A Sticky Mess
Nobody falls in love with an Enron. People don’t spend their childhoods with noses pressed against shop windows, watching in fascination as the machines dip WorldComs into vats of hot oil, waiting impatiently for the red “Hot Global Crossings Now” sign to light up.
That’s why Krispy Kreme’s financial implosion came as such a painful surprise to its sticky-fingered devotees.
Krispy Kreme’s outlook sweetened a bit this week when its creditors extended a key deadline, giving the company a chance to avoid default. But it is just marginally healthier than its products. Its stock, which peaked at near $50 in 2003, is now around $8.75, thanks to a serious downturn in sales, a restatement of earnings and two federal investigations into accounting issues. In the clearest signal of its fall from grace, Krispy Kreme is now being run by the same turnaround specialist assigned to salvage Enron.
The company was a well-timed Wall Street darling. As the dot-coms tanked, investors fled to solid, brick-and-mortar companies with real products and strong brands, and there was Krispy Kreme, a Southern phenomenon that had taken New York by storm, going public. People camped out for the opening of a new franchise; they lined up out the door for weeks after its arrival.
What went wrong? When business started to slow down in 2004, then-Chief Executive Scott Livengood blamed the Atkins diet. Never believe a junk-food executive who says his company is suffering because Americans’ health habits are changing. Fad diets come and go, but cheating is eternal.
Greed was likely a stronger factor. The company was forced to restate fiscal 2004 results because of “accounting mistakes” in the repurchase of franchises in Michigan and Northern California. The latter franchise was partly owned by Livengood’s ex-wife, who reportedly pocketed $1.5 million in the transaction -- hence the federal probes. Meanwhile, Livengood was shuttling around in a private jet being leased for about $3 million a year. Not bad for a doughnut king.
More than that, though, Krispy Kreme just lost its mystique. As the chain became ubiquitous, interest waned. Worse, Krispy Kremes became commonly available, cold and old, in grocery stores.
Krispy Kreme may regain its footing, but it’ll be a doughnut chain, not a phenom. That’s fine as long as just the products, not the financial statements, are sugar-coated.
