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.

Last year there was much to-do in the papers about a Muslim man and orthodox Jewish (Hasidic) woman going into business together in two Dunkin’ Donuts franchises. Both have spouses and four young children.

Essam “Sam” Habib and Hindy “Cindy” Gluck met while she was a real estate broker showing him store locations. They decided to pool their life savings and, in 2005, opened a Dunkin’ Donuts franchise on Church Avenue at East 17th Street in Flatbush, Brooklyn. In 2006 they opened another Dunkin’ Donuts franchise, on Flatbush Avenue and Sixth Avenue, in Brooklyn.

Habib is the majority shareholder and Gluck owns less than 50% of the business. He goes to his mosque to pray on Fridays and she takes off on Saturdays to observe the Jewish Sabbath, leaving him in charge.

The doughnuts are brought in from a kosher bakery. On Jewish holidays, Ms. Gluck transfers her share of the business to Mr. Habib, because she is not allowed to earn money on those holy days.

Neither Habib or Gluck take any money from the profits made from selling pork products, such as bacon, sausage and ham. They give away the sales proceeds from those items.

The New York Times noted last year that because of a contract dispute, Mr. Habib and Ms. Gluck were selling their stores back to Dunkin’ Donuts. But the truth is nastier. A fight broke out because Gluck tried to sell a small part of her portion of the business to two employees.

Now, Dunkin’ Donuts has an interest in controlling who runs its franchised restaurants. Dunkin’ makes certain that the owners and operators of its restaurants are qualified to run a first-class operation, so that they will do nothing to tarnish the Dunkin’ Donuts name ‘ a very valuable name and trademark, indeed. Because of this almost every business franchise agreement in the world, and certainly the Dunkin’ Donuts franchise agreement, provides that Dunkin’ Donuts headquarters must approve any sale or transfer of ownership interest.

The point is this. While Gluck tried to sell part of her ownership interest to her employees, she could not legally do so without the approval of Dunkin’ Donuts headquarters. So that any sale she made without that approval ‘ as was the case here ‘ was and is null and void. Being reasonable people, you and I would say that, there being no injury here, “No harm, no foul.” But Dunkin’ Donuts h.q. felt differently and sued to terminate Habib and Gluck’s franchise for violation of their franchise agreement. Why would Dunkin’ Donuts do this?

The owners allege, essentially, that Dunkin’ is trying to rip them off. On March 23, 2008 the New York Post reported that Dunkin’ Donuts offered Habib and Gluck “a munchkin-sized buyout of $400,000 for the two stores they opened – stores they could resell for $700,000 or $800,000 each. And when the partners solicited offers elsewhere, Dunkin’ Donuts nixed the deals – even though the potential buyers came from a corporate-approved list . . . “.

Habib and Gluck memorialized their claim in their legal response to Dunkin’ Donuts’ lawsuit against them (called an Answer), a lawsuit started by Dunkin’ in Brooklyn Federal court, by alleging that:

(1) Dunkin’ has a “scheme . . . to sell franchises to persons seeking to better themselves in the business world”;

(2) Dunkin’ Donuts’ franchise agreement is “one-sided, unilateral and non-negotiable”;

(3) Dunkin’ seeks “to find a technical violation of the franchise agreement,” which is one that “does not affect the operation of the franchise or the integrity or honesty of the franchisee or the funds that [Dunkin gets]“;

(4) Dunkin’ deliberately looks to create a default of the franchise agreement to force franchisees to pay penalties or sell their stores, “all of which enriches [Dunkin' Donuts'] bottom line”;

(5) Dunkin Donuts’ conduct “is unconscionable” and violates the law and “constitutes a fraud.”

What do you think, Dear Readers?

Commentary: You can’t know the whole story just from newspaper accounts and reviewing court papers, but in my opinion it seems that Dunkin’ is (what we used to call as kids) “dirty-fighting.”

Dunkin Donuts says gift card offers from a Florida company are a scam.

The coffee giant says that e-mail messages are promising a free $25 gift card.

The company says “Dunkin’ Donuts is not affiliated with these offers, does not sponsor nor endorse this activity and is unable to fulfill these offers.”

Dunkin’ spokesman Andrew Mastrangelo tells the Boston Herald that this is “clearly fraudulent.”

Read the full article: Dunkin’ Donuts: Gift Card Offers A Scam – CBS 4

The coffee giant says that e-mail messages are promising a free $25 gift card.

The company issued the following statement on it’s website:

“A fraudulent email message promising a Free $25 Dunkin’ Donuts gift card is being forwarded around the internet. Dunkin’ Donuts is not affiliated with these offers, does not sponsor nor endorse this activity and is unable to fulfill these offers. We apologize if you have received such an email with this fraudulent offer.”

Dunkin’ spokesman Andrew Mastrangelo tells the Boston Herald that this is “clearly fraudulent.”

The company has sent cease-and-desist orders to USA Research Forums, a Boynton Beach, Florida firm that Dunkin Donuts alleges is the culprit.

Mastrangelo says that the company wants to “make sure our customers are protected.”

A telephone number wasn’t available for USA Research Forums.

Source: Dunkin Donuts has a warning about an e-mail scam going around – Tampa Bay\’s 10

The company says “Dunkin’ Donuts is not affiliated with these offers, does not sponsor nor endorse this activity and is unable to fulfill these offers.”

Dunkin’ spokesman Andrew Mastrangelo tells the Boston Herald that this is “clearly fraudulent.”

The company has sent cease-and-desist orders to USA Research Forums, a Boynton Beach, Florida firm that Dunkin Donuts alleges is the culprit.

Read the full article: Dunkin Donuts warns about e-mail scam – WLNE-TV (ABC6)

Beginning today, all 5,000 of Dunkin’ Donuts franchisees will be required to participate in a government database program to verify that workers are here legally. The company was responding to customer concerns about illegal employees. Only 6,200 out of the nation’s 8 million employers participate in the screening program, by the way. (Hat tip: Polipundit) The open-borders crowd is up in arms, of course, because enforcing the law = profiling!

We would agree with Ms. Malkin on the subject and fully support Dunkin Donuts as they take a bold step forward in leading this charge.

On May 30, Dunkin’ Brands, the parent company of Dunkin Donuts, announced that it would require all 5,000 of its franchisees to participate in the Basic Pilot verification program starting June 1. Gerri Ratliff, chief of the verification division for U.S. Citizenship & Immigration Services (USCIS), says Dunkin’ Brands isn’t alone — roughly 200 new companies — both small and large businesses — are signing up for the free program every month. Over 6,200 U.S. employers have joined so far.

“Dunkin’ Brands is participating in [the] Basic Pilot program because we see it as a way to help our franchisees comply with the laws when the authenticity of their new hires’ credentials are difficult to discern,” said Dunkin’ Brands Chief Legal Officer Stephen Horn in an e-mail statement. “We were compelled to participate in the [program] because of the difficulty faced by employers for screening new hires within the confines of the law.”

The issue of hiring only legal workers should be a no-brainer. Would people accept treatment from physicians not certified by the relevant Medical Board, or allow teachers to be hired without a criminal background check? In this age of frivilous lawsuits and declining standards, its about time that corporations and individuals set a minimum bar for hiring and then live by it. Why shouldn’t every company, not just Dunkin’ Donuts, agree to follow the law as written and set reasonable standards in the hiring of its employees?

Source: BusinessWeek