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May 14, 2004

Krispy Kreme Sued

My beloved doughnut maker is being sued by shareholders for supposedly misleading them. Let me quote from the Reuters story:

The complaint names members of Krispy Kreme's senior management as defendants, and charges that they disregarded signs that the company had expanded too quickly, that its wholesale business undermined sales at its retail stores, and that it faced stiff competition from rival doughnut chain Dunkin' Donuts.

According to the statement, the suit also alleges that "the company ineptly accounted for how their bottom line would be affected by the popular low-carbohydrate diets; first by claiming that the trend would have no influence, and then by over-exaggerating the effect of the diet fad."

This suit stems from a company statement last week telling investors that earnings would be "10% lower than previously announced guidance." Krispy Kreme is being sued because they may have misjudged their expansion plans and not realized how much the low-carb craze would effect them. It sounds to me that this is a case of business error. There's a big difference between lying and being wrong (as I've mentioned [and here] with regards to Iraq's lack of WMD). There isn't much here unless there's a smoking gun hidden that shows management thought one thing but said something else. That would be fraud, and that's untolerable.

This is a reason why companies should bother with earnings guidance. There are too many variables that can change. It's similar to the problem macroeconomists have with measuring GDP or someother large aggregate. Months, even years later, revisions are made. It's good that Google won't be offering any guidance.

"Krispy Kreme Facing Two Shareholder Lawsuits"

Posted by Sean Hackbarth in Economics at 02:10 PM | Comments (3)