Krispy Kreme Reports Net Income for the Fourth Quarter and Breakeven Results for the Fiscal Year Ended January 31, 2010

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Apr 15, 2010, 04:39 ET

WINSTON-SALEM, N.C., April 15 /PRNewswire-FirstCall/ -- Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the fourth quarter and fiscal year ended January 31, 2010 ("fiscal 2010").

(Logo: http://www.newscom.com/cgi-bin/prnh/19991216/NYTH146 )

Fourth Quarter Fiscal 2010 Highlights Compared to the Year-Ago Period:

Revenues decreased 5.6% to $86.8 million from $91.9 million; approximately $1 million of the decrease was due to refranchising
Company same store sales rose 1.1%, the 5th consecutive quarterly increase
Operating income increased 65% to $2.4 million from $1.5 million (the results reflect impairment charges and lease termination costs in both periods of $2.0 million and $1.2 million, respectively)
Net income was $0.5 million compared to a net loss of $0.3 million

Fiscal Year 2010 Highlights Compared to the Year-Ago Period:

Revenues decreased 10.1% to $346.5 million from $385.5 million; approximately $8 million of the decrease was due to refranchising
Company same store sales rose 3.5%
Operating income more than doubled to $11.8 million from $4.8 million (the results reflect impairment charges and lease termination costs in both periods of $5.9 million and $0.5 million, respectively)
Net loss was $0.2 million compared to a net loss of $4.1 million
Cash provided by operating activities increased to $19.8 million from $16.6 million
Reduced total debt by $31.4 million, to $43.4 million at year end

The Company ended fiscal 2010 with a total of 582 Krispy Kreme stores systemwide, a net increase of 59 locations since February 1, 2009. As of January 31, 2010, there were 83 Company stores and 499 franchise locations.

"During fiscal 2010, we made substantial progress in building a stronger foundation for our Company and improving our business model. We generated positive Company same store sales in all four quarters despite the difficult economy, while also delivering substantially higher operating income. In addition, we reduced our debt by over 40% during the year. The improvements in our operating results and financial position are a testament to the soundness of our business strategy, and reflect our ongoing efforts to enhance shareholder value over the long term. With the support of our team members and franchise partners, we intend to build on these accomplishments and look forward to continued momentum in fiscal 2011," said Jim Morgan, the Company's President and Chief Executive Officer.

Fiscal 2011 Outlook

The Company expects consolidated revenues will stabilize in fiscal 2011 after years of decline due to store closings and other factors. Excluding the effects of refranchising Company stores, consolidated revenues are expected to rise in fiscal 2011.

The Company is providing the following outlook with respect to its expectations for fiscal year 2011:

Seven to ten Company stores and 35 to 45 domestic and international franchise shop openings are expected
Total domestic store count is expected to rise for the first time since 2005
Same store sales at Company stores are expected to rise in the low to mid single digits, inclusive of pricing
Total revenues are expected to rise slightly, exclusive of the effects of refranchising
Higher input costs, including sugar and fuel, are expected to increase operating costs by about $5 million
Higher spending to support domestic and international franchisee growth and operations is expected to continue
Consolidated operating income is expected to range from $10 million to $13 million, exclusive of any impairment charges and lease termination costs
We expect to report a net profit for the year

"We are continuing to make targeted investments to build our operational capabilities to support future growth, despite those investments penalizing our results in the short term. We are working vigorously to continue implementation of our strategic plans and, in doing so, we believe we are setting the stage for additional and more robust growth in revenues and earnings in fiscal 2012 and beyond."

Fourth Quarter Fiscal 2010 Results

For the fiscal quarter ended January 31, 2010, revenues decreased 5.6% to $86.8 million from $91.9 million, with year-over-year increases in domestic and international franchise revenue offset by decreases in Company Stores and KK Supply Chain revenues. Direct operating expenses were $74.6 million compared to $80.2 million in the year-ago period, and as a percentage of total revenues, decreased to 86.0% from 87.3%.

General and administrative expenses were $5.5 million compared to $6.1 million in the same period last year and, as a percentage of total revenues, decreased to 6.3% from 6.6%. The fourth quarter of fiscal 2010 included a non-recurring credit of $1.3 million from the receipt of additional insurance proceeds related to the securities class action suit that was settled in October 2006. Impairment charges and lease termination costs were $2.0 million compared to $1.2 million in the year-ago period.

Operating income increased 65% to $2.4 million from $1.5 million.

Interest expense declined by $1.1 million to $2.3 million from $3.3 million. The year-ago period included a charge of $0.9 million representing a mark-to-market adjustment on an interest rate derivative for which there was no comparable charge in the fourth quarter of 2010. During the quarter, the Company reduced its outstanding debt by $5.6 million to $43.4 million.

Other non-operating income and expense in the fourth quarter of fiscal 2009 included a non-cash gain of $2.8 million relating to the refranchising of four Company stores in Eastern Canada.

The provision for income taxes in the fourth quarter of fiscal 2010 reflected a benefit of $560,000 from enactment of the Worker, Homeownership and Business Assistance Act of 2009. The tax provision in the fourth quarter of fiscal 2009 included a $1.2 million charge related to the Canada refranchising gain.

Net income was $0.5 million, or $0.01 per diluted share, compared to a net loss of $0.3 million (less than $.01 per share) last year.

Segment Financial Results

Company Store revenues decreased 5.1% to $60.6 million; same store sales rose 1.1%, offset by locations that were closed or refranchised and lower off-premises sales to convenience stores. The fourth quarter of 2010 included a charge of $950,000 for the settlement of wage/hour litigation in Northern California, which was more than offset by a $2.0 million favorable adjustment to self-insurance reserves (principally workers' compensation). The comparable insurance adjustment in the fourth quarter last year was $1.0 million. Company Stores generated an operating loss of $0.7 million compared to an operating loss of $0.8 million last year.

Domestic Franchise revenues increased 7.7% to $2.0 million, reflecting a slight rise in sales by domestic franchisees, while Domestic Franchise same store sales fell 0.4%. The Domestic Franchise segment generated operating income of $0.8 million compared to operating income of $1.2 million, reflecting increased resources devoted to franchisee support and higher allocated management costs.

International Franchise revenues increased 12.1% to $4.6 million. A decline in international franchise same store sales of 10.5% was offset by new store openings and more favorable exchange rates. Adjusted to eliminate the effects of changes in foreign exchange rates, International Franchise same store sales fell 19.1%, reflecting waning honeymooon effects from the 281 stores opened internationally in the past three years, as well as anticipated cannibalization as markets develop. The International Franchise segment generated operating income of $3.4 million compared to $2.8 million last year.

External KK Supply Chain revenues decreased 11.4% to $19.5 million, reflecting lower unit sales of doughnut mix and other ingredients due to lower sales by Company and domestic franchise stores, as well as lower selling prices of doughnut mix and shortening compared to last year resulting from lower agricultural commodity costs. KK Supply Chain generated operating income of $6.6 million compared to $5.8 million in the fourth quarter last year reflecting, among other things, lower freight and other distribution costs.

Company Store and Franchise Development

During the fourth quarter, the Company opened one new Company small shop, while domestic franchisees opened two small shops and three factory stores. International franchisees continued to expand, with a net increase of 17 locations in the quarter, including the first Krispy Kreme shop in China, located in Shanghai.

Conference Call

Management will host a conference call to review fourth quarter and fiscal year 2010 results as well as management's outlook for fiscal 2011 this afternoon at 4:30 p.m. (ET). A live webcast of the conference call will be available at http://www.KrispyKreme.com. The call also can be accessed live by dialing (888) 278-8475 or, for international callers, by dialing (913) 981-5593. A replay will be available after the call and can be accessed by dialing (888) 203-1112 and entering the passcode 7646829. International callers may access the replay by dialing (719) 457-0820 and entering passcode 7646829. The audio replay will be available through April 21, 2010. A transcript of the conference call also will be available at the Company's 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 580 locations in 19 countries around the world. Visit us at http://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; and risks associated with competition. 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, contain 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 (In thousands, except per share amounts)
	Quarter Ended		Year Ended
	Jan. 31, 2010	Feb. 1, 2009	Jan. 31, 2010	Feb. 1, 2009

Revenues	$ 86,770	$ 91,919	$ 346,520	$ 385,522
Operating expenses:
Direct operating expenses (exclusive of depreciation and amortization shown below)	74,590	80,232	297,185	346,545
General and administrative expenses	5,469	6,052	22,728	23,458
Depreciation and amortization expense	2,045	2,100	8,191	8,709
Impairment charges and lease termination costs	1,981	1,196	5,903	548
Other operating (income) and expense, net	265	875	739	1,501
Operating income	2,420	1,464	11,774	4,761
Interest income	55	44	93	331
Interest expense	(2,261)	(3,338)	(10,685)	(10,679)
Equity in income (losses) of Equity Method Franchisees	18	(101)	(488)	(786)
Other non-operating income and (expense), net	80	2,744	(276)	2,815
Income (loss) before income taxes	312	813	418	(3,558)
Provision for income taxes	(208)	1,116	575	503
Net income (loss)	$ 520	($ 303)	($ 157)	($ 4,061)

Income (loss) per common share:
Basic	$ .01	$ —	$ —	($ .06)

Diluted	$ .01	$ —	$ —	($ .06)

Weighted average shares outstanding
Basic	67,908	66,998	67,493	65,940

Diluted	68,582	66,998	67,493	65,940

KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED BALANCE SHEET
		Jan. 31,		Feb. 1,
		2010		2009
	(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	20,215	$	35,538
Trade receivables		17,371		19,229
Receivables from Equity Method Franchisees		524		1,019
Inventories		14,321		15,587
Deferred income taxes		—		106
Other current assets		6,792		4,327
Total current assets		59,223		75,806
Property and equipment		72,527		85,075
Investments in Equity Method Franchisees		781		1,187
Goodwill and other intangible assets		23,816		23,856
Other assets		8,929		9,002
Total assets	$	165,276	$	194,926

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	762	$	1,413
Accounts payable		6,708		8,981
Accrued liabilities		30,203		29,222
Total current liabilities		37,673		39,616
Long-term debt, less current maturities		42,685		73,454
Deferred income taxes		—		106
Other long-term obligations		22,151		23,995
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 10,000 shares authorized; none issued and outstanding		—		—
Common stock, no par value; 300,000 shares authorized; 67,441 and 67,512 shares issued and outstanding		366,237		361,801
Accumulated other comprehensive loss		(180)		(913)
Accumulated deficit		(303,290)		(303,133)
Total shareholders' equity		62,767		57,755
Total liabilities and shareholders' equity	$	165,276	$	194,926

KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
	Year Ended
	Jan. 31,		Feb. 1,
	2010		2009
	(In thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss	($	157)	($	4,061)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		8,191		8,709
Deferred income taxes		(479)		651
Impairment charges		2,666		1,050
Accrued rent expense		(412)		(352)
Loss on disposal of property and equipment		915		746
Gain on refranchise of Canadian subsidiary		—		(2,805)
Gain on disposal of interests in Equity Method Franchisees		—		(931)
Impairment of investment in Equity Method Franchisees		500		—
Unrealized loss on interest rate derivatives		559		798
Share-based compensation		4,779		5,152
Provision for doubtful accounts		(161)		270
Amortization of deferred financing costs		859		832
Equity in losses of Equity Method Franchisees		488		786
Other		(225)		1,820
Change in assets and liabilities:
Trade receivables		2,351		4,158
Inventories		1,216		4,263
Other current and non-current assets		394		590
Accounts payable and accrued liabilities		(1,650)		(3,817)
Other long-term obligations		(7)		(1,266)
Net cash provided by operating activities		19,827		16,593
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(7,967)		(4,694)
Proceeds from disposals of property and equipment		5,752		748
Investments in Equity Method Franchise		(325)		(113)
Other investing activities		365		(237)
Net cash used for investing activities		(2,175)		(4,296)
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of long-term debt		(31,678)		(1,989)
Deferred financing costs		(954)		(467)
Proceeds from exercise of stock options		—		3,103
Repurchase of common shares		(343)		(2,069)
Net cash used for financing activities		(32,975)		(1,422)
Effect of exchange rate changes on cash		—		(72)
Net increase (decrease) in cash and cash equivalents		(15,323)		10,803
Cash and cash equivalents at beginning of year		35,538		24,735
Cash and cash equivalents at end of year	$	20,215	$	35,538
Supplemental schedule of non-cash investing and financing activities:
Assets acquired under capital leases	$	258	$	143

KRISPY KREME DOUGHNUTS, INC. SEGMENT INFORMATION (Dollars in thousands)
	Quarter Ended		Year Ended
	Jan. 31, 2010	Feb. 1, 2009	Jan. 31, 2010	Feb. 1, 2009
Revenues:
Company Stores	$ 60,643	$ 63,929	$ 246,373	$ 265,890
Domestic Franchise	2,009	1,865	7,807	8,042
International Franchise	4,640	4,140	15,907	17,495
KK Supply Chain:
Total revenues	40,201	44,707	162,127	191,456
Less- intersegment sales elimination	(20,723)	(22,722)	(85,694)	(97,361)
External KK Supply Chain revenues	19,478	21,985	76,433	94,095
Total revenues	$ 86,770	$ 91,919	$ 346,520	$ 385,522

Operating income (loss):
Company Stores	($ 663)	($ 828)	$ 2,288	($ 9,813)
Domestic Franchise	843	1,165	3,268	4,965
International Franchise	3,401	2,822	9,896	11,550
KK Supply Chain	6,587	5,829	25,962	23,269
Total segment operating income	10,168	8,988	41,414	29,971
Unallocated general and administrative expenses	(5,767)	(6,328)	(23,737)	(24,662)
Impairment charges and lease termination costs	(1,981)	(1,196)	(5,903)	(548)
Consolidated operating income	$ 2,420	$ 1,464	$ 11,774	$ 4,761

Depreciation and amortization expense:
Company Stores	$ 1,584	$ 1,548	$ 6,293	$ 6,402
Domestic Franchise	14	22	71	86
International Franchise	—	—	—	—
KK Supply Chain	214	254	883	1,019
Corporate administration	233	276	944	1,202
Total depreciation and amortization expense	$ 2,045	$ 2,100	$ 8,191	$ 8,709

KRISPY KREME DOUGHNUTS, INC. STORE COUNT
	NUMBER OF STORES
	DOMESTIC	INTERNATIONAL	TOTAL
Number of Stores at January 31, 2010:
Company:
Factory	69	—	69
Satellite	14	—	14
Total Company	83	—	83
Franchise:
Factory	104	95	199
Satellite	37	263	300
Total Franchise	141	358	499
Total Systemwide	224	358	582


	NUMBER OF STORES
	COMPANY	FRANCHISE	TOTAL
Quarter Ended January 31, 2010:
NOVEMBER 1, 2009	84	479	563
Opened	1	28	29
Closed	(1)	(9)	(10)
Refranchised	(1)	1	—
JANUARY 31, 2010	83	499	582

Quarter Ended February 1, 2009:
NOVEMBER 2, 2008	97	412	509
Opened	—	24	24
Closed	—	(10)	(10)
Refranchised	(4)	4	—
FEBRUARY 1, 2009	93	430	523

KRISPY KREME DOUGHNUTS, INC. SELECTED OPERATING STATISTICS (Dollars in thousands)
	Quarter Ended		Year Ended
	Jan. 31, 2010	Feb. 1, 2009	Jan. 31, 2010	Feb. 1, 2009

Year over year percentage change in systemwide sales (1)	1.6%	(6.0)%	(5.8)%	(0.3)%
Year over year percentage change in systemwide sales, in constant dollars (2)	(2.4)%	(1.0)%	(4.4)%	0.0%

Change in same store sales (3):
Company	1.1%	0.9%	3.5%	(0.7)%
Domestic Franchise	(0.4)%	(0.3)%	0.9%	(3.3)%
International Franchise	(10.5)%	(34.7)%	(24.2)%	(23.4)%
International Franchise, in constant dollars (2)	(19.1)%	(19.7)%	(21.1)%	(18.6)%

Company off-premises sales (4):
Grocers/mass merchants:
Change in average weekly number of doors	(10.6)%	(6.5)%	(10.7)%	(8.0)%
Change in average weekly sales per door	12.8%	0.5%	10.5%	(4.8)%
Convenience stores:
Change in average weekly number of doors	(13.7)%	(6.8)%	(11.7)%	(5.0)%
Change in average weekly sales per door	(1.9)%	(8.4)%	(4.1)%	(10.7)%

(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. (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 57^th 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. (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.