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Krispy Kreme’s turnaround bid suffers $27 million setback in second quarter

WINSTON-SALEM N.C. Krispy Kreme Doughnuts Inc. looks today like the embattled company it was two years ago, with newly bankrupt franchisees and a most recent quarter of wider net losses blamed on large impairment charges and declining sales. —

Despite efforts to reverse a steep drop in sales and profit that started in 2004, the operator or franchisor of 411 Krispy Kreme doughnut shops posted a second-quarter net loss of $27 million, or 42 cents per share, compared with a loss of $4.6 million, or 7 cents per share, in the year-earlier quarter. —

Revenue for the three months ended July 29 decreased 7.5 percent from a year ago to $104.1 million. Systemwide sales declined about 0.5 percent from a year ago, and average weekly sales per store decreased by about 2.8 percent to $37,500, the company said. —

Current-year impairment charges and lease termination costs totaled $22.1 million, including $10.6 million related to the company’s decision to divest an “underutilized” manufacturing and distribution facility in Illinois and charges for underperforming locations that were closed or that will be closed this year. —

“After several quarters of progress on our turnaround, second-quarter results did not meet our expectations,” Daryl Brewster, the company’s president and chief executive, said in a statement. —

Krispy Kreme’s fortunes began to sink in 2004, when the company attributed its first earnings miss and slumping sales to the low-carbohydrate craze sweeping the nation. Soon after, however, management was taken to task by shareholders for allegedly inflating sales and profit results and growing the concept too quickly. —

The company’s quick descent caught the attention of regulators and prompted shareholder and franchisee lawsuits aimed at the franchisor. Management eventually resigned in 2005, and just this year Krispy Kreme became up to date with regulatory filings after sorting out its accounting. —

The company’s latest weak earnings report came on the heels of bankruptcy filings by two franchisees. Krispy Kreme acknowledged that “several franchisees have been experiencing financial pressures which, in certain instances, appear to have become more exacerbated during the second quarter.” —

Franchisees closed 13 locations in the first six months of fiscal 2008, Krispy Kreme said, and a “significant number” of additional franchised units are likely to close during the rest of the company’s fiscal year, which ends in January. —

“Our initial optimism that the worst was behind [Krispy Kreme] has proven incorrect,” John S. Glass, analyst at CIBC World Markets in Boston, said in a report, “as flagging company-shop sales, especially wholesale, financially distressed franchisees, and rising commodity costs have all taken their toll.” —

Krispy Kreme’s Brewster said the company was “taking steps to transform the company and improve its performance.” —

Those steps include the continued closing of underperforming units, the reduction of corporate costs through another recent management restructuring, efforts to refranchise various markets and the opening of locations with a smaller footprint to increase market penetration, particularly in the chain’s Southeast home base. —

Krispy Kreme also said it would increase the frequency of product introductions, like its latest football-shaped doughnut offerings, which coincide with the start of football season. —

The news was not met with much optimism from analysts and investors. The company’s stock traded at a new annual low Sept. 7, the day after the earnings report was released, and closed down 38.2 percent to $3.91. —

“Krispy Kreme is not yet in turnaround mode, and we don’t expect near-term brand recovery,” J.P. Morgan securities analyst John Ivankoe said in a note to investors. —

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