Krispy Kreme Struggling

CHARLOTTE, N.C. -- Buried deep in Krispy Kreme Doughnuts Inc.'s annual report, released earlier this month, was a startling revelation: sales of the once-trendy treats have dropped more than 18 percent in each of the last two years, The Associated Press reported.

Krispy Kreme is still trying to find its way out of an accounting mess that's kept it from reporting quarterly earnings on time during those two years, but it's the plummet in sales -- nearly unheard of among established restaurant chains -- that presents the biggest long-term challenge for the maker of the famous "Hot Now" doughnuts, according to the AP report.

"I cannot think, over the years, whose trends would have been that bad in such a short period of time," said Robert Derrington, a senior restaurant analyst with Morgan Keegan & Co., which does not own, trade or follow Krispy Kreme shares. "The question becomes, can they turn things around?"

Krispy Kreme went public in 2000 and became a national sensation as it expanded across the country. Its stock price and profits climbed rapidly, but then crashed in 2004.

Company executives at the time blamed the low-carb craze for declining sales, but the company had serious problems -- it faced shareholder lawsuits and investigations alleging it engaged in faulty accounting -- and analysts said it grew too fast, the AP reported. Krispy Kreme recently hired two former tobacco executives who are expected to help the company clear up some of its problems.

The Winston-Salem, N.C.-based company stopped short of promising such a reversal in its annual report, The Associated Press said. The company wrote: "We are in the process of re-evaluating our business and have taken steps to improve our sales. There can be no assurance, however, that these steps will produce the desired results."

Krispy Kreme will also face increasing competition as Canton, Mass.-based Dunkin' Donuts has announced plans to expand into its home turf, the South. Dunkin' Donuts currently has about 4,400 stores in 36 U.S. states, but the majority are in the Northeast and mid-Atlantic region. Company executives hope to triple the total number of U.S. stores by 2020.

"Our objective is to take the brand national," Dunkin' Donuts brand officer Robert Rodriguez told The Associated Press. "We have been a very successful super-regional chain."

Executives at both companies say their doughnuts have a universal appeal. Stan Parker, senior vice president of marketing for Krispy Kreme, said many Southerners have grown up with their doughnuts and think of a trip to Krispy Kreme as more than just breakfast or a snack. "For many people, Krispy Kreme has been part of their lives for a long time," he said. Dunkin' Donuts believes some of its other products -- bagels, breakfast sandwiches, cookies, flavored coffee -- will attract Southern customers, even if they stay loyal to Krispy Kremes.

"We're very different," Rodriguez told the AP. "Our brand and our model is very different. We're a full line of baked goods. We're renowned for our coffee, which is a major, major player."