Stockholders v Krispy Kreme Doughnuts, Inc.
Krispy Kreme Doughnuts May Have Sugarcoated the Truth, Say Investors
Several class actions have been filed against Krispy Kreme Doughnuts, Inc. (NYSE:KKD) and certain of its officers and directors by stockholders who purchased the company's common stock between August 21, 2003, and May 7, 2004. The actions claim that the defendants violated federal securities laws by issuing a series of material misrepresentations to the market over this time period, thereby artificially inflating the price of the company's securities. The stockholders seek to recover compensatory damages for the loss of value of their stock.
The complaint alleges that, during the applicable period, Krispy Kreme touted its strong operational growth, reporting substantial increases in revenues, income and earnings per share and representing that the company would continue to grow. The action further alleges that the defendants failed to disclose that, as a result of the trend toward low-fat, low carbohydrate diets such as the South Beach and Atkins diets, Krispy Kreme had been suffering from increasingly poor sales performance. Other allegedly undisclosed reasons for the company's poor performance include: (1) Sales at newly-opened stores surge initially, but quickly taper off when consumer enthusiasm wears off-- this phenomenon seems to be especially damaging in smaller markets with a limited number of potential new customers. (2) Rather than cultivating a base of steady customers, the action alleges that the company instead attempts to capitalize on Krispy Kreme's "fad appeal" and adopted a business model and strategy for increasing sales that is predicated on the perpetual addition of new stores and the hyping of the company's entry into new markets. This short-term tactic allegedly results in unsustainable surges in sales that fall off once the novelty of the new stores wears off. (3) The company's strategy of offsetting slowing retail sales with wholesale shipments to supermarkets is allegedly failing because the wholesale business is more expensive to operate, so that profit margins are thinner than Krispy Kreme store sales. Finally, the action alleges that Krispy Kreme's wholesale business has saturated the market with Krispy Kreme products, cannibalizing and undermining the company's retail operations.
On May 7, 2004, the defendants issued a news release in which they announced that Krispy Kreme's expected fiscal 2005 diluted earnings per share from continuing operations, excluding charges, to be 10% lower than previously announced, and that Krispy Kreme was closing certain company-owned stores and reducing plans to open new ones. Krispy Kreme also announced that it was closing its Montana Mills bread stores, an operation that it had bought a year ago, and that it was going to write off as much as $40 million on the venture; as recently as mid-April 2004, the defendants had said they intended to refine and expand the operation.
On this news, shares of Krispy Kreme fell $9.29, or 29%, to close at $22.51, a new 52-week low and more than 50% below Krispy Kreme's 52-week high of $49.74. Trading volume was 20.5 million shares, the largest ever for Krispy Kreme and amounting to a third of the shares outstanding.
If you purchased securities issued by Krispy Kreme during the applicable period, you may request appointment by the court as a lead plaintiff if you do so by July 11, 2004. A lead plaintiff is a representative party that acts on behalf of other class members in directing the litigation. In order to be appointed lead plaintiff, the court must determine that your claim is typical of the claims of other class members, and that you will adequately represent the class. Under certain circumstances, one or more class members may together serve as lead plaintiffs. Your ability to share in any recovery is not affected by the decision whether or not to serve as a lead plaintiff. You may retain any counsel of your choice to serve as you in this action, or you may choose to do nothing, and remain in the class as a silent member.
