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Chapter closes as reality settles in on Krispy Kreme
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Published: March 15, 2009
The cloud that hung over Krispy Kreme Doughnuts Inc. for 4½ years is breaking up.
But analysts say there is no guarantee that the company will recover anytime soon from the problems of former management and failed expansion on a national scale.
"Krispy Kreme became a vehicle for someone's Starbuckian dreams, but it ended up as just another bubble in an era of stock-market bubbles of this decade," said John Challenger, the chief executive of Challenger, Gray & Christmas, a consulting firm.
"It won't be again what it was during its heyday as a publicly traded company, but it is a different company in terms of strategy and management, and perhaps it will get credit for that going forward." After the company went public in April 2000, Krispy Kreme became an investor favorite by beating earnings expectations for 13 consecutive quarters. That performance spurred a share price that topped out at $108.50 in November 2000. The stock was split twice in 2001.
But since July 2004, when the Securities and Exchange Commission began a probe into Krispy Kreme's accounting practices, the local community braced for a verdict that some analysts thought could drive the company into bankruptcy, or worse.
On March 4, the SEC ordered that three former top executives pay a combined $783,000 for violating accounting laws and for fraud. They were Scott Livengood, the chairman, chief executive and president; John Tate, the chief operating officer; and Randy Casstevens, the chief financial officer.
However, the company received only a cease-and-desist order from committing or causing violations of several provisions of the Securities Act.
Neither the executives nor the company admitted or denied wrongdoing in agreeing to resolve the SEC civil lawsuit in the Middle District of U.S. District Court of North Carolina.
One reason for the leniency was the cooperation by subsequent Krispy Kreme management in the probe, SEC officials said.
Another settlement in October 2006 resolved a lawsuit, when Krispy Kreme disclosed a settlement of a securities class action and a derivative lawsuit that cost about $75 million.
That included a cash payment of $34.9 million from the insurers of the company's directors and officers, $35.8 million in common stock and warrants to purchase common stock to be issued by the company, and $100,000 in cash from Casstevens and Tate. Livengood was not a party to the deal.
That settlement covered all investors who bought Krispy Kreme's securities between March 8, 2001, and April 18, 2005.
"A lot of companies were manipulating their numbers to beat earnings estimations," Challenger said. "The former CEO was not unique in doing that. He just had an earnings-driven focus, which led the company on a skyrocket ride that dramatically fell back to earth."
Krispy Kreme management provided a brief statement regarding the SEC ruling.
"We are pleased that the SEC investigation has concluded on satisfactory terms, with no monetary penalty against the company," said Darryl Marsch, the general counsel for Krispy Kreme.
"Today, we can finally close the book on this investigation into the events that occurred under former Krispy Kreme management."
However, with the revelation of accounting violations and fraud coming out of the SEC settlement, several analysts project that there will be more civil lawsuits filed against the company.
"Given the level of shareholder anger out there about corporate fraud in general, I'd suspect more than a few class-action suits out of this decision," said Tony Plath, a finance professor at UNC Charlotte.
Michael Lord, an associate professor of management at Wake Forest University, said that the SEC ruling will at least relieve Krispy Kreme's management of carrying the burden of past executive sins.
"It's good to close a troubling chapter, at least in terms of these particular SEC actions," Lord said.
"Krispy Kreme is on its third CEO since all this transpired, so I'd assume current management has long since put these matters in the past as much as possible.
"They're too busy with more pressing concerns," he said, such as expanding its international presence and attracting consumers to eat doughnuts that are shipped in from a central site rather than made in front of them.
The SEC settlement makes it easier for the company to move forward, said Paul Lapides, the director of the Corporate Governance Center at the Coles College of Business at Kennesaw State University in Georgia.
"But as far as believing in Krispy Kreme stock again, shareholders will continue to be more concerned about performance than the SEC action," Lapides said.
The conclusion of the SEC investigation also provides a closing chapter to a financial cautionary tale, which already has inspired lectures on how not to go overboard in the frenzy of a red-hot initial public stock offering.
"Krispy Kreme is a case of a management team living large on the market's overblown expectations for corporate earnings and revenue growth, when in reality the company's ability to expand and compete against Dunkin' Donuts was far more limited and pedestrian," Plath said.
"Rather than letting the market know it was creating sublime fiction about a Southern doughnut company, management chose to live the lie along with the market by perpetrating accounting fraud.
"In the process, they almost destroyed a fine middle-market company," Plath said.
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
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