Hand-Holding Ends at Krispy Kreme

Its CEO is out, replaced by the head of a turnaround firm.
Author:
Publish date:

Updated from 10:14 a.m. EST

Krispy Kreme

(KKD)

threw in the towel on conventional reassurance Tuesday, hiring a turnaround specialist from the distinguished rubble of Enron while warning that sales trends continue to deteriorate.

The result was a 13% pop in the doughnut maker's stock.

Krispy Kreme announced Tuesday it was replacing its own much-maligned chief executive, Scott Livengood, with the same man who replaced Ken Lay after Enron's spectacular flameout.

Stephen Cooper, chairman of the consulting company retained by Krispy Kreme to revive its fortunes -- Kroll Zolfo Cooper LLC, or KZC -- will take over as the pastry purveyor's new chief executive. In his role at KZC, Cooper specializes in leading companies through operational and financial restructurings and currently acts as interim chief executive, president and chief restructuring officer for Enron.

"I am looking forward to working with all of the company's employees, franchisees, vendors and other business partners to strengthen Krispy Kreme," Cooper said in a statement.

Wall Street liked the idea and the stock was recently adding $1.11, or 12.7%, to $9.83. Still, Krispy Kreme shares remain more than $2 below their level the day before the company detailed its accounting issues on Jan. 4. And Tuesday's reports of falling sales and expectations for a fourth-quarter loss serve as a reminder that the company has yet to plug any holes.

Krispy Kreme's predicament was neatly summarized by an analyst named Peter Kyviakidis in a

Reuters

story on Jan. 5.

"The pattern is fairly clear," he said. "The company was once doing very well, they just wanted to maintain their reported operating results even in the face of a declining business." Kyviakidis' employer? Kroll Zolfo Cooper.

Livengood, a 28-year veteran of the company who took the helm in 1998, has been roundly criticized for his handling of Krispy Kreme's misfortunes last year. He tried to blame the sales collapse on the low-carb dieting trend, while

Dunkin' Doughnuts

(a subsidiary of

Allied Domecq PLC

(AED)

), remained prosperous in the same environment.

A series of accounting issues under his watch have been brought to light, leading to an announcement earlier this month that the company will restate its 2004 earnings lower, in part to reclassify as compensation some of the money it paid to managers to buy back their store franchises.

By the end of 2004, Krispy Kreme had fallen from Wall Street's graces and into the proverbial doghouse, losing 76% of its value to become one of the year's biggest losers. Federal regulators launched a probe into the company's accounting practices, centered around its franchise dealings, and its auditor refused to sign off on its financials until investigations were completed. Despite the performance, Livengood will remain as a consultant to the company on an interim basis.

KZC Chairman Cooper will take over as chief executive, and Steven Panagos, national practice leader of KZC's domestic corporate advisory and restructuring group, was named president and chief operating officer.

Meanwhile, James Morgan, a former director with the company and chairman of the Morgan Crossroads Fund, was elected chairman of Krispy Kreme by its board of directors. He was previously chairman and chief executive with

Wachovia Securities

(WB) - Get Report

.

Also, the retired chairman of

Lowe's

(LOW) - Get Report

, Robert Strickland, was elected vice chairman. He has been a director on Krispy Kreme's board since 1998.

"I believe that the company's employees, franchisees, vendors and shareholders will be excited with the energy, experience and vision which Mr. Cooper and the KZC team will bring to the Company," Morgan said in a statement. "On behalf of the board, I want to thank Scott for his years of dedicated service to the company and for making himself available to Krispy Kreme as a consultant to facilitate the transition."

Todd Hooper, a principal in the growth and profitability group with Kurt Salmon & Associates, said a turnaround at Krispy Kreme is conceivable, given the strength of its brand, and the management shakeup represents a good first-step toward achieving the goal.

"They definitely had to make a change for the investment community," Hooper said. "Having been a darling for a long time, the stock has really swung in the other direction now, so there probably is room for a comeback. And the fact that they're acknowledging that they've got some governance and operational issues is an important new step that can allow them to build on what I think is a fundamentally healthy concept."

That said, Krispy Kreme still has some short-run financial issues that are troubling. Its creditors have extended the deadline for delivery of its third-quarter financial statements, which were delayed due to internal and external investigations. The 10-day extension pushed the default date back to Jan. 24. Currently, Krispy Kreme is not able to borrow funds from its credit facility.

Also, the company said its fourth-quarter results were likely to be hurt by "significant sales declines" and "substantial costs associated with the legal and regulatory matters." It said that for the eight weeks ended Dec. 26, its sales have declined 18%, while its average weekly sales per store were down 25%.

The lackluster performance could result in a loss for the quarter. Meanwhile, analysts are expecting a gain of 5 cents a share, according to consensus estimates reported by Thomson First Call.

"KZC will work with the company to review whether it should take certain operational actions, which could include the consolidation of store locations," the company said. "Any such actions could result in substantial losses, although it is expected that any restructuring charges largely would be noncash charges."