Scott A. Livengood loves to wax about the "brand mythology" that has built up around Krispy Kreme Doughnuts Inc. (KKD), which enjoys a cult-like following. But investors, once enthralled with KK's soaring profits and giddy over its stock price, today see it as a kind of corporate Icarus, crashing to earth. After a heady rise following its 2000 initial public offering, Krispy Kreme's shares have plunged by roughly 80% from their peak. And the Securities & Exchange Commission has launched an inquiry into whether the North Carolina-based chain used improper accounting to prop up its earnings, which are now on the decline. The company says it's cooperating with the SEC.
While Livengood blames the doughnut chain's woes on the low-carb craze, critics counter that rival Dunkin' Donuts Inc. (AED)doesn't seem to be suffering any similar effects. The real problem, critics contend, is that Livengood expanded too fast after the IPO, saturating some markets with so many stores that the brand quickly lost its novelty. The company is also being dogged by questions over how it accounted for the buyout of franchisees, as well as accusations of self-dealing in its buyback of some franchises owned by corporate insiders. A group of shareholders filed suit earlier this year after learning that Krispy Kreme paid a hefty premium to reacquire a franchise partially owned by Livengood's ex-wife.
Livengood still believes he can reinvigorate sales, by rolling out smaller stores and new products such as a sugar-free doughnut. The company says he is "laying the groundwork for long-term, sustained growth." But it will take a lot to restore Krispy Kreme's luster.