Glazing Over Krispy Kreme

How nice. It's all glaze and jelly back at Krispy Kreme (NYSE: KKD  ) HQ. That's because this week a special committee finally released the results of its internal investigation regarding what went wrong with the company. Its conclusion? Blame the guys who left. They blew it.

Excerpts from the report specifically point the finger at top management. Have a look: "In our view, Scott A. Livengood, former Chairman of the Board and Chief Executive Officer, and John W. Tate, former Chief Operating Officer, bear primary responsibility for the failure to establish the management tone, environment and controls. ... Krispy Kreme and its shareholders have paid dearly for those failures." Certainly the latter part is true -- I mean, really, how many happy Krispy Kreme investors are there these days? -- but can all the blame really be laid at the feet of Livengood and Tate?

Well, maybe. A while back, fellow Fool Bill Mann wrote that the new management at Krispy Kreme had been dealt such a lousy hand that bankruptcy appeared inevitable. I suspect he's right. Indeed, the filing shows Krispy Kreme was in such poor shape in January that its credit was all but maxed out. That has since been addressed ... by adding $30 million more in debt over the past six months.

Still, the company wants us to believe the worst has passed. After all, the bad guys have left! I quote again: "All officers or employees who we believe had any substantial involvement in or responsibility for the accounting errors have left." Really? Fabulous! Buy!

Or not.

Look, this is as convenient an excuse as the old "the dog ate my homework" trick. We can't really verify that everyone involved is gone. Nor should we really care all that much. There were bound to be some perfectly legitimate executives pulled in by the reality distortion field created by the prior regime. What matters now is performance, and Krispy Kreme is very far from demonstrating anything positive in that area. For example, systemwide per-store sales were down by at least 20% over two of the past three quarters.

So take the report for what it is: management's apparently frank assessment of the current situation facing the company. That's fine; I'm glad to see the honesty. You should be, too. Just don't allow yourself to glaze over the simple fact that Krispy Kreme still has fundamental structural problems -- you know, block-and-tackle stuff like selling more of its products today than it did yesterday. I simply won't let this company anywhere near my portfolio till that starts to change. You probably shouldn't, either.

Get more freshly baked Foolishness here:

Krispy Kreme is down more than 84% since David Gardner selected it forMotley Fool Stock Advisor, but you should see what else he's invested in. David has beaten the market by more than 30% since the newsletter's inception. Get in on the action. Take a risk-free trialtoday.

Motley Fool contributorTim Beyersis still a sucker for a good jelly doughnut. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profilehere. The Motley Fool has an ironcladdisclosure policy.


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