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Krispy Kreme Doughnuts Inc. is slimming down in Canada as its business is being squeezed by a more diet-conscious consumer.

Krispy Kreme plans to close three stores and three kiosks in Ontario, leaving it with just six outlets here, after operating in this country for the past few years. In all, the company has about 20 outlets across Canada, a spokeswoman said. It also sells its products in Wal-Mart, Loblaw and Petro-Canada and Shell convenience stores.

The stores in Toronto, Oakville and Windsor will shut after an "extensive analysis" of the business showed there was excess production capacity in Ontario, said Judi Richardson, vice-president of marketing and business development for KremeKo, which develops the stores for most of Canada.

"We have a great business, the brand is still extremely profitable, and this is no reflection on the crew in each of those stores," she told Dow Jones Newswires, adding that closing these stores made the most "economic sense."

Krispy Kreme's business has been hit by rising costs, declining sales, a U.S. Securities and Exchange Commission investigation, and a share price that's plunged more than 70 per cent this year.

The Windsor store was launched at the end of 2002 and is a stand-alone "hot doughnut factory." The Toronto location, in the Don Mills district, opened about a year ago, while the Oakville location opened in the summer. The latter two are within stores operated by grocer Loblaw Cos. Ltd.

Loblaw was a great partner, but its locations lack a drive-through, which represents about a third of the business, Ms. Richardson said.

The decision to close stores was made locally but tied into a company-wide mandate to make the Krispy Kreme network more efficient and profitable, she said.

KremeKo opened the first Canadian store in Mississauga, in November, 2001. Krispy Kreme of Winston-Salem, N.C., is taking a fresh look at all its franchisees.

KremeKo has had only one "factory" format, which is capable of making more than 200 dozen doughnuts an hour.

In a filing late yesterday, the company said a delay in filing its fiscal third-quarter report was "primarily" the result of accounting issues surrounding its recent consolidation of KremeKo.

In reporting its third-quarter results last month, Krispy Kreme said it had propped up KremeKo with "additional subordinated financial support." The move meant Krispy Kreme essentially took control of the franchisee and thus was required to add $14-million (U.S.) in KremeKo debt to its balance sheet -- far more than the $3.5-million it previously indicated was backing for KremeKo. The company had previously reported KremeKo lost $2.1-million on revenue of $21-million in the most recent fiscal year.

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