Low-Carb Diets Hurting Sales, Krispy Kreme Says

The glaze is off the cruller at Krispy Kreme Doughnuts Inc.

A onetime stock market darling and full-scale American fad, Krispy Kreme on Friday gave investors its first profit warning since going public more than four years ago, slashing its annual earnings outlook by 10%. The company said its trademark hot glazed doughnuts have fallen prey to a newer American trend: low-carbohydrate diets.

“The popularity of low-carb diets has captured the consumer’s attention,” Chairman and Chief Executive Scott Livengood said. “It’s impossible to predict if low carb is a passing fad or will have a lasting impact.”

The Winston-Salem, N.C., company, which has about two dozen outlets in Southern California, also said it would shutter six underperforming stores and sell or close its Montana Mills Bread Co., a gourmet bread and pastry chain it bought last year.

Investors sent the stock tumbling 29%, or $9.29, to $22.51 on the New York Stock Exchange. Krispy Kreme shares have lost more than half their value since hitting an all-time high of $49.74 in August.

Analysts said the company’s explanation for the coming profit downturn was a few doughnuts short of a dozen.

“Low carb is part of the issue at Krispy Kreme; I don’t think it’s the entire issue though,” said Glenn Guard, an analyst with Legg Mason Wood Walker Inc. who has a “buy” rating on the stock. “The other part is that the company is growing and, in my opinion, has already begun to develop its best markets. So the average weekly volume will come down as they open in less-than-stellar markets.”

Other analysts were even more skeptical.”We believe many issues are internal,” J.P. Morgan Chase & Co. analyst John Ivankoe, who rates the stock “underweight,” wrote in a note to clients. He said the chain of more than 360 stores was suffering from “waning fad appeal” and an increased reliance on sales in grocery stores and other retail outlets.

Krispy Kreme stressed that doughnuts weren’t the only category that was suffering from the low-carb diet craze. Sales of several flour-based food categories -- including bread, cereal and pasta -- also have dropped, Livengood said.

Until recently, Krispy Kreme hadn’t been hurt by the low-carb trend, Livengood said. But recent market data suggested that more consumers were jumping on the bandwagon.

The trend is most clear in sales of packaged doughnuts to grocery stores, which have fallen 0.4% in the 12-week period ended April 18, compared with the same period last year.

Although the category as a whole is suffering, Krispy Kreme is gaining market share, Livengood said. All other doughnut brands have fallen a combined 7.2% at grocery stores, he noted, while Krispy Kreme has gained 26.3%.

That’s part of the reason Guard believes the company still has ample room for expansion.

“I don’t know if this is a blip,” he said. “It will be a tough year for Krispy Kreme. They’re dealing with growing pains, and they’re dealing with Atkins. But the long-term investment thesis remains intact.”

Krispy Kreme said it expected earnings per share to be about 23 cents for its fiscal first quarter ended Sunday, not including charges. Analysts surveyed by Thomson First Call were expecting earnings of 27 cents a share.

For its fiscal year ending in February, the company forecast earnings of $1.04 to $1.06 a share before certain charges. Analysts had estimated earnings of $1.17.