Krispy Kreme says diet will reduce earnings

By Abigail Goldman
Los Angeles Times

The glaze is off the cruller at Krispy Kreme Doughnuts Inc.

Krispy Kreme's high-calorie doughnut products are losing ground among the increasing numbers of American consumers who are turning to low-carbohydrate diets. Associated Press

"The popularity of low-carb diets has captured the consumers' attention," said Chairman and Chief Executive Scott Livengood. "It's impossible to predict if low-carb is a passing fad or will have a lasting impact."

The Winston-Salem, N.C.-based company said it will shutter six underperforming stores and sell or close Montana Mills Bread Co., a chain that it bought last year.

Investors sent the stock tumbling 29 percent, or $9.29, to $22.51 on the New York Stock Exchange. Krispy Kreme shares have lost more than half their value since hitting an all-time high of $49.74 in August.

Analysts said the company's explanation for lowered earnings forecast was a few doughnuts short of a dozen.

"Low-carb is part of the issue at Krispy Kreme; I don't think it's the entire issue though," said Glenn Guard, an analyst with Legg Mason Wood Walker Inc. "The other part is that the company is growing and, in my opinion, has already begun to develop its best markets. So the average weekly volume will come down as they open in less-than-stellar markets."

J.P. Morgan analyst John Ivankoe wrote in a note to clients that "we believe many issues are internal." He said the chain of more than 360 stores is suffering from "waning fad appeal" and an increased reliance on sales in grocery stores and other retail outlets.

Although the doughnut industry as a whole is suffering, Krispy Kreme is gaining market share, Livengood said. All other brands have fallen a combined 7.2 percent at grocery stores, he noted, while Krispy Kreme has gained 26.3 percent.

That's part of the reason Guard believes that the company still has ample room for expansion.