stations and a radio station broadcast live from the store site. The first Krispy Kreme store in Denver grossed $1 million in revenues in its first 22 days of operation, commonly had lines running out the door with a one-hour wait for doughnuts, and, according to local newspaper reports, one night had 150 cars in line for the drive-through window at 1:30 am—opening day was covered by local TV and radio stations, and off-duty Sheriff’s deputies were brought in to help with traffic jams for a week following the Denver store’s grand opening. To capitalize on all the buzz and customer excitement, Krispy Kreme added new stores at a record pace throughout 2002-2003. The company’s strategy and business model were aimed at adding a sufficient number of new stores and boosting sales at existing stores to achieve 20 percent annual revenue growth and 25 percent annual growth in earnings per share. In the just-completed 2004 fiscal year, total company revenues rose by 35.4 percent, to $665.6 million compared with the $491.5 million in the fiscal 2003. Net income in fiscal 2004 increased by 70.4 percent, from $33.5 million to $57.1 million. Krispy Kreme’s stock price had increased eightfold since it went public in April 2000, giving the company a high profile with investors and Wall Street analysts. In February 2004, Krispy Kreme stock was trading at 30 times the consensus earnings estimates for fiscal 2005, a price/earnings ratio that was “justified” only if the company continued to grow 20-25 percent annually. In March 2004, Krispy Kreme executives said that the company should earn $1.16 to $1.18 per share in fiscal 2005 (up from $0.92 in fiscal 2004) and that systemwide comparable store sales growth should run in the mid-to-high single digits. Their expectations were that systemwide sales would increase approximately 25 percent in fiscal 2005 (ending January 29, 2005) and that approximately 120 new stores would be opened systemwide, including 20 to 25 smaller doughnut-and-coffee-shop stores, during the next 12 months. But as 2004 progressed, Krispy Kreme’s business prospects went from rosy to stark within a matter of months. In a May 7, 2004 press release that caught investors by surprise, CEO Scott Livengood said: For several months, there has been increasing consumer interest in low-carbohydrate diets, which has adversely impacted several flour-based food categories, including bread, cereal and pasta. This trend had little discernable effect on our business last year. However, recent market data suggests consumer interest in reduced carbohydrate consumption has heightened significantly following the beginning of the year and has accelerated in the last two to three months. This phenomenon has affected us most heavily in our off-premises sales channels, in particular sales of packaged doughnuts to grocery store customers. Livengood said the company was lowering its earnings guidance for the first quarter of fiscal 2005 to about $0.23 per share, down from about $0.26 per share. The company went on to announce in the same press release that it was νDivesting its recently...
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