Craving for Krispy Kreme stock faces test in secondary offering

"When longtime stockholders sell, it puts a cap on the valuation," said Greg Schroeder, restaurant analyst at Josephthal & Co. "When insiders are selling, no one wants to buy the stock."

New York Times
January 15, 2001

Craving for Krispy Kreme stock faces test in secondary offering

Will Krispy Kreme Doughnuts Inc., the second-hottest initial stock offering of last year, go the way of Starbucks? Or will it fizzle, as have so many other trendy chain concepts? Like Starbucks, Krispy Kreme rocketed after its public debut. From a start of $21 on April 5, it hit a high of $108.50 on Nov. 2.

Krispy Kreme executives and some analysts expect the brand to become more widespread as the company expands in the U.S. and, under plans announced on Jan. 2, pushes into Canada.

But since the company's announcement three days later that it plans to sell as many as 2.3 million additional shares, mostly from a top executive and franchisees, the stock has dropped nearly 15 percent, closing Friday at $67.31. Analysts expect the stock to fall further.

In the secondary offering, only 150,000 of the shares will be newly issued; 2.15 million will come from insiders, including 264,000 from the vice chairman, John McAleer, and his family. "When longtime stockholders sell, it puts a cap on the valuation," said Greg Schroeder, restaurant analyst at
Josephthal & Co. "When insiders are selling, no one wants to buy the stock."

The current sale gives longtime franchisees and their families a chance to cash out after generations of loyalty to Krispy Kreme, the popular doughnut chain that opened in 1937 in Winston-Salem, N.C., where the company is based.

McAleer's father, Joseph McAleer Sr., led a franchisee buyout of Krispy Kreme from Beatrice Foods in 1982 after Beatrice's short but disastrous period of control. The list of selling shareholders now reads like a McAleer family tree.

Some analysts expect that sales growth will slow and that the positive media attention the company has received will wear off. They attribute the stock's early rise in part to the small amount available for trading—only 3.45 million shares in the initial offering last April, out of a total of 13 million. But this April, restrictions on insiders' ability to sell an additional 7.6 million shares will be lifted.

Other news has given investors pause. Margaret Urquhart, president of the company's U.S. operations, resigned Dec. 7 after less than a year. The company says she left for personal reasons and will remain a consultant.


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