Case Study of Krispy Kreme

The Beginning

On July 13, 1937, Vernon Rudolph opened the doors to a

doughnut shop he called Krispy Kreme in Winston Salem, NC. He

had a vision to be the worldwide leader in sharing delicious tastes

and creating joyful memories. Known for their “hot now”

doughnuts, Krispy Kreme’s mission is to touch and enhance lives

through the joy that is Krispy Kreme. In 1973 the founder died but

the values remain the same. Krispy Kreme believes:

• Consumers are our lifeblood, the center of the doughnut

• There is no substitute for quality in our service to consumers

• Impeccable presentation is critical wherever Krispy Kreme is sold

• We must produce a collaborative team effort that is unexcelled

• We must cast the best possible image in all that we do

• We must never settle for "second best;" we deliver on our

commitments

• We must coach our team to ever-better results

In 1999, Krispy Kreme announced its consideration to sell public

stock and later did just that. Once registered with the Securities

and Exchange Commission (SEC), the companies stocks where

one of the second best performing initial public offerings of the

year ("Krispy kreme mulls," 1999). John McAleer, a vice chairman;

Robert McCoy, a director; and 40 others including shop owners

and their brothers, sisters, mothers, daughters, sons and even

former wives, sold $141 million of the stock as of January 30, 2001

("Krispy kreme gains," 2001). Krispy Kreme Doughnuts Inc.

reported an increase of nearly 89 percent in its first-quarter profit a

day before moving to the New York Stock Exchange on May 17,

2001 ("Profit increases 89%," 2001). The company posted

earnings of $5.7 million, or 20 cents a share. The results compared

with a profit of $3 million, or 13 cents a share, in the same quarter

a year ago. Analysts' estimates ranged from 17 cents to 18 cents.

Krispy Kreme encountered their first quarterly loss in May 2004

after the low-carbohydrate diet craze, also known as the Atkins

Diet, hurt the sale of doughnuts. The company lost $24.4 million,

or 38 cents a share, for its first fiscal quarter ending May 2, in

contrast to a profit of $13.1 million, or 22 cents a share, a year

prior ("Krispy kreme posts," 2004). Consumers of the popular

doughnut were concerned with the unhealthy affects eating

doughnuts could have on their health.

The Problems Begin

In 2005, a filing in a shareholder lawsuit against the company

alleged the company routinely padded sales by doubling doughnut

shipments to wholesale customers at the end of fiscal quarters.

Unsold doughnuts were shipped back after the quarters ended

("Krispy kreme to," 2005). Krispy Kreme’s stock went into a tailspin

and dropped by 66% after the earnings report, which was followed

by the revelation that the company was under investigation by the

Securities and Exchange Commission ("Krispy kreme to," 2005).

The charge was leveled by two unidentified “confidential

witnesses” who were former employees of the company. This

lawsuit was one of the many consolidated group of shareholder

lawsuits that claim executives at the once-trendy doughnut maker

knew sales were slowing by at least January 2003 but hid that fact

until May, when Krispy Kreme reported its first-ever quarterly loss

("Krispy kreme to," 2005).

The three top officers named in the lawsuit were chief executive

officer Scott Livengood, former chief operating officer John W.

Tate and former chief financial officer Randy S. Casstevens

“unloaded more than 475,000 shares of Krispy Kreme stock for

proceeds of $19.8 million,” the suit charges. According to one

witness cited, Krispy Kreme double-shipped wholesale customer

orders at the end of quarters on four separate occasions while the

witness worked for the company ("Krispy kreme to," 2005).

A former sales manager at a Krispy Kreme plant in Ravenna, Ohio,

said a regional manager demanded that customers be sent double

orders on the last Friday and Saturday of the 2004 fiscal year,

explaining “that Krispy Kreme wanted to boost the sales for the

fiscal year in order to meet Wall Street projections.” The witness

said the manager explained that the doughnuts would be returned

for credit the following week once the 2005 fiscal year was under

way. The witness “understood that it was commonplace at Krispy

Kreme to channel stuff in order to meet Wall Street expectations,”

according to the complaint("Krispy kreme to," 2005).

The plaintiffs in the case sought a class-action status for investors

who bought Krispy Kreme shares between January 2003 and May

2004. The suit sought a jury trial and unspecified damages. Krispy

Kreme has blamed its problems on popularity of low-carbohydrate

diets and high oil prices. On the contrary, critics have argued that

the company expanded too quickly and saturated its market by

making its product available in grocery stores and convenience

stores ("Krispy kreme to," 2005).

The Verdict

On March 4, 2005, the local community braced for a verdict that

some analysts thought could drive the company into bankruptcy, or

worse. The SEC ordered that three former top executives (Scott

Livengood, the chairman, chief executive and president; John

Tate, the chief operating officer; and Randy Casstevens, the chief

financial officer) pay a combined $783,000 for violating accounting

laws and for fraud. However, the company received only a cease-

and-desist order from committing or causing violations of several

provisions of the Securities Act (Craver, 2009).

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.

SEC officials said one reason for the leniency was the cooperation

by subsequent Krispy Kreme management in the probe (Craver,

2009).

Another settlement in October 2006 resolved a lawsuit 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 (Craver, 2009).

References

Craver, R. (2009, March 15). Chapter closes as reality settles in on

krispy kreme. Winston-Salem Journal,

Krispy kreme gains realized. (2001, January 31). The New York

Times,

Krispy kreme mulls issue. (1999, August 13). The New York

Times,

Krispy kreme posts first loss. (2004, May 26). The New York

Times,

Krispy kreme to restate some 2004 earnings. (2005, July 5).

Retrieved from

http://www.msnbc.msn.com/id/6784620/ns/business-

corporate_scandals/t/krispy-kreme-restate-some-earnings/

Profit increases 89% at krispy kreme. (2001, May 17). The New York Times,