Case Study of Krispy Kreme

The Beginning

On July 13, 1937, Vernon Rudolph opened the doors to a doughnut shop he called Krispy Kreme in Winston Salem, NC. He had a vision to be the worldwide leader in sharing delicious tastes and creating joyful memories. Known for their hot now doughnuts, Krispy Kremes mission is to touch and enhance lives through the joy that is Krispy Kreme. In 1973 the founder died but the values remain the same. Krispy Kreme believes: Consumers are our lifeblood, the center of the doughnut There is no substitute for quality in our service to consumers Impeccable presentation is critical wherever Krispy Kreme is sold We must produce a collaborative team effort that is unexcelled We must cast the best possible image in all that we do We must never settle for "second best;" we deliver on our commitments We must coach our team to ever-better results In 1999, Krispy Kreme announced its consideration to sell public stock and later did just that. Once registered with the Securities and Exchange Commission (SEC), the companies stocks where one of the second best performing initial public offerings of the year ("Krispy kreme mulls," 1999). John McAleer, a vice chairman; Robert McCoy, a director; and 40 others including shop owners and their brothers, sisters, mothers, daughters, sons and even former wives, sold $141 million of the stock as of January 30, 2001

("Krispy kreme gains," 2001). Krispy Kreme Doughnuts Inc. reported an increase of nearly 89 percent in its first-quarter profit a day before moving to the New York Stock Exchange on May 17, 2001 ("Profit increases 89%," 2001). The company posted earnings of $5.7 million, or 20 cents a share. The results compared with a profit of $3 million, or 13 cents a share, in the same quarter a year ago. Analysts' estimates ranged from 17 cents to 18 cents. Krispy Kreme encountered their first quarterly loss in May 2004 after the low-carbohydrate diet craze, also known as the Atkins Diet, hurt the sale of doughnuts. The company lost $24.4 million, or 38 cents a share, for its first fiscal quarter ending May 2, in contrast to a profit of $13.1 million, or 22 cents a share, a year prior ("Krispy kreme posts," 2004). Consumers of the popular doughnut were concerned with the unhealthy affects eating doughnuts could have on their health. The Problems Begin In 2005, a filing in a shareholder lawsuit against the company alleged the company routinely padded sales by doubling doughnut shipments to wholesale customers at the end of fiscal quarters. Unsold doughnuts were shipped back after the quarters ended ("Krispy kreme to," 2005). Krispy Kremes stock went into a tailspin and dropped by 66% after the earnings report, which was followed by the revelation that the company was under investigation by the Securities and Exchange Commission ("Krispy kreme to," 2005). The charge was leveled by two unidentified confidential witnesses who were former employees of the company. This lawsuit was one of the many consolidated group of shareholder lawsuits that claim executives at the once-trendy doughnut maker knew sales were slowing by at least January 2003 but hid that fact until May, when Krispy Kreme reported its first-ever quarterly loss ("Krispy kreme to," 2005).

The three top officers named in the lawsuit were chief executive officer Scott Livengood, former chief operating officer John W. Tate and former chief financial officer Randy S. Casstevens unloaded more than 475,000 shares of Krispy Kreme stock for proceeds of $19.8 million, the suit charges. According to one witness cited, Krispy Kreme double-shipped wholesale customer orders at the end of quarters on four separate occasions while the witness worked for the company ("Krispy kreme to," 2005). A former sales manager at a Krispy Kreme plant in Ravenna, Ohio, said a regional manager demanded that customers be sent double orders on the last Friday and Saturday of the 2004 fiscal year, explaining that Krispy Kreme wanted to boost the sales for the fiscal year in order to meet Wall Street projections. The witness said the manager explained that the doughnuts would be returned for credit the following week once the 2005 fiscal year was under way. The witness understood that it was commonplace at Krispy Kreme to channel stuff in order to meet Wall Street expectations, according to the complaint("Krispy kreme to," 2005). The plaintiffs in the case sought a class-action status for investors who bought Krispy Kreme shares between January 2003 and May 2004. The suit sought a jury trial and unspecified damages. Krispy Kreme has blamed its problems on popularity of low-carbohydrate diets and high oil prices. On the contrary, critics have argued that the company expanded too quickly and saturated its market by making its product available in grocery stores and convenience stores ("Krispy kreme to," 2005). The Verdict On March 4, 2005, the local community braced for a verdict that some analysts thought could drive the company into bankruptcy, or worse. The SEC ordered that three former top executives (Scott

Livengood, the chairman, chief executive and president; John Tate, the chief operating officer; and Randy Casstevens, the chief financial officer) pay a combined $783,000 for violating accounting laws and for fraud. However, the company received only a ceaseand-desist order from committing or causing violations of several provisions of the Securities Act (Craver, 2009). Neither the executives nor the company admitted or denied wrongdoing in agreeing to resolve the SEC civil lawsuit in the Middle District of U.S. District Court of North Carolina. SEC officials said one reason for the leniency was the cooperation by subsequent Krispy Kreme management in the probe (Craver, 2009). Another settlement in October 2006 resolved a lawsuit that included a cash payment of $34.9 million from the insurers of the company's directors and officers, $35.8 million in common stock and warrants to purchase common stock to be issued by the company, and $100,000 in cash from Casstevens and Tate. Livengood was not a party to the deal. That settlement covered all investors who bought Krispy Kreme's securities between March 8, 2001, and April 18, 2005 (Craver, 2009).

References Craver, R. (2009, March 15). Chapter closes as reality settles in on krispy kreme. Winston-Salem Journal, Krispy kreme gains realized. (2001, January 31). The New York Times, Krispy kreme mulls issue. (1999, August 13). The New York Times,

Krispy kreme posts first loss. (2004, May 26). The New York Times, Krispy kreme to restate some 2004 earnings. (2005, July 5). Retrieved from http://www.msnbc.msn.com/id/6784620/ns/businesscorporate_scandals/t/krispy-kreme-restate-some-earnings/ Profit increases 89% at krispy kreme. (2001, May 17). The New York Times,