Krispy Kreme Doughnuts, Inc.

Krispy Kreme Doughnuts, Inc. (hereinafter, “Krispy Kreme”) seemed poised to become an industry leader and Wall Street chart topper in 2000, however, by 2004 the company’s stock price had plummeted. Krispy Kreme’s stock price one day after the initial public offering in April of 2000, was $40.63, giving the company a market capitalization of nearly $500 million. Investors believed Krispy Kreme was the next big money maker to enter the market. By 2005, Krispy Kreme shares were trading at less than $10 a share, the company was in the midst of an SEC investigation into their accounting treatment for franchise acquisitions, and they found themselves on the verge of potentially defaulting on their credit facility.

Following the successful IPO, Krispy Kreme announced their aggressive plan to add approximately 350 more stores to their 144 store domestic arsenal and an additional 32 international locations. On May 7, 2004, Krispy Kreme announced adverse financial results for the first time since it became a publicly traded entity. Krispy Kreme told investors to expect earnings to be 10% lower than anticipated for the following three reasons: 1. the low-carbohydrate diet trend in the US had hurt sales 2. the company would take a $35 to $40 million charge because it was divesting a chain of 28 bakery cafes it had acquired for $40 million in stock the year before and 3. the company had plans to shut down three new doughnut shops at a charge of $7 million to $8 million because they were underperforming. Following the announcement about the company’s financial standing, shares closed down 30% at $22.51 a share. On May 25, 2004, the Wall Street Journal published an article which described Krispy Kreme’s questionable accounting practices surrounding the treatment of franchise acquisitions. In July of 2004, when Krispy Kreme announced that the SEC had launched an informal investigation the company’s shares dropped another 15% to $15.71 a share. Krispy Kreme’s stock fell