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Winston-Salem, NC- Krispy Kreme Doughnuts Inc. is continuing its expansion plans at a slower pace after facing Wall Street’s gloomy forecast and an official investigation launched by the Securities and Exchange Commission last week.

Initially, Krispy Kreme had planned to open 100 stores in 2004. But, during the second quarter, the company’s statewide sales grew just 14.8%, a significant decrease from the 24% increase posted during the first quarter.

As a result, Krispy Kreme lowered its new store-opening program for this year to just 60 stores. At the end of the second quarter, Krispy Kreme had a total of to 423 stores in operation – 32 new stores opened during the second quarter and nine closed. Eight more stores are planned to open this year including a second store in England and the first Krispy Kreme in Korea.

Scott Livengood, Krispy Kreme’s chairman, president & CEO, expressed disappointment with the company’s second quarter results and cited America’s obsession with low-carb dieting, but conveyed confidence in the company’s financial report that performance would improve. (Krispy Kreme did not comment for this article.)

Yet, analysts who cover Krispy Kreme and the restaurant sector are not so confident. “We forecast that Krispy Kreme’s fundamentals will remain troubled in the intermediate term,” says Andrew Wolf, an analyst with BB&T Capital Markets. He adds that he expects further deterioration for the rest of year.

And, in a move that threw fuel on the fire, after reporting second quarter earnings, Kripsy Kreme withdrew its earnings guidance for the rest of the year and 2005. Moreover, the company revised its development plans for next year and now expects to open 75 new stores systemwide, down from more than100.

JP Morgan has spoken out against Krispy Kreme’s expansion strategy, primarily because of declining stores returns. In a recent report, analysts John Ivankoe and Steven Rees wrote: “Most of the crux of our argument against Krispy Kreme’s growth strategy has centered on declining new unit returns.” They concluded: “We believe earnings risk is still likely over the next several quarters, and do not see any near term multiple upside…”

Also in the mix the Securities and Exchange Commission’s investigation. The inquiry generally concerns Krispy Kreme’s franchise reacquisitions and previously announced reduction in earnings guidance.

Earlier this fall, Krispy Kreme’s accounting firm PricewaterhouseCoopers LLC declined to sign off on financial statements. And, the company has experienced an upper management shakeup as well; COO John Tate resigned to join retailer Restoration Hardware, and CFO Randy Casstevens also left.

In response, Krispy Kreme has appointed two new independent directors to its Board. The addition of Michael Sutton and Lizanne Thomas brings the company’s total Board membership to 11 and the number of independent directors to nine. Sutton and Thomas will head up a special committee to assist the SEC.

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