Low Carb Trend Means Manufacturers Are Losing More than Weight

It has been a few years since I last tried a glazed doughnut from Krispy Kreme Doughnuts Inc. (NYSE/KKD), but I still remember the mouthwatering taste of the 400-calorie treat.

 Krispy Kreme was then a “Made in America” success story. In the time since, the climate has changed. Obesity has become a major problem for Americans. From doughnuts to burgers, the demand for fatty and calorie-laden foods has dwindled, and the so-called fast food stocks are continuing to take it in the chin. The king of fast foods, McDonald’s Corporation (NYSE/MCD), recognized this problem early on and revised its menu accordingly, adding low carb and healthy alternatives to its fat- laden burgers and French fries. The result has been highly successful to its bottomline.

 But don’t tell that to doughnut maker Krispy Kreme. The company continues to face a trend of declining sales and is having a difficult time fighting the low carb trend.

 The U.S. Securities and Exchange Commission is also compounding the problem as it investigates the company’s accounting practices.

 Krispy Kreme must find a way to turn its operations around or face annihilation. It has already taken a severe beating at the hand of investors, down 63% from its 52-week high and a whopping 93% from its historical high of $108.50 on November 2, 2000.

 The trend is negative, but is there any hope of a turnaround? McDonald’s was able to add healthy additions to its menu to great success, but how do you make doughnuts healthy? You can take away the glaze, but that’s like taking the cheese off a pizza.

 On Monday, Krispy Kreme warned it would delay filing its most recent quarterly report due to restatements in 2004 and 2005. For investors, it has been brutal. The company has not filed a financial statement since September 2004. On the management side, longtime CEO Scott Livengood was removed from his post and replaced by Stephen F. Cooper–a turnaround specialist who did the same for disgraced Enron Corp. Also on board is Cooper’s partner, Stephen Panagos, as president. But as they are quickly finding out, trying to turn around a doughnut maker in a low carb climate is more than an uphill battle.

 But if there is a miracle and the turnaround is successful, Cooper’s firm Kroll Zolfo Cooper will be paid a “success fee.” I would guess that the miracle would have to be either getting people to eat doughnuts again in droves or finding other revenue streams to replace the declining sales. I did hear something about a low fat alternative, but I really don’t see this idea flying, as Krispy Kreme built its image on a single 400-calorie glazed doughnut. People are not going to pay for a healthy doughnut.

 Krispy Kreme has few options. Given the low carb movement, it will be an uphill battle to lift this sinking ship. KKD lost $0.03 in its Q4, 50% below estimates, and $0.04 in its Q3, 69% below estimates. The stock, a member of the S&P 400 MidCap, has seen its market-cap plummet to $499 million and really should be tossed out of the index. If you own it, this one may look like a dog. You may want to reconsider your position.