Markets & Finance

Can Krispy Kreme Rise Again?


Hot off the conveyor belt at Krispy Kreme Doughnuts (KKD): a new chief executive. Daryl Brewster, a 23-year veteran of the food business, stepped in Mar. 7 to replace interim CEO Stephen Cooper. But it may take more than a new cook to put the glaze back on the troubled doughnut maker.

True, investors seem to like Brewster's chances. Shares in the Winston-Salem (N.C.) chain surged 20.7% on Tuesday, to $7.71, nearly double their 52-week low of $3.91. "This is a significant step forward for the company," says Morningstar analyst John Owens. But Krispy Kreme, once a high-flying stock that traded as high as $44.54 in 2003 after an impressive public debut in 2000, has been beset by accounting woes and falling sales since May, 2004 (see BW Online, 11/23/05"Krispy Kreme Has That Glazed Look").

THE RIGHT GUY. Brewster's hefty industry resume should suit him well for his new role, most analysts say. Before joining Krispy Kreme, he was president of the $6 billion North American snack and cereal division at Kraft Foods (KFT). His eight years with Kraft and its affiliate Nabisco gave him experience that should prove especially relevant for the wholesale side of Krispy's operation. Former Pizza Hut executive Jeff Jervik, who joined Krispy Kreme last October as executive vice-president of operations, can probably compensate for the retail experience Brewster lacks, says Morningstar's Owens.

But J.P. Morgan analyst John Ivankoe issued a report Tuesday maintaining an underweight rating for Krispy Kreme. "While a new CEO is a positive for the stock, much uncertainty still remains with regards to the fundamentals of the business and the timing of a turnaround," Ivankoe wrote. Standard & Poor's stopped covering the stock in the wake of earnings restatements announced last year, and Morningstar no longer gives it a rating. No other analysts filed reports today.

Back in May, 2004, Krispy Kreme blamed flagging revenues on the low-carb craze, but the company has more to fear from its pastry-purveying competitors, who avoided Krispy Kreme's fate. Dunkin' Donuts, owned by privately traded Dunkin' Brands, is hungry for expansion. Wendy's International (WEN) recently announced plans to spin off Tim Hortons, the primarily Canadian coffee-and-doughnut chain.

WAKING UP THE BRAND. Brewster must also return the luster to a tarnished brand, analysts say. Franchisee conflicts have bedeviled the chain's public-relations efforts. Two franchisees filed for bankruptcy in 2005, while three others sued. At least one of the suits has been settled. Delays in filing financial statements and missed loan covenants have also hurt Krispy Kreme's reputation.

The company's expansion into grocery and convenience stores means it can't directly control the quality of its sugary treats. Perhaps even more important, such outlets can't offer what many saw as the Kreme de la Kreme -- fresh, hot, glazed doughnuts. The glowing red light, a signal that fresh doughnuts were for sale, was the basis for a cult phenomenon. After all, who ever had a craving for cold Krispy Kremes?

Krispy Kreme also must catch up with early-morning rivals Dunkin' Donuts and Starbucks (SBUX) when it comes to caffeine (see BW Online, 7/3/03, "Can Dunkin' KO Krispy?"). In recent years, Krispy Kreme went beyond its starchy staples and started offering specialty coffees, but both the variety and quality aren't as robust as they could be.

The new chief's predecessor, meanwhile, will stay on the payroll. Former CEO Cooper, the Kroll Zolfo Cooper turnaround specialist who took over in January, 2005, following longtime CEO Scott Livengood's ouster, moves into the new position of chief restructuring officer. Steven Panagos, previously president and COO, will become director of restructuring. Cooper must be optimistic about the company's prospects, as his new compensation deal allows his firm to purchase 1.2 million shares of Krispy Kreme common stock at $7.75 a share (see BW Online, 12/5/05, "Krispy Kreme's Problems: Not "Fatal").

OUT OF THE HOLE? In a statement, Brewster expressed confidence profitability will return for the company, which hasn't filed earnings reports since 2004. A company spokesman declined to comment beyond the press release.

It has been reported that Krispy Kreme will look to overseas markets for growth, but a global push might not be the best immediate strategy. The company has more immediate issues, such as continuing to pare back the number of its underperforming stores, analysts say. "I'd be interested in seeing a turnaround of the existing business before taking on any significant expansion," Owens says.

Brewster's hire signals the embattled chain's celebrated conveyor belts are moving in the right direction, but it may be a while before its doughnuts -- and its stock -- are really hot again.


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW

Sponsored Financial Commentaries

Sponsored Links

Buy a link now!

 
blog comments powered by Disqus