Strategic Audit

Managers at Krispy Kreme Doughnuts Inc. are facing their sternest rebukes from Wall Street analysts in the company's four-year term on the public markets.

Despite collecting record profits -- again -- on surging sales of hot glazed confections, stock in Krispy Kreme fell 10 percent this month. The reason: Sales at newly opened stores, even near locations where hungry customers once camped out overnight in anticipation, are dropping short of expectations.

Was it all just a fad?

Several analysts have tempered their appetite for recommending Krispy Kreme stock. And a leading stock watcher claimed that the Winston-Salem company's rush to open even more stores was a naked attempt to meet profit goals while masking lackluster per-store sales.

"We view the recent acceleration of store development in (2004) as a method to hit earnings targets at a time when new-store productivity is clearly running below expectations," wrote John Ivankoe, restaurant analyst with JP Morgan Securities. "We encourage investors to wait for the eventual acknowledgment that new- store growth and, subsequently, earnings growth, be slowed."

Chimed in CIBC World Markets' John Glass: "This implies that the trend toward lower new-store productivity is still an issue and (may) raise eyebrows."

Krispy Kreme managers dispute those characterizations. The company's plan to open 20 percent more stores in 2004 than it did last year is in keeping with past rates, said Robbin Moore, director of investor relations.

"One of our growth strategies has been and continues to be entering new markets with factory stores," Moore said. "If you look at what we've done historically, a 20 percent increase is in line with what we've done in the past."

Even before Krispy Kreme went public with the year's most successful IPO in April 2000, company managers have dealt with naysayers. Most of the doubters have tended to be short-selling investors or media outlets, which at regular intervals seem to criticize the company's consistently strong stock price as too good to be true.

Wall Street critics

But seldom has the bulk of questioning come from Wall Street analysts. And rarer still has been criticism of Krispy Kreme's strategic thinking.