SEC Probing Krispy KremeJul 30, 2004 | Newsday Krispy Kreme Doughnuts Inc. said yesterday that the Securities and Exchange Commission is investigating its accounting and some of its business deals, sending its stock tumbling by more than 15 percent.
The second-largest U.S. doughnut chain said the probe concerned how it accounted for the repurchase of franchises and earnings forecasts.
Krispy Kreme is "fully cooperating with the SEC," the Winston-Salem, N.C.-based doughnut maker said in a statement.
Chief executive Scott Livengood said the company "is confident in its practices" and would cooperate fully with the SEC probe, which the company described as an "informal, nonpublic inquiry."
But investors took the news hard. Shares of the company, already hard hit by a forecast of lower profits and down by about half since the company warned of a profit shortfall in May, dropped $2.95, almost 16 percent, yesterday, to close at $15.71. The stock hit a 52-week high of $49.74 last August.
The company, which had its first loss as a public company in the first quarter, blamed the low-carb diet craze and cut its annual profit forecast in May, prompting the biggest share drop ever.
The company also reacquired franchises in Michigan and Northern California late last year and early this year. Investors and analysts suggest these franchisees haven't been performing well.
What's more, Krispy Kreme may have used questionable accounting to inflate its earnings when it bought back its Michigan franchise last year, according to some accounting experts quoted yesterday by the Wall Street Journal in its "Heard on the Street" column.
The company didn't disclose, when it acquired its Northern California franchise in January, that Livengood's former wife was one of the sellers, the newspaper said.
"The accounting for the Michigan acquisition was in accordance with generally accepted accounting principles and any assertion to the contrary is false and inaccurate," Livengood said on a May 25 earnings conference call.
"It's just one more blow to their credibility," said Joe Bonner, an analyst at Manhattan-based Argus Research told Bloomberg News. "Now that it seems there is some fire with the smoke, it makes it worse. This is the kind of thing that puts management at risk."