Is Krispy Kreme Clogging Your Sewer?

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Journalists are drawn to Krispy Kreme (KKD) like ... well, like journalists are drawn to doughnuts. Michelle Leder of footnoted.org is no different.

The chain's stock has fallen by 90 percent since she started covering the company in September 2003, so this week she "took a bit closer of a read than we normally would for a small cap stock and were delighted to find a new disclosure about doughnut sludge."

"Actually," she writes, "the words doughnut sludge never appear in the filing, but after reading the disclosure, it’s the first thing we thought about."

The company operates a plant in the Gunston Commerce Center industrial park in Lorton, Va., in suburban Washington. In May, Fairfax County sued Krispy Kreme, alleging that it had damaged the sewer system in much the same way as it damages human arteries. The county sought $2 million in damages, plus $18 million in civil penalties.

But Krispy Kreme managed to settle the whole thing for $750,000.

The Washington Examiner has been all over this story from the start (though it apparently hasn't yet covered the settlement). Leder was indeed correct about the doughnut sludge. In its lawsuit, the county alleged that "excessive quantities of highly corrosive wastes, doughnut grease and other pollutants" wrecked the surrounding sewerage. The company blamed the "faulty design and construction" of the sewer system.

Before this month's settlement, the dispute grew heated, with county officials saying Krispy Kreme belonged on the Clean Water Act's "Hall of Shame list," and with the company basically calling county officials a bunch of liars.

I'm a bit confused about why the company calls its facility a "commissary" in its filings, when it appears to be a doughnut plant that, as the Examiner reported, churns out 83 million doughnuts a year. I'm guessing there is some legal or accounting reason for that. In the filing, the company says the settlement "is included in Company Stores direct operating expenses." (Update, December 11: Thanks to readers Jim DeSchinkle and Nate Whitney for pointing out that "commissary" is apparently an industry term for "production facility," and for noting that Krispy Kreme's doughnuts actually take their final form in stores. The Examiner likely meant to say that the Lorton plant produces enough dough for 83 million doughnuts a year.)