Skype Fires Executives, Avoiding Payouts After Microsoft Buyout

Skype Technologies SA, the Internet- calling service being bought by Microsoft Corp. (MSFT), is firing senior executives before the deal closes, a move that reduces the value of their payout, according to three people familiar with the matter.
Vice Presidents David Gurle, Christopher Dean, Russ Shaw and Don Albert were dismissed from the Luxembourg-based company, said the people, who requested anonymity because the departures aren’t public. Chief Marketing Officer Doug Bewsher and Anne Gillespie, head of human resources, were also fired. Executives Ramu Sunkara and Allyson Campa, from the 2011 Qik purchase, were also let go.
The timing of the dismissals means stock options will be worth less than if the executives stayed until the closing of the $8.5 billion deal, the people said. When a company gets bought, compensation is often tied to the purchase price, said Neil Sims, a managing director at Boyden, a search firm.
“All is good if you’re staying with that transition team or you’re packaged out,” said Sims, who is based in San Francisco. “But if you’re eliminated unceremoniously, without a package and without some negotiation, you could certainly lose unvested options.”
Silver Lake, based in Menlo Park, California, led a $2 billion buyout of a 70 percent stake in Skype from EBay Inc. (EBAY) in 2009. The private equity firm and several Skype directors have actively voiced their opinions on who should be fired, two of the people said.
Jenny Farrelly, a spokeswoman for Silver Lake, and Frank Shaw, a spokesman for Microsoft, declined to comment.

‘Management Changes’

“As part of a recent internal shift, Skype has made some management changes,” said Brian O’Shaughnessy, a Skype spokesman.
Silver Lake hired Chief Executive Officer Tony Bates from Cisco Systems Inc. to replace Josh Silverman last year. Bates has put his stamp on Skype by trying to restore its engineering- centric roots, churning out more features at a faster pace for its 170 million active users. He also streamlined a global management structure that was decentralized and fraught with territorial disputes and slow bureaucracy. The company was headed for an initial public offering before Microsoft agreed to buy it last month.

FTC Approval

Microsoft announced the Skype acquisition on May 10 and plans to connect it to Outlook e-mail, Xbox game console, Windows mobile phones and corporate-phone software. Skype offers voice and video calling over the Internet and is primarily used by consumers. The U.S. Federal Trade Commission said it approved the deal, according to a June 17 statement.
Gurle joined Skype in January 2010, overseeing its efforts to persuade corporations to adopt Skype. Dean served under Silverman as chief strategy officer, helping forge a partnership with Facebook Inc. Albert oversaw advertising endeavors including a partnership with The Oprah Winfrey Show.
Six of the departures were previously reported by Skype Journal, a blog that covers the company.
Skype was founded in 2003 by Niklas Zennstrom and Janus Friis. The founders sold the company for $2.6 billion in 2005 to San Jose, California-based EBay.

RIM Takeover Beckons Microsoft With Cheapest Multiple: Real M&A

Research In Motion Ltd. (RIM) has lost so much value that an acquirer could pay a 50 percent premium and still buy the BlackBerry maker for a lower multiple than any company in the industry.
RIM, once worth $83 billion, has fallen more than 80 percent from its record three years ago as Apple Inc. (AAPL)’s iPhone and Google Inc. (GOOG)’s Android platform siphoned off smartphone customers. The Waterloo, Ontario-based company, which plunged last week after saying quarterly sales may drop for the first time in nine years, closed yesterday at $25.89 a share, or 4.7 times earnings next year. That’s less than any communications- equipment provider, according to data compiled by Bloomberg.
While Jim Balsillie and Mike Lazaridis, RIM’s co-chief executive officers, said last week that their commitment to RIM is “stronger than ever,” the company may now attract Microsoft Corp. (MSFT) and Dell Inc. (DELL), BMO Harris Private Banking said. A buyer would get a smartphone maker that is still dominant among corporate clients, offers greater security with its own e-mail servers and generates more free cash versus its market value than any of its rivals. Paying $40 a share still values RIM at a discount to comparable companies in the industry.
“Given how significant the deterioration of the stock price has been, that alone will cause interest,” said Paul Taylor, who oversees $14.5 billion, including RIM shares, as chief investment officer at BMO Harris in Toronto. “RIM still has meaningful market share in the U.S. and meaningful market share internationally, and RIM has an iconic brand.”
Shareholder Value
“It’s not hard to envision a stock price that’s somewhere between $40 and $50 a share” in an acquisition, he said.
Tenille Kennedy, a spokeswoman at RIM, declined to comment.
Since peaking in June 2008, RIM’s shareholders have lost almost $70 billion, leaving it with a market capitalization of $13.6 billion. The 82 percent decline was the biggest among communications-equipment providers worth at least $10 billion in the past three years, data compiled by Bloomberg show.
Over that span, Cupertino, California-based Apple advanced 74 percent to become the world’s most valuable technology company, with a market capitalization of $292 billion.
RIM, which slumped 55 percent this year alone, now sells for less than 5 times its per-share earnings of $5.49 in its fiscal year ending February 2013, according to analysts’ estimates compiled by Bloomberg.

Market Share

HTC Corp. (2498), the Taoyuan, Taiwan-based maker of handsets using Android and Microsoft operating systems, trades at about 9 times profit, while Apple is valued at 11 times earnings next year, the data show. Espoo, Finland-based Nokia Oyj (NOK1V), which has fallen 48 percent this year on concern it’s also losing share of smartphone sales, trades at 14.4 times next year’s profit.
RIM’s slump accelerated last week after it released second- quarter sales and profit forecasts that trailed analysts’ estimates. In a span of about two years, RIM’s market share in North America declined to 13 percent from 54 percent, Pierre Ferragu, a London-based analyst at Sanford C. Bernstein & Co., wrote in a report yesterday.
The company, which is losing out as consumers spurn its aging models for iPhones and handsets running Android software, hasn’t introduced a major new BlackBerry since August.
Cheaper Android phones are also making inroads in Latin America, Asia and Europe, threatening the popularity of RIM’s less expensive BlackBerry models such as the Curve.

Acquisition Cost

“Any device they come out with is likely at best to catch up with current offerings, not exceed them,” said Michael Yoshikami, chief investment strategist at YCMNet Advisors, which manages $1 billion in Walnut Creek, California. “I wonder if management completely recognizes the market challenge.”
While RIM’s managers have made it less valuable versus its earnings than any other smartphone maker, it’s also giving buyers willing to bet on a turnaround a chance to purchase the company on the cheap.
At $40 a share, or an almost 55 percent markup to yesterday’s price, RIM would be valued at 7.29 times next year’s earnings, according to data compiled by Bloomberg. That’s still less than the average communications equipment provider, which trades at about 12.3 times profit, the data show.
RIM also generated $2.87 billion in free cash flow, or cash from operations after capital expenses, in the past 12 months, the data show. That equals about 21 percent of its market value, the highest proportion in the industry.

Papandreou Faces Confidence Vote

Greek Prime Minister George Papandreou faces a confidence vote in his government today that may determine whether Greece becomes the first euro-area country to default.
Tonight’s vote caps a week of turmoil for Papandreou, who fended off a revolt from the ranks of his ruling socialist Pasok party in parliament last week. That came after opposition parties rejected his call for a national unity government. European Union leaders have insisted Papandreou secure multi- party support for austerity measures that are a condition of the aid needed to avoid default as soon as next month.
“Pasok now knows it has to close ranks,” said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London. “The situation is volatile. A negative vote by the Greek parliament could trigger a serious crisis in Europe.”
The International Monetary Fund, contributor of a third of the bailout money for Greece, Ireland and Portugal, has warned European leaders that a failure to take decisive action on the debt crisis risks triggering “large global spillovers.” At the same time, Papandreou is struggling to convince Greeks to accept a 78 billion-euro ($112 billion) package of state-asset sales and budget cuts, which include a “crisis levy” on wages.
Papandreou, 59, now has 155 seats in the 300-seat chamber after one Pasok deputy on June 14 resigned from the party and declared himself independent in protest at the government’s economic policies. Two days later, two socialist lawmakers quit parliament, prompting Papandreou’s party to demand an emergency meeting and stoking investor concern that his grip was slipping and the chance of default growing.

Cabinet Reshuffle

In an effort to shore up political support, Papandreou on June 17 replaced finance minister George Papaconstantinou with Evangelos Venizelos, his defense minister and one-time rival for the party leadership, in a cabinet reshuffle.
The debate on the confidence motion, which began on June 19, will end around midnight. Two days later, Papandreou hopes to meet EU leaders at a summit that will discuss a new financing package to shield Greece from record borrowing costs for as many as three years. If Papandreou survives tonight’s vote, he will seek approval in parliament next week for his five-year economic plan.
Euro-area finance chiefs, pushing Greece to pass the laws needed to cut its deficit and sell state assets, yesterday left open whether the country will get the full 12 billion euros promised for July as part of last year’s 110 billion-euro lifeline.

‘National Unity’

Greek bonds and European stocks fell after that decision. The yield on Greece’s 10-year bond climbed 41 basis points to 17.35 percent. Finance ministers will meet again July 3 to decide on Greece’s loans.
“Greece’s national unity has become a pre-requisite for our partners,” Venizelos, 54, said after his first meeting with European counterparts in Luxembourg yesterday. “It should have been the nation’s self-preservation instinct.”
Defeat tonight would embolden the opposition and could lead to elections, giving Antonis Samaras, leader of New Democracy, the largest opposition party, the opportunity the pursue his vow to renegotiate the package.
“We cannot support a further policy mix exactly in line with the first policy mix which hasn’t produced any of the results,” Notis Mitarachi, alternate head of economic policy for the opposition party, told Maryam Nemazee on Bloomberg Television yesterday. “We agree on the goals of the program but we disagree on the policy mix through which it’s implemented.”

Snow Falling in Colorado on Eve of Northern Hemisphere’s Summer Solstice

The calendar says summer starts tomorrow in the Northern Hemisphere. The snow falling in the mountains of Colorado tells a different story.
A storm that has prompted a tornado watch across Nebraska and Kansas today also left 2 to 4 inches of snow in the Rocky Mountains, said Joe Ramey, a weather service meteorologist in Grand Junction, Colorado.
“It is unusual,” Ramey said. “Here it is the last day of spring.”
A winter storm advisory has been posted in the mountains of Colorado above 10,000 feet until 6 p.m. local time, and at least one tornado was reported in Kansas, according to the weather service. The Northern Hemisphere summer starts at 1:16 p.m. New York time tomorrow.
Ramey said the lingering effects of the La Nina ocean cooling are still playing havoc with local weather patterns. Normally at this time of year the daytime high temperature in Grand Junction, at an altitude of almost 4,600 feet, is 88 degrees Fahrenheit (31 degrees Celsius), according to the weather service. Yesterday it was 59, Ramey said.
La Ninas can bring more rain and stormy conditions to the northern U.S., while drying out the southern half of the country. The most recent La Nina was declared over earlier this month by the U.S. Climate Prediction Center in Camp Springs, Maryland.
The atmosphere is still showing signs of the phenomenon, however.
Ramey said the snow won’t mean ski slopes will be able to reopen. The snow is in patches, he said.
“You could ski a little bit, pick up your skis and walk some, and then ski a little more,” Ramey said.
To contact the reporter on this story: Brian K. Sullivan in Boston at bsullivan10@bloomberg.net.
To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

Haptics Adds New Dimensions to Touchscreens

Sitting in a coffee shop in Mountain View, Calif., Mike Levin unlocks a large, hardened carrying case that looks like a prop from a Mission: Impossible movie. He opens it and reveals...not the antidote to a supervirus, but a pile of computer screens, mouse pads, and other parts. He fishes out a keyboard. It's paper-thin and almost completely flat. Then he connects the keyboard to a laptop, and the amazement begins. Instead of using actual keys, this keyboard has stationary, printed-on tiles that only feel as if they go up and down. "It's that feel of a switch going on and off that most people are looking for," he says.
Engineers have a word for what Levin is describing: haptics, or technology that adds tactile sensations to gadgetry. It's been around a while. Think of vibrate mode on a cell phone, or videogame controllers rumbling when a linebacker blindsides a quarterback. Levin is the chief sales and marketing officer of Pacinian of Spokane, Wash., one of many haptics startups to appear in recent years. In the near future, these companies plan to give smartphones and tablets new powers. Imagine videogame guns that deliver a kick to your hand when fired, just like the real thing; virtual guitars with strings that feel real; buttons and knobs that actually grow out of touchscreens.
Pacinian's approach uses a coating that can be put on just about any surface to give it electrostatic properties. In the case of, say, a tablet, the touchscreen gets two coats with a layer of air in between. When you press the image of a button, Pacinian's technology triggers an electrical charge that essentially pulls the screen away from your finger at lightning speed. "It's like controlled static cling," Levin says. A version of the keyboard will go on sale in 2012, and the company's technology will be licensed to other hardware manufacturers. Levin says that Pacinian's haptics technology will begin showing up on casino games next year, as well, and that auto manufacturers should be putting it into dashboards and in-car displays by 2013.
A Helsinki-based startup named Senseg is developing technology that will let users feel textures on the screen. During a demonstration, the textures were discernible but faint. Senseg executives say that future versions will let people shopping online actually sense the ridges of corduroy pants or the soft feel of a flannel shirt.
This new generation of haptic technology has captured the imagination of software developers, too. Some 200 million Nokia (NOK), Samsung (005930:KS), and LG (066570:KS) phones already come preloaded with haptics software made by Immersion (IMMR). The technology controls handsets' (until now) primitive motors and tells them to vibrate, for example, when something explodes during a smartphone game. "In something like the Angry Birds game, you want to feel the slingshot pull back and feel the bird crash into pigs," says Dennis Sheehan, the vice-president for marketing at Immersion. It's a subtle but compelling enhancement. He says such games will be feasible as new haptics hardware arrives over the next year or two.
The most mind-blowing brand of haptics may come from a Silicon Valley startup called Tactus Technology. In a pair of patent applications, the company's executives describe a touchscreen display capable of growing a keyboard out of its surface. Seriously. You go to type an e-mail, and a keyboard rises up slightly out of the display, allowing your fingers to feel the edges of the letters, numbers, and symbols. When you're done, the keyboard recedes back into the surface. To play a game, controller knobs and buttons emerge.
Tactus declined requests to discuss its work. However, applications for patents and government grants provide clues about the company's technology and ambitions. In basic terms, Tactus would sandwich liquid or gas between two surfaces and use a mechanism to expand and contract the surfaces, creating buttons, knobs, and other shapes. In a confidential part of a document seen by Bloomberg Businessweek, Tactus says, "The buttons can rapidly be enabled on demand by the user or by the device software, and even the button size and configuration can be changed. While this functionality may sound like magic, we have demonstrated that the technology works." The same document says that Apple (AAPL), Samsung, and Nokia have held discussions with Tactus. (The companies all declined to discuss any relationship with Tactus or interest in the technology.)
Past haptics technology has been underwhelming. Consumer electronics makers, like consumers themselves, have had little reason to get terribly excited about devices that offered it. The new wave of haptics might change that. The technology certainly promises to make typing on virtual keyboards easier. More than that, it promises to fill a basic human desire to feel things, says Andrew Hsu, a strategist at Synaptics, which makes touchscreen technology. "Our devices are with us all the time now and so much more personal," he says. "You want to give them more awareness and create a much more immersive experience."

Professor Bernanke’s Paralysis Warning Meets Fed Facing Same

June 20 (Bloomberg) -- As a Princeton University professor, Ben Bernanke castigated the Bank of Japan in 2000 for a “case of self-induced paralysis” that led to a decade of stagnation. Now, the Federal Reserve chairman may be allowing the U.S. central bank to fall into the same trap after its second round of quantitative easing ends this month.

By all but ruling out another cycle of bond purchases, Fed officials have left themselves with little in the way of policy options to respond to slowing growth and rising unemployment. This raises the risk that the U.S. will remain saddled with what Bernanke himself has called a “frustratingly” sluggish recovery that leaves millions of Americans out of work.

“I worry that QE3 will be hostage to QE2,” said Vincent Reinhart, a former director of the Fed’s monetary-affairs division who is now a scholar at the American Enterprise Institute in Washington. “That may lead to that self-induced paralysis” in further easing policy to aid the economy.

Fed officials, who begin a two-day meeting tomorrow to plot monetary strategy, are betting the slowdown will prove short- lived and growth will pick up from July through December as shocks from Japan’s earthquake and an oil-price surge fade.

GDP Outlook

Private economists agree. After growing at a 2.3 percent annual pace this quarter, the world’s largest economy will expand at a 3.2 percent rate in the second half of the year, according to the median forecast of 67 economists surveyed by Bloomberg News from June 1 to June 8.

Economist Allen Sinai, who sees growth strengthening to between 2.5 percent and 3 percent in the second half and 3 percent in 2012, called the recent stock-market swoon a “consolidation” and forecast that the Standard and Poor’s 500 Index of stocks will rise as high as 1,450 by the end of the year. It was at 1,271.50 on June 17.

The president of Decision Economics in New York also said the “new trading range” for the yield on the 10-year Treasury note is 2.75 percent to 3.375 percent as the Fed responds to the recent economic slowdown by putting off any move to tighten credit until next year. The yield was 2.91 percent as of 9:54 a.m. in London, according to Bloomberg Bond Trader prices.

The danger is that, once again, forecasts for an improved economy prove too optimistic. Economists polled by Bloomberg began 2011 looking for 3.1 percent expansion this year; they now predict a 2.5 percent rate. Fed policy makers are likely to follow suit this week.

“The last batch of data is disappointing, and it is causing us to rethink our outlook for growth for the remainder of the year,” Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, told reporters on June 13.

Shaved Forecast

The central bankers may cut their estimate for this year to 2.75 percent from the 3.1 percent to 3.3 percent they foresaw in April, said Laurence Meyer, a former Fed governor who is now vice chairman of St. Louis-based Macroeconomic Advisers.

They probably also will shave their forecast for 2012, by a couple of tenths of a percentage point, he added. In April, the bulk of policy makers saw growth of 3.5 percent to 4.2 percent next year.

The odds have doubled in the last few months to 10 percent that the U.S. will suffer a growth recession -- with gross domestic product rising at an annual pace of about 1 percent for two or more quarters while other economic indicators remain soft, Sinai said.

“If I were at the Fed, I’d be looking at ways to do something like QE3,” he added.

Fed officials don’t seem so inclined.

“We’ve done enough,” Federal Reserve Bank of Dallas President Richard Fisher said in a June 13 speech.

Dangers of Deflation

The successes and failures of QE2 have diminished chances of QE3. When Bernanke first raised the possibility of a second round of stimulus last August, he stressed the central bank’s determination to avoid deflation: an across-the-board fall in consumer prices and wages that would drive the economy down.

Such concerns have since dissipated as surging oil and food prices have driven up inflation and inflation expectations, said Roberto Perli, a former Fed economist who is now a managing director at International Strategy & Investment Group in Washington.

Consumer prices rose at a rate of 3.6 percent in May from a year earlier, compared with a 1.1 percent advance in November, when the central bank began its purchases of $600 billion worth of Treasury securities.

Further Action

The bond buys have had less of a discernible impact on GDP, raising questions inside the Fed about the efficacy of further action, Sinai said. While the purchases did lift stock prices and household wealth, consumer spending has lagged behind, dragging the growth of the overall economy down to 1.8 percent in the first quarter from 3.1 percent in the final three months of 2010.

The political opposition to QE2 -- Congressional Republicans have attacked it as an inflationary policy -- also weighs against the launch of QE3, especially at a time when fiscal policy makers are squabbling over the budget and debt ceiling.

“There are some political constraints that inhibit their willingness to do more,” said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York and a former member of the Fed’s economic forecasting team.

Wal-Mart Million-Worker Bias Suit Thrown Out by High Court

June 20 (Bloomberg) -- The U.S. Supreme Court, in a ruling that will mean new limits on nationwide class-action suits, ruled that Wal-Mart Stores Inc. can’t be sued for discrimination on behalf of potentially a million female workers.

The justices, dividing 5-4, said the lawyers pressing the case failed to point to a common corporate policy that led to gender discrimination against workers at thousands of Wal-Mart and Sam’s Club stores across the country.

The workers “provide no convincing proof of a companywide discriminatory pay and promotion policy,” Justice Antonin Scalia wrote for the majority. All nine justices voted to overturn an appeals court decision that approved the class action, with four of them saying they would have ordered further proceedings.

Wal-Mart rose 22 cents to $53.04 at 4 p.m. in trading on the New York Stock Exchange. The company, based in Bentonville, Arkansas, said in a statement that the ruling “effectively ends this class-action lawsuit.”

“As the majority made clear, the plaintiffs’ claims were worlds away from showing a companywide pay and promotion policy,” Wal-Mart said.

Limiting Lawsuits

The ruling limits the ability of plaintiffs’ lawyers to win multimillion-dollar damages through a single lawsuit, particularly against employers. Units of Cigna Corp., Goldman Sachs Group Inc., Bayer AG, Toshiba Corp., Publicis Group SA, Deere & Co. and Costco Wholesale Corp. all face gender discrimination complaints that seek class-action status.

More than 20 companies supported Wal-Mart at the Supreme Court, including Intel Corp., Altria Group Inc., Bank of America Corp., Microsoft Corp. and General Electric Co.

Four justices -- Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan -- said they would have returned the case to a lower court and let the workers try to press a class action using a different legal theory.

The women’s lawyers said they would seek to move ahead with claims on behalf of aggrieved workers, either as individuals or as part of smaller groups.

Case Not Over

“This case is not over,” said Brad Seligman, one of two lead attorneys for the workers. “Wal-Mart is not off the hook. There are thousands of claims of discrimination that remain to be filed.”

The case was one of the most closely watched Supreme Court business disputes in years, in part because the justices hadn’t looked at the standards for certifying a class-action suit in 12 years. Billions of dollars were at stake for Wal-Mart, the world’s largest private employer.

“This is without a doubt the most important class-action case in more than a decade,” Robin Conrad, who runs the U.S. Chamber of Commerce’s litigation unit, said in a statement. “Our economy would be better served if businesses could spend more resources creating jobs and fewer resources fighting frivolous litigation.”

Women’s advocates called on Congress to enact new legislation protecting the rights of female workers.

“With this decision, the Supreme Court has assisted Wal- Mart in its efforts to systematically dole out promotions and pay raises on the basis of sex,” said Terry O’Neill, president of the National Organization for Women.

White House Reaction

White House spokesman Jay Carney declined to comment on the case, while saying President Barack Obama supports proposed federal legislation to ensure pay equity for women in the workplace.

Filed in 2001, the suit aimed to cover every woman who worked at the retailer’s Wal-Mart and Sam’s Club’s stores at any point since December 1998, including those not hired until years after the suit was filed.

The women pressing the suit claimed they and colleagues across the country were victimized by Wal-Mart’s practice of letting local managers make subjective decisions about pay and promotions. More than 100 Wal-Mart employees filed sworn statements saying they were paid less and given fewer opportunities for promotion than male colleagues.

Scalia said that neither those anecdotes, nor statistical evidence that workers said showed a gender-based pay disparity, was enough to show a common corporate practice.

“Even if every single one of those anecdotes is true, that would not demonstrate that the entire company operates under a general policy of discrimination,” Scalia wrote.

Appeals Court Ruling

A federal appeals court had let the suit go forward on behalf of women who were working at Wal-Mart at the time the suit was filed.

Ginsburg said she would have resolved the case on narrower grounds. She said the appeals court should have required the workers to meet the standards that normally apply to class actions seeking damages, instead of the looser requirements for plaintiffs seeking an injunction.

“The plaintiffs’ evidence, including class members’ tales of their own experiences, suggests that gender bias suffused Wal-Mart’s company culture,” Ginsburg wrote.

Wal-Mart was represented by Theodore Boutrous Jr. of Gibson, Dunn & Crutcher. The lead attorneys for the plaintiffs are Joseph Sellers of Cohen Milstein Sellers & Toll and Seligman of the Impact Fund, which describes itself as a foundation that handles public interest litigation.

The case is Wal-Mart Stores v. Dukes, 10-277.

--With assistance from William McQuillen, Lisa Lerer and Roger Runningen in Washington. Editors: Jim Rubin, Laurie Asseo.

Krispy Kreme Wants to Be Good for You

Over the past 75 years, Krispy Kreme Doughnuts (KKD) won a fanatical following with one product: sinfully sugary doughnuts, served warm. "Nothing better than the classic glazed doughnuts," says Rodney Blake, a Philadelphia banker who rarely passes a Krispy Kreme shop without stocking up. "There are other places to go if you want healthy food."
That's about to change. Chief Executive Officer James Morgan plans to add oatmeal, yogurt, and fruit juice to the Krispy Kreme menu. The very prospect would have been laughable in the late 1990s when the chain's "Original Glazed" doughnut became a national obsession—before falling victim to overexpansion and the carb-free Atkins diet.
The new menu is part of a revival at Krispy Kreme. Its stock has more than doubled in the past year, to $9 per share. Last month the chain posted its best quarterly profit since 2004: $9.17 million on sales of $104.6 million for the first quarter ended May 1, more than double that of the year before. To keep the momentum, Morgan says he needs to sell healthier food and specialty coffee. "We weren't getting a lot of verbal complaints," he says. "But we also were not getting the sales we thought we should."
Krispy Kreme was founded in 1937, when Vernon Rudolph bought a yeast-raised doughnut recipe from a New Orleans chef and opened a factory in Winston-Salem, N.C. In the 1980s the company began opening stores across the U.S., and by the late '90s the Krispy Kreme doughnut had become a cultural icon complete with its own featured role in a 2002 episode of Sex and the City. Before long, however, Krispy Kreme's pell-mell expansion caught up with it, and by 2005 the company's board sent its CEO and several executives packing amid an accounting scandal. The stock tanked, the company was forced to close half its 390 stores, and 14 quarters of losses followed.
In early 2008, Morgan, a former securities executive who had been a director since 2000, took over and began revamping the chain. One of his first acts was to drop the so-called factory stores, 7,000-square-foot spaces where customers could watch hot doughnuts bounce along conveyor belts. The showcase stores were a mistake because their locations required people to drive as much as 20 miles to buy a doughnut, says Sam Yake, an analyst at BGB Securities. The new stores, dubbed neighborhood shops, are less than half that size and located in highly trafficked shopping centers and college campuses; some even have drive-throughs.
Morgan has also ramped up overseas expansion. He's doubled the store count abroad to more than 400—compared with 230 in the U.S.—and recently said Krispy Kreme is looking for partnerships in Latin America. Last year international revenue grew 15 percent, to $18.3 million.
Still, if Krispy Kreme is to have any hope of prospering against the likes of Dunkin' Brands and Starbucks (SBUX), which have 6,800 and 10,900 U.S. locations, respectively, it must generate more sales. Besides adding healthier fare, Morgan is placing a big bet on coffee, which is more profitable than doughnuts. In September, Krispy Kreme will roll out a range of coffee drinks, beginning with signature blends and moving to espressos and lattes over the next 18 months. Nancy Childs, a food marketing professor at Saint Joseph's University in Philadelphia, says Morgan would do well to target people in their 20s and 30s. "Starbucks isn't really their brand," she says. "Krispy Kreme has room to step up."
The brand still connects with many consumers. The Krispy Kreme page on Facebook has more than twice as many fans as Tim Hortons (THI) and nearly as many as Dunkin' Donuts. So Morgan is careful not to stray too far from the company's roots. Despite its shift to healthier fare the chain still lends its name to the annual Krispy Kreme Challenge in Raleigh, N.C., where contestants run two miles, down a dozen doughnuts, then run two more. Who needs oatmeal?