Hurting from falling sales and unable to borrow money, Krispy Kreme Doughnuts Inc. announced the retirement of its chief executive yesterday and hired as his successor a specialist in corporate reorganizations who is already running Enron Corp.
The new boss, Stephen F. Cooper, has a history of working with companies that enter bankruptcy protection and reorganizing their debts, but in an interview last night he voiced confidence that Krispy Kreme would be different.
"Keeping in mind that I have only been here for eight hours, it looks to me that the company has a reasonable level of free cash flow, so I see no reason why this should be a bankruptcy candidate," he said.
Krispy Kreme shares, which had fallen to their lowest level since early 2000, rose 89 cents, to $9.61 yesterday.
The company said it was negotiating with lenders and had secured an extension to keep it from being declared in default until Monday. Cooper said he thought it would be "somewhere between not very bright and completely cavalier" for the banks to force it to file for bankruptcy.
"I'm convinced we can reach a middle ground where the banks will be satisfied and provide the company with what it needs," he said.
Krispy Kreme was a hot new stock in April 2000, at a time when other hot new issues were all technology companies, and it kept rising long after those stocks fell with the bursting of the Internet bubble.
But in the past year it has run into questions on its accounting, for which it is being investigated by the Securities and Exchange Commission, amid indications that many of its franchises are losing money.
Sales have slowed, and yesterday the firm said its sales in company stores, which were down 19.9 percent in its fiscal third quarter that ended Oct. 31, had declined 25 percent in the eight weeks that ended Dec. 26.
Systemwide sales, including those of franchises, were down 18 percent for the most recent period, compared with a drop of 16.7 percent in the third quarter.
Krispy Kreme had become a cult item in new markets, with buyers lined up around the block when it opened stores, but the demand for doughnuts fell off last year. At first the company blamed low-carbohydrate diets, but its sales have fallen much faster than those of its competitors.
The company said it was considering consolidating stores, a move that could lead to the reporting of substantial losses as investments in closed stores are written off. It said it may post a loss for the fiscal fourth quarter, which ends Jan. 30.
Krispy Kreme dates back to 1937, but its rapid expansion came in the 1990s under the direction of Scott A. Livengood, whose retirement was announced yesterday. He gave up his positions as chairman of the board, chief executive and president, and resigned as a director.
The company said Livengood would stay on as a consultant and be paid his monthly salary of $48,833, plus expenses, for at least the next six months.
The consulting agreement says he will be reimbursed for lawyer's fees for negotiating the agreement, but does not say whether the company will pay lawyer's fees in conjunction with the SEC investigation. Cooper said he assumed Krispy Kreme's insurance would pay such fees.
Cooper is chairman of Kroll Zolfo Cooper, which Krispy Kreme retained as its financial adviser and interim management consultant. He is to be chief executive, and Steven G. Panagos, a managing director of Kroll Zolfo, will be president and chief operating officer of Krispy Kreme. Cooper will remain chief executive of Enron.
James H. Morgan, a director of Krispy Kreme since July 2000 and former chief executive of Wachovia Securities, was named chairman of the board.
The company did not say how much it would pay Kroll Zolfo or Cooper for their services.
Cooper was brought in to run Enron in early 2002 after it collapsed in a scandal that led to several former executives pleading guilty to fraud and to the indictment of two former chief executives of the company, Kenneth L. Lay and Jeffrey K. Skilling. The company has sold most of its assets, and Cooper said that running it was no longer a full-time job.
Through last June, Kroll Zolfo had received $63.4 million in fees from Enron. Cooper said he and his associates would be paid at hourly rates by Krispy Kreme, but that he hoped to negotiate an additional fee if he did a good job.
Yesterday's move came two weeks after Krispy Kreme said it would reduce its reported profit for fiscal 2004, which ended last Feb. 1, and said it was not able to borrow more from its banks.
It added that it expected to make further reductions in its past reported profits. Because the statements are overdue, the creditors could declare the company to be in default on its loans, but they have agreed to defer that action until Monday while talks continue.