Krispy Kreme shares get that glazed look

They tumble 29% as profit outlook is cut amid the low-carb craze

May 08, 2004|By Andrea K. Walker | Andrea K. Walker,SUN STAFF

The sugar high appears to be wearing off at Krispy Kreme Doughnuts Inc., and the company says Dr. Atkins is to blame.

Americans who once scooped up a supply of Krispy Kremes from grocery store racks are increasingly opting for low-carb diets as they struggle to slim waistlines.

So many people have stopped eating its sugar-laden doughnuts that the Winston-Salem, N.C., company yesterday cut its profit projection for its fiscal year by 10 percent, sending its stock price into a 29 percent nose dive. Shares lost $9.29 to close at $22.51, a 52-week low.

"The popularity of low-carb diets has captured consumers' attention," said Scott Liven- good, the company's chief executive officer and chairman. "It's impossible to predict if low-carb is a passing phenomena or has gained substantial momentum."

Livengood said sales have dropped most in grocery stores and announced the company would shut down two manufacturing facilities. One of those plants is an 18,000-square-foot plant in Woodlawn that the company opened two years ago to bake its high-caloric treats for Giant Food and other grocery stores and convenience chains.

Krispy Kreme sales are split about evenly between Krispy Kreme stores, where doughnuts are made, and what it calls "off-premise" outlets.

The doughnut-maker first began to feel the effects of the low-carb craze this year, but the impact accelerated in the past few months, company officials said yesterday. In March, Krispy Kreme unveiled plans to offer a low-sugar doughnut. Yesterday, executives took it a step further and said they hoped to have a no-sugar doughnut on the market by the end of the year.

One of Krispy Kreme's Hot Original Glazed doughnuts has 200 calories. More than half those calories come from fat, which gives the fried doughnut texture and flavor.

"People who are smart about such things will understand that `no sugar' means lower carbs," said Amy Hughes, a Krispy Kreme spokeswoman.

Doughnuts aren't the only foods that Americans have shunned in favor of low-carb alternatives. The trend has put many food industries on the defensive.

The bread industry held a summit in November to fend off blame for Americans' obesity problem The orange juice industry recently developed a marketing campaign to defend its products. The British Potato Council launched an advertising campaign called "Fab Not Fat."

On the Atkins diet, people are given a green light to fill up on cheese, eggs, meat and other protein-laden foods but must strictly limit carbohydrates, especially refined ones such as white flour. White bread, pasta, potatoes, white rice and other carbo-loaded foods are all but prohibited. The South Beach Diet doesn't have as many restrictions, but still limits many carbohydrates.

It's a different world from the early 1990s, when a then-regional chain leveraged its cult-like following into a breath-taking expansion. Krispy Kremes sprouted everywhere, dishing out hot, freshly made doughnuts and turning the company's signature flat box into an icon that industry leader Dunkin' Donuts was forced to copy.

When it opened its first Baltimore area store in 1998, customers created gridlock on Belair Road at 5:30 in the morning. Krispy Kreme now operates 374 company-owned stores.

Seeing an opportunity, Krispy Kreme started selling its doughnuts in other outlets such as Giant Food even though it meant they weren't fresh from the fryer. In 2000, it went public, and investors gobbled up its shares.

But yesterday, as more Americans resist the temptation of the fried cream-filled, frosted and powdered treats, the company said earnings for its fiscal first quarter, which ended May 2, would be about 23 cents a share- 4 cents below the estimates of analysts surveyed by Thomson Financial.

And it lowered its forecast for annual earnings per share from continuing operations, excluding charges, by 10 percent, to $1.04 to $1.06.

Glenn M. Guard, an analyst with Legg Mason in Baltimore, said the low-carb craze has peaked, and Krispy Kreme is still a relatively healthy company.

"I do think that low--carb is affecting the way people are making decisions in grocery stores," Guard said.

"I don't think it's the whole problem, but I do think it has hurt them."

Joe Bonner, an analyst with Argus Research in New York, said he was skeptical about the impact of the low-carb diet. Bonner, who posted a recommendation to sell Krispy Kreme stock in March, said some of the company's new stores aren't selling well.

"It's hard to believe low-carb was the main factor," he said.

Along with the closing of the manufacturing facilities, Krispy Kreme will shutter six underperforming stores. The five Baltimore-area stores will continue to operate.

The company is also bailing out of a bakery cafe chain it bought to "reduce its exposure to flour-based products."

Hughes wouldn't say how many employees worked at the Woodlawn facility, but said some would be offered jobs in other parts of the company. Operations will be moved to a facility in Lorton, Va.

Yesterday's announcement did little to deter customers from coming to the Krispy Kreme on Belair Road in Perry Hall. Assistant Manager Jackie Dargan said she has seen no drop-off in sales.

"They ask about that low-carb doughnut but then they'll order two or three dozen," she said.

Daniel Starks, a 23-year-old electrician, came in to order a couple of doughnuts and walked out with a dozen. Buzz Nasdor was shopping at Wal-Mart when he felt the urge for a Krispy Kreme. He ordered two chocolate frosted and devoured them in a couple of minutes.

"This low-carb is just a trend or fad that comes and goes," he said. "I'm not overweight, so until they say there's something really bad with Krispy Kremes, I'm not giving them up."

Sun Staff writer William Patalon III contributed to this article.

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