Guidance Flattens Krispy Kreme

The doughnut maker trims guidance because of the low-carb diet craze.
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Updated from 8:01 a.m. EDT

Krispy Kreme

(KKD)

has discovered a hole in its business model. And you can blame it on the Atkins diet.

Shares in the North Carolina-based doughnut maker plunged Friday after it lowered earnings guidance for the first quarter and full-year 2005, saying the low-carbohydrate craze has hurt demand for its products.

Shares of the fast-growing company fell $7.95, or 25%, to $23.85, a new 52-week low and more than 50% below their 52-week high of $49.74.

The company lowered its earnings forecast by about 10%, saying it expects EPS of 23 cents in the first quarter and $1.04 to $1.06 for fiscal 2005, based on continuing operations.

That compares with analysts' consensus forecasts of 27 cents a share and $1.17 a share, respectively, according to Thomson First Call.

Including charges, the company forecast EPS of 16 cents for the first quarter and between 93 cents and 95 cents for fiscal 2005.

The company said: "There has been increasing consumer interest in low-carbohydrate diets, which has adversely impacted several flour-based food categories, including bread, cereal and pasta. This trend had little discernable effect on our business last year. However, recent market data suggests consumer interest in reduced carbohydrate consumption has heightened significantly following the beginning of the year and has accelerated in the last two to three months. This phenomenon has affected us most heavily in our off-premises sales channels, in particular sales of packaged doughnuts to grocery store customers."

The company said the U.S. packaged doughnut category experienced a 0.4% decrease in volume for the 12-week period ended April 18. Krispy Kreme expects a 24% increase in systemwide sales for the first fiscal quarter ended May 2.

The company said it intends "to minimize any expenditures" by divesting its underperforming Montana Mills unit, a bread and pastry chain. It will close the majority of existing locations and sell the remaining ones.

The moves will result in pre-tax charges of approximately $35 million to $40 million in the first quarter and $2 million to $4 million in subsequent quarters.

Krispy Kreme has undergone explosive growth since going public more than four years ago. It currently operates 374 factory stores in 44 U.S. states, Australia, Canada, Mexico and the U.K.