Krispy Kreme Doughnuts Inc.'s chief executive, Scott A. Livengood, ended his functions as a chairman of the company Jan. 18, during the time when company's legal and financial troubles are at their peak. The company began experiencing trouble a while ago and the factors leading to current situation are numerous. People watching the industry, are not optimistic about future prospects of Krispy Kreme. One of the major issues facing the company today is Federal investigations concerning their accounting practices. The manner in which company performs its accounting does not correspond with current laws and GAAP standards. Krispy Kreme repurchases franchises and according to earnings quality analyst Rob Miceli of Camelback Research Alliance Inc. in Scottsdale, Ariz., Krispy Kreme does not amortize, in other words reduce the value, of those bought assets on its books over time. Clearly the company is violating the industry norm. On the other hand, in case if company would follow the law, the value of its purchased franchised units would reduce the total assets carried by Krispy Kreme on its balance sheet and thus make profits look smaller, as the items being amortized are considered a spending against earnings. The federal search has to look into the company's purchases of formerly franchised doughnut shops and figure out in what way the company accounted those operations for.

Bad signs of company’s failing health were showing during the first quarter of the current fiscal year which ended last May 2 when the company informed about its first quarterly loss since going public in 2000. Krispy Kreme booked a net deficit of $24.4 million for the period stated, that amount included a $34.3 million charge related to the company's spending on purchase of Montana Mills bakery-cafe chain, in 2003 for $39 million. For the vivid comparison we should look at the following figures: quarter, ended Oct. 31, Krispy Kreme reported a net loss of $3 million, meaning- 5 cents a share, versus a profit of $14.5 million, or 23 cents a share, in the quarter one year ago. The revenues of $170.1 million accounted for only 1.4 percent increase compared to previous year results. Krispy Kreme said that for the eight weeks ended Dec. 26 average weekly sales fell by18 percent in all company’s operations and 25 percent at corporate factory stores, as opposed to prior-year levels. In the sight pf current events Krispy Kreme began an internal audit that led to restated financials for fiscal 2004, and as a result those amounts restated earlier in January, 2005 would reduce last full-year profits of 2004 by 6.6 percent to 8.6 percent, or between $3.8 million and $4.9 million. Also the company is likely to restate the records for the first and second quarters of fiscal 2005. All of the actions urgently taken by the company are necessary for the company’s actual survival, as they have lost the trust of both their shareholders and the government.

In the recent year company’s sales growth from their stores were as little as 0.1% and Krispy Kreme said it would slow unit growth and would only be opening 75 new stores except of 100 scheduled. This strategic move is directed on the reevaluation of company’s overall strategy and also it would save them money which they have to repay to their lenders, currently a sum of $90.9 million.

As already has been mentioned the stocks earnings fell considerably with the profit loses, but the prices of shares have been falling since last May as well. The company's stock price volatility which mainly began in May was resulted by the company’s first revealed negative earnings position. At the same time Krispy Kreme blamed their weakening sales on the low-carbohydrate diet trend, rather than taking a closer look at their own operation which caused the situation. Those announcements resulting in reduced company’s control sent Krispy Kreme’s stock dropping 29 percent in one day. Moreover Krispy Kreme's initial quarterly loss, which was followed by the discloser that it was under investigation by the SEC, sent the company's stock as low as 66 percent below its initial price a year ago. Clearly this situation could not be disregarded by neither analytics or by shareholders who feared to lose their money, because of company’s sudden instability. In sight of these unfortunate events the company should put all its efforts and money into gaining public’s trust again, stop opening more and more new store and quit unlawful accounting practices.

The story of Krispy Kreme is like a fairy tale, it had 174 units in 2000 and 423 restaurants it owns currently. The real picture however tells us the other side of this fairy tale with huge debts outstanding, they are unable to pay and overall mismanagement. The company has been borrowing too much money too fast and could not control it too well, which caused situation we are observing now. It has built too many restaurants which do not prove to be as popular as the company forecasted. It could be the low-carbohydrate diets that the company is blaming its losses at but critics have argued that the company expanded too quickly and saturated its market. Their strategy of making their product available in many grocery stores, convenience stores and Wal-Mart Supercenters was too much and they should have revised their policy long time ago before sales started dropping.

Besides doughnuts, Krispy Kreme has been expanding into coffee business, with acquisition of

Digital Java Inc., a small coffee company in 2002. This company offered a broad collection of coffee-based and non-coffee based beverages, both hot and cold. This attainment met many strategic goals for Krispy Kreme including the desire to provide an improved coffee experience for the customers and as well as company’s increased vertical integration. With this acquisition Krispy Kreme got more control over consistent sourcing of coffee to their stores. The question of much usefulness of the integration steps of the company would probably be much better seen if it didn’t have so many problems. The idea of selling high quality coffee beverages is an excellent one, if the company was consistent in its actions. There should be fewer stores with more thought put into them; Krispy Kreme would become a major Dunkin Donut’s competitor with more chances to win additional customers.

All of the factors enumerated which describe current Krispy Kreme’s situation show that the company has few ways out of this mess. Although company’s management has not talked about a turnaround strategy as a solution, it should consider undertaking some significant measures. The audit of the statements and slowing down on the stores’ opening are some of them. Reevaluating the grand strategy is vital to the company now and should be done in the nearest future to save the company’s current clientele and regain shareholders’ trust.