Nov 23, 2004 By Paul Nowell Ap Business Writer 3 min read

CHARLOTTE, N.C. (AP) – Shares of Krispy Kreme Doughnuts Inc.’s fell sharply Monday as a 79 percent plunge in third quarter earnings and an intensifying accounting investigation overshadowed the pastry maker’s statement that the low-carb craze might be easing. The Winston-Salem-based company also withdrew its sales forecast and said it would not provide an outlook for the current quarter and 2005.

Losses for the quarter were $3 million, or 5 cents per share, from a profit of $14.5 million, or 23 cents per share, a year ago.

Excluding the one-time charges related to discontinued operations, the company earned $2.4 million, or 4 cents per share, in the latest quarter.

Analysts surveyed by Thomson First Call had expected Krispy Kreme to earns 13 cents per share.

“Clearly we are disappointed with our third quarter results,” chairman and chief executive officer Scott Livengood said in a statement. “We are focused on addressing the challenges facing the company and regaining our business momentum.”

Those challenges include a federal investigation into its accounting practices. The company said earlier this year that the Securities and Exchange Commission was looking into its franchise reacquisitions and its future earnings outlooks.

Krispy Kreme said Monday that it incurred about $3 million in fees during the third quarter from the SEC probe and related matters, and expects more such expenses going forward.

The company also said it has set aside $2 million to deal with potential expenses related to accounting issues involving two franchisees.

Since May, Krispy Kreme has closed a number of stores. The company also said it would close a $4.6 million doughnut plant in northeast Ohio due to oversupply problems.

Shareholder lawsuits followed the company’s first-quarter earnings report, with allegations that Krispy Kreme was too aggressive in its accounting of the buyback of franchises in Michigan and did not disclose that one of the sellers in another buyback was Livengood’s ex-wife.

On a conference call with analysts, Livengood said the low-carb dieting phenomenon is still a factor in the company’s soft sales, but he believes the trend might have peaked. Krispy Kreme had previously blamed the diet for much of its sales difficulties this year.

He declined to answer any questions during the call, citing the pending investigations. Instead, the company said it would post answers to questions submitted by analysts on its Web site.

Total sales for the quarter ended Oct. 31 increased 1.4 percent to $170.1 million from $167.8 million in the third quarter of last year. Company store sales overall were up 9.6 percent to $121.2 million, though sales at company stores open at least one year fell 6.2 percent.

Fifteen new Krispy Kreme stores – 13 factory stores and two satellites – opened during the quarter. Nine stores, comprised of seven stores and two satellites, were closed.

That brought the number of stores systemwide at quarter-end to 429.

The company’s net loss for the first nine months was $21.7 million, or 34 cents per share, on sales of $531.9 million, compared with net income of $40.7 million, or 66 cents per share, on sales of $475.6 million in the year-ago period.

AP-ES-11-22-04 1231EST