By Paul Nowell
The Associated Press

CHARLOTTE, N.C. - Krispy Kreme Doughnuts Inc., which has been transformed from Wall Street's darling into the bane of carb-conscious consumers, scaled back its expansion plans Thursday after posting second-quarter profits that fell far short of expectations.

Shares in the doughnut-maker fell more than 10 percent, a slide that began almost immediately after Krispy Kreme announced that it earned $5.7 million, or 9 cents per share, in the three months ending Aug. 1, compared with $13 million, or 21 cents per share, a year earlier.

Excluding discontinued operations and other items, the Winston-Salem-based company posted earnings of $7.3 million, or 12 cents per share. Analyst expectations compiled by Thomson First Call were for profits of nearly twice that, or 22 cents per share.

Until this year, meeting or surpassing Wall Street's expectations was all but inevitable for Krispy Kreme, which went public in 2000 and posted quarter after quarter of ever-increasing profits.

Despite company efforts to blame diet trends for their woes, "they are facing bigger issues than just the low-carb phenomenon," said Skip Carpenter, an analyst at Thomas Weisel Partners.

For one, as Krispy Kreme continues to expand, chief executive Scott Livengood and his management team must find a new retail format that works in smaller markets, Carpenter said. Traditional factory stores, where the doughnuts are made on the premises, work well in larger markets like Seattle or Denver, but are too big for markets like Boise or Waco, Carpenter said.

Krispy Kreme also needs to increase the profitability of off-premise doughnut sales, he said. "The manager at the local Kroger's or Ralph's is probably giving less shelf space these days to Krispy Kreme products," he said. "They probably negotiated new deals with companies that are making new products that cater to the low-carb dynamic."

Krispy Kreme said Thursday that it expects slower sales for the remainder of the year and it declined to project earnings for the third quarter or for 2005.

The company said it is reducing its systemwide sales guidance for 2005 by about 15 percent. And Livengood said the company now plans to open about 75 new stores next year, down from the 100 openings it previously anticipated.

"Our primary focus over the last six years was on growth," he said. "Building stores and our brand overshadowed building profit. ... Now, our first priority will be to make our stores as profitable as they can be."

On a conference call with analysts, Livengood said Krispy Kreme is developing a new kind of shop that will be much smaller than the typical outlet.

A prototype will open in Greensboro next month, he said, with plans in the works for additional stores in the same mold.

The company is hoping the new stores will generate the same amount of business at a lower cost. "This concept has the potential for us to be able to open significantly more stores," he said. "It's our desire to generate long-term sustainable growth."

Livengood admitted that the company's management has not paid enough attention to fundamentals. "We have not gotten the job done with new stores when it comes to the bottom line," he said. "This will no longer be the case."

That didn't seem to appease investors. The company's shares fell $1.59 to close at $13.77 on the New York Stock Exchange.

For the second quarter, total sales rose $177.4 million, up 11.5 percent. On a comparable-store basis, systemwide sales were up 0.1 percent, while sales at stores owned by the company rose 0.6 percent, Krispy Kreme said.