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Krispy Kreme Reports Financial Results for the Second Quarter of Fiscal 2012

EARNINGS PER SHARE OF $0.12 INCLUDES A NON-RECURRING GAIN OF $0.06 PER SHARE
REAFFIRMS FISCAL 2012 OUTLOOK

WINSTON-SALEM, N.C., Aug. 25, 2011 /PRNewswire via COMTEX/ --

Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the second quarter of fiscal 2012, ended July 31, 2011. The Company also reaffirmed its fiscal 2012 outlook and announced that it will present at an investor conference on September 14, 2011.

Second Quarter Fiscal 2012 Highlights Compared to the Year-Ago Period:

  • Revenues increased 11.4% to $98.0 million from $87.9 million
  • Company same store sales rose 2.5%, the eleventh consecutive quarterly increase
  • Operating income rose 18.8% to $4.9 million from $4.2 million
  • Net income was $8.8 million ($0.12 per share diluted) compared to $2.2 million ($0.03 per share diluted) in the second quarter last year
  • Net income for the second quarter of fiscal 2012 includes a gain on the sale of the Company's equity interest in its Mexican franchisee of $4.7 million after tax ($0.06 per share diluted)
  • Cash provided by operating activities was $7.6 million compared to $3.7 million in the second quarter last year

The Company ended the second quarter of fiscal 2012 with a total of 669 Krispy Kreme stores systemwide, a net increase of 17 shops during the quarter. As of July 31, 2011, there were 88 Company stores and 581 franchise locations.

James H. Morgan, President and Chief Executive Officer, commented: "Our second quarter performance was the best of any second quarter since fiscal 2005 and reflects the progress we've made in executing our strategic plans. We generated double-digit revenue growth in each of our business segments, doubled earnings per share excluding a nonrecurring gain of $0.06, and expanded the Krispy Kreme system with a net 17 new stores. Moreover, our results were generated in the face of higher agricultural commodity prices, extreme temperatures, and much higher gas prices compared to the year ago period. Based upon our year-to-date financial performance, we are very pleased to be reiterating our annual outlook for fiscal 2012 consolidated operating income, exclusive of impairment charges and lease termination costs, of between $22 million and $24 million. We continue to believe the high end of this range is achievable and look forward to building on our recent momentum as we move toward calendar 2012."

Second Quarter Fiscal 2012 Results

Consolidated Results

For the second quarter ended July 31, 2011, revenues increased 11.4% to $98.0 million from $87.9 million. Year-over-year revenue increases were generated in all four business segments.

Direct operating expenses increased to $85.7 million from $77.1 million in the same period last year, but as a percentage of total revenues, were down slightly to 87.5% from 87.7%. General and administrative expenses decreased to $4.9 million from $5.0 million in the year-ago period and, as a percentage of total revenues, decreased to 5.0% from 5.7%. Impairment charges and lease termination costs were $300,000 compared to a credit of $220,000 in the same period last year.

Operating income increased to $4.9 million from $4.2 million.

Interest expense decreased to $410,000 from $1.6 million, principally reflecting lower interest rates as a result of the January 2011 refinancing of the Company's credit facilities as well as the reduced level of indebtedness.

As previously announced, on May 5, 2011, the Company sold its 30% equity interest in KK Mexico. The Company received cash proceeds of approximately $7.7 million in exchange for its equity interest and, after deducting costs of the transaction, realized a gain of approximately $6.2 million on the sale. After provision for payment of Mexican income taxes on the sale of $1.5 million, the Company reported an after tax gain on the disposition of $4.7 million ($0.06 per share) in the second quarter.

Net income was $8.8 million ($0.12 per share diluted) compared to $2.2 million ($0.03 per share diluted), in the second quarter last year.

Segment Results

Company Stores revenues increased 10.0% to $66.0 million from $60.0 million. Same store sales at Company stores rose 2.5%, the eleventh consecutive quarterly increase. Price increases instituted during the first quarter to help offset higher input costs drove the increase, but were partially offset by a decrease in customer traffic. In addition, exclusive of the effects of pricing, our average guest check declined slightly. The Company believes that expected cannibalization by new stores in expansion markets adversely affected same store sales in the second quarter. The Company Stores segment posted an operating loss of $1.0 million, compared to an operating loss of $1.7 million in the second quarter last year.

Domestic Franchise revenues increased 13.3% to $2.3 million from $2.1 million, reflecting a 10.3% rise in sales by domestic franchisees. Same store sales rose 6.3% at domestic franchise stores. The increase in revenues was offset by a charge of $820,000 for estimated payments under a lease guarantee related to a franchisee whose franchise agreements were terminated during the quarter. This resulted in Domestic Franchisee segment operating income of $220,000, compared to $1.0 million in the second quarter last year.

International Franchise revenues increased 33.5% to $5.4 million from $4.0 million. The increase in revenue was primarily driven by higher royalty revenues reflecting a 13.7% increase in constant dollar sales by international franchise stores. Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 11.7%, reflecting, among other things, honeymoon effects from the over 300 stores opened internationally in the past three years, as well as cannibalization as markets develop. In addition, the Company estimates that the aftereffects of the March 2011 tsunami in Japan adversely affected international constant dollar same store sales by between four and five percentage points in the second quarter. The International Franchise segment generated operating income of $3.4 million compared to $2.5 million in the second quarter last year.

KK Supply Chain revenues (including sales to Company stores) increased 12.1% to $50.3 million from $44.9 million in the same period last year, driven by selling price increases. External KK Supply Chain revenues rose 10.9% to $24.3 million from $21.9 million in the year-ago period. KK Supply Chain generated operating income of $7.7 million in the second quarter of fiscal 2012 compared to $7.3 million in the second quarter last year. KK Supply Chain has raised selling prices to recover rising input costs resulting from higher agricultural commodity prices, but generally has not marked up those higher costs; accordingly, KK Supply Chain's operating margin declined in the second quarter of fiscal 2012 compared to the second quarter last year.

Investor Conference Presentation

The Company will be presenting at the 9th Annual C.L. King Best Ideas Conference 2011 at the Omni Berkshire Place Hotel in New York City on Wednesday, September 14, 2011. The presentation is scheduled to begin at 12:45 p.m. (EDT) and will be webcast live from the Company's website at www.krispykreme.com.

Conference Call

Management will host a conference call to review financial results for the second quarter of fiscal 2012 as well as management's outlook this afternoon at 4:30 p.m. (EDT).

A live webcast of the conference call will be available at www.KrispyKreme.com. The conference call also can be accessed over the phone by dialing (866) 730-5763 or, for international callers, by dialing (857) 350-1587. To access an archived audio replay of the call, dial (888) 286-8010, or (617) 801-6888 for international callers; the passcode is 71908714. The audio replay will be available through September 1, 2011. A transcript of the conference call also will be available on the Company website.

About Krispy Kreme

Krispy Kreme is a leading branded specialty retailer and wholesaler of premium quality sweet treats and complementary products, including its signature Original Glazed® doughnut. Headquartered in Winston-Salem, NC, the Company has offered the highest quality doughnuts and great tasting coffee since it was founded in 1937. Today, Krispy Kreme shops can be found in over 660 locations in 21 countries around the world. Visit us at www.krispykreme.com.

Information contained in this press release, other than historical information, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management's beliefs, assumptions and expectations of our future economic performance, considering the information currently available to management. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to differ materially from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. The words "believe," "may," "could," "will," "should," "anticipate," "estimate," "expect," "intend," "objective," "seek," "strive" or similar words, or the negative of these words, identify forward-looking statements. Factors that could contribute to these differences include, but are not limited to: the quality of Company and franchise store operations; our ability, and our dependence on the ability of our franchisees, to execute on our and their business plans; our relationships with our franchisees; our ability to implement our international growth strategy; our ability to implement our new domestic operating model; currency, economic, political and other risks associated with our international operations; the price and availability of raw materials needed to produce doughnut mixes and other ingredients; compliance with government regulations relating to food products and franchising; our relationships with off-premises customers; our ability to protect our trademarks and trade secrets; restrictions on our operations and compliance with covenants contained in our secured credit facilities; changes in customer preferences and perceptions; risks associated with competition; risks related to the food service industry, including food safety and protection of personal information; and increased costs or other effects of new government regulations relating to healthcare benefits. These and other risks and uncertainties, which are described in more detail in the Company's most recent Annual Report on Form 10-K and other reports and statements filed with the United States Securities and Exchange Commission, are difficult to predict, involve uncertainties that may materially affect actual results and may be beyond the Company's control, and could cause actual results and developments to be materially different from those expressed or implied by any of these forward-looking statements. New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the impact of each such factor on the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.


KRISPY KREME DOUGHNUTS, INC.















CONSOLIDATED STATEMENT OF OPERATIONS




















Three Months Ended



Six Months Ended




July 31,


August 1,


July 31,


August 1,




2011


2010


2011


2010




(In thousands, except per share amounts)















Revenues

$

97,952


$

87,932


$

202,552


$

180,049

Operating expenses:













Direct operating expenses (exclusive of depreciation expense














shown below)


85,697



77,075



172,680



154,230


General and administrative expenses


4,930



4,981



10,574



10,725


Depreciation expense


2,087



1,937



4,025



3,801


Impairment charges and lease termination costs


301



(216)



545



1,083

Operating income


4,937



4,155



14,728



10,210

Interest income


56



82



101



122

Interest expense


(414)



(1,567)



(891)



(3,438)

Equity in income (losses) of equity method franchisees


12



(165)



3



181

Gain on sale of interest in equity method franchisee


6,198



-



6,198



-

Other non-operating income and (expense), net


86



81



172



162

Income before income taxes


10,875



2,586



20,311



7,237

Provision for income taxes


2,036



379



2,301



562

Net income

$

8,839


$

2,207


$

18,010


$

6,675















Earnings per common share:













Basic

$

0.13


$

0.03


$

0.26


$

0.10


Diluted

$

0.12


$

0.03


$

0.25


$

0.10















Weighted average shares outstanding:













Basic


68,900



68,195



68,827



68,145


Diluted


71,706



69,327



71,438



69,279



KRISPY KREME DOUGHNUTS, INC.









CONSOLIDATED BALANCE SHEET













July 31,


January 30,



2011


2011




(In thousands)


ASSETS


CURRENT ASSETS:






Cash and cash equivalents

$

32,324


$

21,970

Receivables


20,569



20,261

Receivables from equity method franchisees


582



586

Inventories


18,556



14,635

Other current assets


5,099



5,970


Total current assets


77,130



63,422

Property and equipment


71,183



71,163

Investments in equity method franchisees


-



1,663

Goodwill and other intangible assets


23,776



23,776

Other assets


9,892



9,902


Total assets

$

181,981


$

169,926




LIABILITIES AND SHAREHOLDERS' EQUITY


CURRENT LIABILITIES:






Current maturities of long-term debt

$

2,078


$

2,513

Accounts payable


11,860



9,954

Accrued liabilities


27,278



28,379


Total current liabilities


41,216



40,846

Long-term debt, less current maturities


25,593



32,874

Other long-term obligations


18,213



19,778









Commitments and contingencies














SHAREHOLDERS' EQUITY:






Preferred stock, no par value


-



-

Common stock, no par value


373,525



370,808

Accumulated other comprehensive loss


(230)



(34)

Accumulated deficit


(276,336)



(294,346)


Total shareholders' equity


96,959



76,428



Total liabilities and shareholders' equity

$

181,981


$

169,926












KRISPY KREME DOUGHNUTS, INC.











CONSOLIDATED STATEMENT OF CASH FLOWS

















Six Months Ended






July 31,


August 1,





2011


2010







(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:






Net income

$

18,010


$

6,675

Adjustments to reconcile net income to net cash provided by operating activities:







Depreciation expense


4,025



3,801


Deferred income taxes


128



(70)


Impairment charges


-



709


Accrued rent expense


315



(395)


Loss on disposal of property and equipment


213



279


Gain on sale of interest in equity method franchisee


(6,198)



-


Share-based compensation


1,806



1,934


Provision for doubtful accounts


(399)



(193)


Amortization of deferred financing costs


218



312


Equity in income of equity method franchisees


(3)



(181)


Other


676



(210)

Change in assets and liabilities:







Receivables


199



(1,113)


Inventories


(3,921)



(106)


Other current and non-current assets


(735)



(2,707)


Accounts payable and accrued liabilities


(102)



(3,055)


Other long-term obligations


(1,540)



(287)


Net cash provided by operating activities


12,692



5,393

CASH FLOWS FROM INVESTING ACTIVITIES:






Purchase of property and equipment


(4,146)



(4,029)

Proceeds from disposals of property and equipment


19



1,268

Proceeds from sale of interest in equity method franchisee


7,723



-

Escrow deposit recovery


1,000



-

Other investing activities


13



27


Net cash provided by (used for) investing activities


4,609



(2,734)

CASH FLOWS FROM FINANCING ACTIVITIES:






Repayment of long-term debt


(7,846)



(1,599)

Deferred financing costs


(12)



-

Proceeds from exercise of stock options


1,036



-

Proceeds from exercise of warrants


-



4

Repurchase of common shares


(125)



(44)


Net cash used for financing activities


(6,947)



(1,639)

Net increase in cash and cash equivalents


10,354



1,020

Cash and cash equivalents at beginning of period


21,970



20,215

Cash and cash equivalents at end of period

$

32,324


$

21,235



KRISPY KREME DOUGHNUTS, INC.

















SEGMENT INFORMATION















Three Months Ended


Six Months Ended






July 31,


August 1,


July 31,


August 1,






2011


2010


2011


2010






(In thousands)

















Revenues:













Company Stores:














On-premises sales

$

28,943


$

26,730


$

61,804


$

56,783



Off-premises sales


37,049



33,240



73,663



65,721




Company Stores revenues


65,992



59,970



135,467



122,504


Domestic Franchise


2,349



2,074



4,718



4,274


International Franchise


5,352



4,009



10,988



8,769


KK Supply Chain:














Total revenues


50,341



44,892



104,224



90,797



Less - intersegment sales elimination


(26,082)



(23,013)



(52,845)



(46,295)




External KK Supply Chain revenues


24,259



21,879



51,379



44,502





Total revenues

$

97,952


$

87,932


$

202,552


$

180,049

















Operating income (loss):













Company Stores

$

(1,049)


$

(1,734)


$

1,125


$

(1,765)


Domestic Franchise


216



1,041



1,363



2,195


International Franchise


3,409



2,500



7,580



5,986


KK Supply Chain


7,745



7,329



16,087



16,019



Total segment operating income


10,321



9,136



26,155



22,435


Unallocated general and administrative expenses


(5,083)



(5,197)



(10,882)



(11,142)


Impairment charges and lease termination costs


(301)



216



(545)



(1,083)



Consolidated operating income

$

4,937


$

4,155


$

14,728


$

10,210

















Depreciation expense:













Company Stores

$

1,689


$

1,459


$

3,226


$

2,854


Domestic Franchise


55



55



110



110


International Franchise


2



2



4



3


KK Supply Chain


188



205



377



417


Corporate administration


153



216



308



417



Total depreciation expense

$

2,087


$

1,937


$

4,025


$

3,801



KRISPY KREME DOUGHNUTS, INC.











STORE COUNT
















NUMBER OF STORES






DOMESTIC


INTERNATIONAL


TOTAL











Number of Stores Open at July 31, 2011:







Company:








Factory


70


-


70


Satellite


18


-


18



Total Company


88


-


88

Franchise:








Factory


103


111


214


Satellite


45


322


367



Total franchise


148


433


581




Total systemwide


236


433


669
















NUMBER OF STORES






COMPANY


FRANCHISE


TOTAL

Quarter ended July 31, 2011







May 1, 2011


86


566


652

Opened


2


22


24

Closed


-


(7)


(7)

July 31, 2011


88


581


669











Quarter ended August 1, 2010







May 2, 2010


83


533


616

Opened


2


20


22

Closed


(1)


(4)


(5)

August 1, 2010


84


549


633



KRISPY KREME DOUGHNUTS, INC.


SELECTED OPERATING STATISTICS








Three Months Ended


Six Months Ended







July 31,


August 1,


July 31,


August 1,







2011


2010


2011


2010












Systemwide Sales (in thousands) (1):













Company stores

$

65,476


$

59,602


$

134,503


$

121,790


Domestic Franchise stores


64,829



58,797



131,526



121,275


International Franchise stores


95,669



77,237



187,260



151,811


International Franchise stores, in constant dollars (2)


95,669



84,120



187,260



162,793


















Change in Same Store Sales (3):













Company stores


2.5%



5.7%



4.2%



4.5%


Domestic Franchise stores


6.3



5.0



5.4



3.8


International Franchise stores


(3.1)



(11.4)



(3.7)



(9.5)


International Franchise stores, in constant dollars (2)


(11.7)



(14.3)



(10.7)



(16.0)


















Change in Same Store Customer Count - Company stores













(retail sales only)


(2.9)%



4.7%



-%



3.4%


















Company stores Off-Premises Sales (4):













Grocers/mass merchants:














Change in average weekly number of doors


3.2%



1.7%



4.9%



(2.3)%



Change in average weekly sales per door


12.9%



6.9%



11.8%



9.1%


Convenience stores:


















Change in average weekly number of doors


(5.7)%



(2.4)%



(1.9)%



(6.4)%



Change in average weekly sales per door


10.2%



(1.0)%



6.8%



(1.4)%



(1) Systemwide sales, a non-GAAP financial measure, include the sales by both Company and franchise stores but excludes sales among Company and franchise stores. The Company believes systemwide sales data are useful in assessing the overall performance of the Krispy Kreme brand and, ultimately, the performance of the Company. The Company's consolidated financial statements appearing elsewhere herein include sales by Company stores, sales to franchisees by the KK Supply Chain business segment, and royalties and fees received from franchise stores based on their sales, but exclude sales by franchise stores to their customers.

(2) Computed on a pro forma basis assuming the average rate of exchange between the U.S. dollar and each of the foreign currencies in which the Company's international franchisees conduct business had been the same in the comparable prior year period.

(3) The change in "same store sales" represents the aggregate on-premises sales (including fundraising sales) during the current year period for all stores which had been open for more than 56 consecutive weeks during the current year period (but only to the extent such sales occurred in the 57th or later week of each store's operation) divided by the aggregate on-premises sales of such stores for the comparable weeks in the preceding year period. Once a store has been open for at least 57 consecutive weeks, its sales are included in the computation of same stores sales for all subsequent periods. In the event a store is closed temporarily (for example, for remodeling) and has no sales during one or more weeks, such store's sales for the comparable weeks during the earlier or subsequent period are excluded from the same store sales computation. The change in "same store customer count" is similarly computed, but is based upon the number of retail transactions reported in the Company's point-of-sale system.

(4) For Company off-premises sales, "average weekly number of doors" represents the average number of customer locations to which product deliveries are made during a week by Company Stores, and "average weekly sales per door" represents the average weekly sales to each such location by Company Stores.

SOURCE Krispy Kreme Doughnuts, Inc.