Battered Krispy Kreme gets loan lifeline

Related tags Krispy kreme

The Krispy Kreme doughnut company has pulled itself back from the
abyss by successfully negotiating a new loan deal, yet financial
pressure on the firm remains intense with analysts sceptical about
its future expansion strategy, reports Chris Mercer.

Battered Krispy Kreme, which has seen its share value fall by 82 per cent since August 2003, has obtained a crucial loan from Credit Suisse First Boston and hedge fund Silver Point Capital.

The deal comes barely a week before the firm faces defaulting on a $150 million (€116 million) loan from BB&T Capital Markets and Wachovia Securities after failing to hand over outstanding financial statements from the quarter ended 31 October 2004. The originally extended deadline was set at 25 March, but the lenders agreed to a reset this to 11 April.

The new loan will be a welcome lifeline to Krispy Kreme, giving it a chance to assess its business strategy and work out how to push sales back in the right direction.

But, the firm still faces a variety of problems which together threaten to bring the company to its knees, and analysts at market research group Datamonitor​ have warned of more troubles ahead.

They said the company was setting itself an extremely tough challenge by planning to open 120 new stores in 2005. Disappointing sales throughout 2004 have already left Krispy Kreme's aggressive expansion plan - 32 new stores in the first half of that year - badly exposed.

And the company has consistently failed to tap into American healthy eating trends at a time when many US retailers are cutting down on doughnuts in their stores to accommodate more foods making healthy diet claims.

Back in May 2004, Krispy Kreme said it was aiming to launch a low-calorie, sugar-free doughnut by the end of the year. This has not materialised and the plan may have suffered from a lack of funds, though the company has just temporarily launched a strawberry shortcake doughnut with white icing.

To make matters worse, Krispy Kreme is also facing added financial problems away from the production line.

The firm, as well as some current and former officers, was recently served a class action 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.

The complainants seek unspecified financial compensation and claim 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.

They also claim the firm "failed to provide complete and accurate information about the risks of the company's common stock"​.

As if this wasn't enough, 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.

All this, plus Krispy Kreme's $21.7 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, has plunged the company's future into doubt.

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