Lawsuit looms for battered Krispy Kreme

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The knives are out for the cash-strapped Krispy Kreme doughnut
company as a class action lawsuit looms, threatening to destroy the
firm's attempts to overhaul losses caused by a lack of innovation
and over-expansion, reports Chris Mercer.

Krispy Kreme announced it had been served a lawsuit on behalf of participants and beneficiaries in the firm's retirement savings plan and profit sharing stock ownership plan between 1 January 2003 and the present.

They allege that Krispy Kreme mismanaged the assets of these plans by holding large percentages of the assets in the company's common stock, and by continuing to offer that common stock as an investment option.

The lawsuit also claims Krispy Kreme, and some of its current and former officers, "failed to provide complete and accurate information about the risks of the company's common stock"​.

Now, the complainants are seeking unspecified financial compensation from Krispy Kreme, and the firm said "an adverse result could have a material adverse effect on the company's results of operations and financial condition"​.

That, coupled with Krispy Kreme's $21.7 million (€16.4 million) loss for the first nine months of 2004 and the recent move to shed a quarter of its workforce to save $7.4 million, could plunge the firm's future into further doubt.

Krispy Kreme's lenders have given it until the end of this week to deliver outstanding financial statements for the quarter ended 31 October 2004. And the company said last month that it was unable to borrow funds under its Credit Facility, although planned to discuss this with its lending banks.

The 67-year-old doughnut veteran has already revealed that average weekly sales at individual stores dropped by almost 20 per cent up to November last year. And after the company then withdrew is 2004 sales forecast, JP Morgan analyst John Ivankoe said he saw nothing but negatives in Krispy Kreme.

The company, once a king on the New York stock market, has spoken little about its decline, yet it did admit that a number of consumers had abandoned its doughnuts because of dietary concerns.

Krispy Kreme has not broken into American healthy eating trends like some other well-known companies with potentially burdensome product portfolios, such as PepsiCo with Frito-Lay salty snacks. Back in May 2004, Krispy Kreme said it was aiming to launch a low-calorie, sugar-free doughnut by the end of the year, though this has not materialised.

Some analysts also cited over-expansion as a major problem. The company pursued a rigorous expansion programme in 2004, opening 32 stores in the first half, at a time when a number of US retailers began cutting down on the number of doughnuts in their stores to accommodate more foods making healthy diet claims, including low-carb products.

To make things worse, the Securities and Exchange Commission has also been conducting a formal investigation into the way Krispy Kreme accounted for the repurchase of some of its franchises from individual franchisees.

The new class action lawsuit has been filed under Section 502 of the Employee Retirement Income Security Act in the US District Court for the Middle District of North Carolina.

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