Filling the hole
CHARLOTTE, N.C. — Most of the blame for the financial woes of snack maker Krispy Kreme Doughnuts Inc. lies with two former executives who tried to “manage earnings” to meet Wall Street’s expectations, according to a report issued Wednesday.
Neither chief executive Scott Livengood nor former chief operating officer John Tate are still with the once high-flying company. It’s not clear whether their departures, and the recommendation Wednesday from independent directors to restate past earnings downward by $25.6 million, will return the luster to the former Wall Street darling known for its tempting “Hot Now” treats.
Morningstar analyst John Owens called the report a “a small but significant step in restoring investor confidence.” But Owens added the Winston-Salem company must still grapple with double-digit sales declines at its factory stores and financial problems with its franchisees.
Meanwhile, the company faces several lawsuits, including one that alleges workers lost millions of dollars in retirement savings because executives at the company hid evidence of declining sales and profits. Krispy Kreme is also the target of a federal criminal inquiry in New York and a Securities and Exchange Commission probe into financial irregularities.
Those investigations could stall the company’s effort to return to profitability, Owens said. In June, the company said it would miss the deadline for filing financial results for the quarter that ended May 1, and that it expected to post a loss when it does so.
“The SEC and the U.S. Attorney are still not done with their investigations,” Owens said. “So certain other things may come to light.”
Krispy Kreme Chairman James Morgan sounded hopeful in a statement issued Wednesday.
“The completion of the special committee report represents an important step forward for Krispy Kreme, both in understanding what occurred and in providing the framework for our upcoming restatement of our financial statements,” he said. “Krispy Kreme is a powerful brand, and we believe we are making progress every day in getting the company back on track to realizing its full potential.”
The company’s stock, which traded for $105 in November 2000 before a pair of two-for-one stock splits, was at $7.47, up 32 cents, or 4.5 percent on the New York Stock Exchange.
Attempts to contact Livengood and Tate on Wednesday were unsuccessful. Livengood has a nonpublished telephone number in Winston-Salem. Tate, who went to work as chief operating officer and executive vice president of Restoration Hardware Inc., did not immediately return a telephone message left at his office.
The report said the two executives failed “to establish the management tone, environment and controls essential for meeting the Company’s responsibilities as a public company.”
The report said company officers and other employees who had substantial involvement in the accounting errors have left Krispy Kreme, but also found that the company should not sue any current or former directors or executives.
The report also found that none of the former and current Krispy Kreme executives interviewed on behalf of the committee acknowledged an effort to beef up the company’s stock price by manipulating financial transactions. But, the report stated, “The number, nature and timing of the accounting errors strongly suggest that they resulted from an intent to manage earnings.”