Krispy Kreme Doughnut

What could be more perfect than a Krispy Kreme doughnut? Hot from the fryer and loaded with sugar, the Original Glazed is practically irresistible. For a time, Krispy Kreme's stock seemed irresistible, too. When the company went public in April 2000, at the peak of the Internet whirlwind, investors flocked to buy into a business they could understand. An old-fashioned franchise based in Winston-Salem, North Carolina, Krispy Kreme Doughnuts Inc. boasted solid fundamentals, adding stores at a rapid clip and showing steadily increasing sales and earnings.

But Krispy Kreme also had a mystique. Its doughnuts, available for many years only in the Southeast, had attracted a devoted, even fanatical, customer base. When the company decided to go national, it opened franchises in locations guaranteed to generate buzz — Manhattan, Los Angeles, Las Vegas — and customers lined up around the block. By August 2003, KKD was trading at nearly $50 on the New York Stock Exchange, up 235 percent from its initial public offering price of $21 on Nasdaq, and Fortune magazine was calling Krispy Kreme the "hottest brand in the land." For the fiscal year ended in February 2004, the company reported $665.6 million in sales and $94.7 million in operating profit from its nearly 400 locations, including stores in Australia, Canada, and South Korea.

And then, just as rapidly as its popularity spiked, Krispy Kreme pitched into a steep downward spiral that may yet end in bankruptcy. The company's woes surfaced in May 2004, when then-CEO Scott Livengood blamed low-carbohydrate diet trends for Krispy Kreme's first-ever missed quarter and first loss as a public company. That raised analysts' eyebrows, as blaming the Atkins diet for disappointing earnings carried a whiff of desperation.

The Securities and Exchange Commission came knocking in July 2004, making an informal inquiry into Krispy Kreme's buybacks of several franchises. As the stock price plunged, shareholders filed suit. Franchisees alleged channel stuffing, claiming that some stores were getting twice their regular shipments in the final weeks of a quarter so that headquarters could make its numbers. The SEC upgraded its inquiry to "formal" status in October 2004. Average weekly