Krispy Kreme Reports Earnings Per Share of $0.03 for the Third Quarter of Fiscal 2011

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Dec 01, 2010, 04:05 ET

WINSTON-SALEM, N.C., Dec. 1, 2010 /PRNewswire-FirstCall/ -- Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the third quarter of fiscal 2011, ended October 31, 2010.

(Logo: http://photos.prnewswire.com/prnh/19991216/NYTH146 )

Third Quarter Fiscal 2011 Highlights Compared to the Year-Ago Period:

Revenues increased 7.9% to $90.2 million from $83.6 million
Excluding the effects of refranchising Company stores, revenues rose 9.6%
Company same store sales rose 5.0%, the eighth consecutive quarterly increase
Operating income rose to $4.1 million from $633,000
Operating income for last year's third quarter reflected charges for the settlement of litigation and related legal costs totaling approximately $2.0 million ($0.03 per share)
Net income was $2.4 million ($0.03 per share diluted) compared to a net loss of $2.4 million ($0.04 per share) in the third quarter last year

The Company ended the third quarter with a total of 649 Krispy Kreme stores systemwide, a net increase of 16 shops during the quarter. As of October 31, 2010, there were 85 Company stores and 564 franchise locations.

"We delivered a strong performance in the third quarter, characterized by revenue growth, a significant increase in consolidated operating income, and a positive bottom line for the fourth consecutive quarter. Higher sales by Company and franchise shops drove profit improvements in the KK Supply Chain segment, and our International Franchise business continued to exceed our expectations. Company Stores continued its impressive track record of positive same store sales, although there is much more work to be done to restore our largest business segment to consistent profitability. We are devoting considerable attention toward this critical objective and over time, expect that the sales growth we are experiencing will more positively impact overall results," said Jim Morgan, the Company's President and Chief Executive Officer.

Outlook

"In our second quarter earnings release on September 2, 2010, we communicated our expectation for fiscal 2011 operating income, exclusive of impairment charges and lease termination costs, of between $13 million and $17 million. Based on our third quarter results, which exceeded our expectations, and other current information, our current fiscal 2011 outlook for consolidated operating income, exclusive of impairment charges and lease termination costs, is between $17 million and $20 million," Morgan continued.

"Looking forward to fiscal 2012, we anticipate opening 5 to 10 Company stores, between 5 and 15 domestic franchise stores, and more than 30 international franchise stores. We expect continued organic same store sales growth in our domestic stores, but believe international franchise same store sales will continue to be pressured by the substantial growth in international markets in recent years. The most significant uncertainty for fiscal 2012 is commodity costs, which are expected to rise significantly compared to the current year. Accordingly, we are working to reduce the consumption of certain key ingredients, and are evaluating the timing and scope of price increases needed to offset higher input costs. Although our planning and budgeting process for fiscal 2012 is ongoing, based on these general themes, we currently estimate that fiscal 2012 operating income, exclusive of impairment and lease termination costs, will be in the range of $22 million to $24 million. This range represents an increase of from 29% to 41% from the low end of our revised fiscal year 2011 guidance, and an increase of from 10% to 20% from the top end of the fiscal 2011 range. It is important to note that this outlook is very preliminary, and we expect to establish more formal guidance in conjunction with the release of our fourth quarter results in April," Morgan concluded.

Third Quarter Fiscal 2011 Results

Consolidated Results

For the third quarter ended October 31, 2010, revenues increased 7.9% to $90.2 million from $83.6 million. Year-over-year revenue increases were generated in all four business segments.

Direct operating expenses increased to $79.2 million from $74.6 million, but as a percentage of total revenues, decreased to 87.7% from 89.2 %. General and administrative expenses decreased to $4.8 million from $6.1 million in the same period last year and, as a percentage of total revenues, decreased to 5.3% from 7.3%. Impairment charges and lease termination costs were $399,000 compared to $109,000 in the year-ago period.

Operating income increased to $4.1 million from $633,000. Last year's results reflect charges of approximately $2.0 million related to the settlement of litigation.

Interest expense decreased to $1.6 million from $2.3 million, principally reflecting the Company's reduced level of indebtedness.

Net income was $2.4 million ($0.03 per share diluted) compared to a net loss of $2.4 million ($0.04 per share), in the third quarter last year.

Segment Results

Company Stores revenues increased 2.6% to $61.6 million from $60.0 million. Higher same store sales and off-premises sales to grocers and mass merchants were offset by the effects of stores closed or refranchised, along with lower off-premises sales to convenience stores. Excluding the effects of refranchising, Company Stores revenues increased 5.9%. Same store sales at Company stores rose 5.0%, the eighth consecutive quarterly increase. The Company Stores segment posted an operating loss of $1.4 million in both periods. Results for the third quarter of last year include a charge of $750,000 for the settlement of litigation.

Domestic Franchise revenues increased 4.9% to $2.0 million from $1.9 million, reflecting a 10.0% rise in sales by domestic franchisees. Excluding the effects of refranchising, sales by domestic franchisees rose 5.9%. Same store sales rose 5.7% at domestic franchise stores. Legal costs associated with the termination of the franchise agreements of a domestic franchisee caused the decline in Domestic Franchise operating income to $499,000 compared to $811,000 last year.

International Franchise revenues increased 22.5% to $4.4 million from $3.6 million, reflecting increased royalties from higher sales by international franchise stores. A decline in international franchise same store sales was offset by new store openings. Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 12.3%, reflecting, among other things, waning honeymoon effects from the over 300 stores opened internationally in the past three years, as well as anticipated cannibalization as markets develop. The International Franchise segment generated operating income of $3.0 million compared to $2.1 million last year. International franchisees continued to expand, with a net increase of 12 locations in the third quarter.

Total KK Supply Chain revenues (including sales to Company stores) increased 14.5% to $45.0 million from $39.3 million, driven by selling price increases in major product categories and generally higher unit volumes. External KK Supply Chain revenues rose 23.2% to $22.2 million from $18.1 million in the third quarter last year. KK Supply Chain generated operating income of $7.3 million compared to $5.5 million in the third quarter last year reflecting, among other things, higher revenues as well as lower freight and other distribution costs.

Conference Call

Management will host a conference call to review third quarter results as well as management's outlook for future periods this afternoon at 4:30 p.m. (ET). A live webcast of the conference call will be available at the Company's website at www.KrispyKreme.com. The call also can be accessed live by dialing (877) 291-1289 or, for international callers, by dialing (631) 865-4991. A replay will be available after the call and can be accessed by dialing (800) 642-1687 and entering the passcode 26498335. International callers may access the replay by dialing (706) 645-9291 and entering passcode 26498335. The audio replay will be available through December 8, 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 630 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; 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
(Unaudited)

				Three Months Ended				Nine Months Ended
			October 31,		November 1,		October 31,		November 1,
			2010		2009		2010		2009
			(In thousands, except per share amounts)

Revenues			$	90,228	$	83,600	$	270,277	$	259,750
Operating expenses:
	Direct operating expenses (exclusive of depreciation and
		amortization shown below)		79,152		74,576		233,382		223,069
	General and administrative expenses			4,784		6,128		15,509		17,259
	Depreciation and amortization expense			1,818		2,154		5,619		6,146
	Impairment charges and lease termination costs			399		109		1,482		3,922
Operating income				4,075		633		14,285		9,354
Interest income				42		10		164		38
Interest expense				(1,585)		(2,295)		(5,023)		(8,424)
Equity in income (losses) of equity method franchisees				190		(393)		371		(506)
Other non-operating income and (expense), net				85		144		247		(356)
Income (loss) before income taxes				2,807		(1,901)		10,044		106
Provision for income taxes				417		487		979		783
Net income (loss)			$	2,390	$	(2,388)	$	9,065	$	(677)

Earnings (loss) per common share:
	Basic		$	0.03	$	(0.04)	$	0.13	$	(0.01)
	Diluted		$	0.03	$	(0.04)	$	0.13	$	(0.01)

Weighted average shares outstanding:
	Basic			68,407		67,612		68,232		67,354
	Diluted			70,023		67,612		69,527		67,354

KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED BALANCE SHEET (Unaudited)
			October 31,		January 31,
			2010		2010
			(In thousands)
	ASSETS
CURRENT ASSETS:
Cash and cash equivalents			$	21,756	$	20,215
Receivables				21,329		17,839
Receivables from equity method franchisees				576		524
Inventories				15,137		14,321
Other current assets				3,675		6,324
	Total current assets			62,473		59,223
Property and equipment				70,748		72,527
Investments in equity method franchisees				1,401		781
Goodwill and other intangible assets				23,816		23,816
Other assets				10,211		8,929
	Total assets		$	168,649	$	165,276

	LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt			$	612	$	762
Accounts payable				8,287		6,708
Accrued liabilities				28,404		30,203
	Total current liabilities			37,303		37,673
Long-term debt, less current maturities				34,773		42,685
Other long-term obligations				20,477		22,151

Commitments and contingencies

SHAREHOLDERS' EQUITY:
Preferred stock, no par value				-		-
Common stock, no par value				369,018		366,237
Accumulated other comprehensive loss				(42)		(180)
Accumulated deficit				(292,880)		(303,290)
	Total shareholders' equity			76,096		62,767
		Total liabilities and shareholders' equity	$	168,649	$	165,276

KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
				Nine Months Ended
				October 31,		November 1,
				2010		2009
					(In thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)				$	9,065	$	(677)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation and amortization				5,619		6,146
	Deferred income taxes				(90)		(380)
	Impairment charges				790		916
	Accrued rent expense				(165)		(569)
	Loss on disposal of property and equipment				473		599
	Impairment of investment in equity method franchisee				-		500
	Unrealized loss on interest rate derivatives				-		537
	Share-based compensation				3,197		3,448
	Provision for doubtful accounts				(300)		40
	Amortization of deferred financing costs				560		636
	Equity in (income) losses of equity method franchisees				(371)		506
	Other				(316)		(137)
	Change in assets and liabilities:
		Receivables			(3,036)		1,072
		Inventories			(816)		1,063
		Other current and non-current assets			(1,948)		(88)
		Accounts payable and accrued liabilities			351		2,105
		Other long-term obligations			(179)		180
			Net cash provided by operating activities		12,834		15,897
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment					(5,457)		(6,160)
Proceeds from disposals of property and equipment					2,688		156
Other investing activities					6		209
			Net cash used for investing activities		(2,763)		(5,795)
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of long-term debt					(8,114)		(25,894)
Deferred financing costs					-		(954)
Proceeds from exercise of warrants					5		-
Repurchase of common shares					(421)		(249)
			Net cash used for financing activities		(8,530)		(27,097)
Net increase (decrease) in cash and cash equivalents					1,541		(16,995)
Cash and cash equivalents at beginning of period					20,215		35,538
Cash and cash equivalents at end of period				$	21,756	$	18,543


KRISPY KREME DOUGHNUTS, INC.

SEGMENT INFORMATION

					Three Months Ended				Nine Months Ended
					October 31,		November 1,		October 31,		November 1,
					2010		2009		2010		2009
					(In thousands)

Revenues:
	Company Stores				$	61,565	$	60,020	$	184,069	$	185,730
	Domestic Franchise					2,040		1,945		6,314		5,798
	International Franchise					4,389		3,583		13,158		11,267
	KK Supply Chain:
		Total revenues				45,001		39,314		135,798		121,926
		Less – intersegment sales elimination				(22,767)		(21,262)		(69,062)		(64,971)
			External KK Supply Chain revenues			22,234		18,052		66,736		56,955
				Total revenues	$	90,228	$	83,600	$	270,277	$	259,750

Operating income (loss):
	Company Stores				$	(1,449)	$	(1,380)	$	(3,214)	$	2,951
	Domestic Franchise					499		811		2,694		2,425
	International Franchise					3,018		2,117		9,004		6,495
	KK Supply Chain					7,342		5,549		23,361		19,375
		Total segment operating income				9,410		7,097		31,845		31,246
	Unallocated general and administrative expenses					(4,936)		(6,355)		(16,078)		(17,970)
	Impairment charges and lease termination costs					(399)		(109)		(1,482)		(3,922)
		Consolidated operating income			$	4,075	$	633	$	14,285	$	9,354

Depreciation and amortization expense:
	Company Stores				$	1,410	$	1,694	$	4,264	$	4,709
	Domestic Franchise					56		14		166		57
	International Franchise					2		-		5		-
	KK Supply Chain					198		219		615		669
	Corporate administration					152		227		569		711
		Total depreciation and amortization expense			$	1,818	$	2,154	$	5,619	$	6,146


KRISPY KREME DOUGHNUTS, INC.

STORE COUNT

				NUMBER OF STORES
				DOMESTIC	INTERNATIONAL	TOTAL

Number of Stores at October 31, 2010
Company:
	Factory			69	-	69
	Satellite			16	-	16
		Total Company		85	-	85
Franchise:
	Factory			101	106	207
	Satellite			42	315	357
		Total franchise		143	421	564
			Total systemwide	228	421	649

				NUMBER OF STORES
				COMPANY	FRANCHISE	TOTAL
Quarter ended October 31, 2010
August 1, 2010				84	549	633
Opened				1	19	20
Closed				-	(4)	(4)
October 31, 2010				85	564	649

Quarter ended November 1, 2009
August 2, 2009				89	459	548
Opened				2	22	24
Closed				(4)	(5)	(9)
Transfer				(3)	3	-
November 1, 2009				84	479	563


KRISPY KREME DOUGHNUTS, INC.

SELECTED OPERATING STATISTICS

			Three Months Ended						Nine Months Ended
			October 31,			November 1,			October 31,			November 1,
			2010			2009			2010			2009


Year over year percentage change in systemwide sales (1)				14.4	%		(4.5)	%		10.9	%		(8.1)	%
Year over year percentage change in systemwide sales, in constant dollars (2)				12.7			(4.5)			8.7			(5.2)

Change in same store sales (3):
	Company stores			5.0	%		5.1	%		4.6	%		4.2	%
	Domestic franchise stores			5.7			1.0			4.4			1.4
	International franchise stores			(8.6)			(15.6)			(9.2)			(28.8)
	International franchise stores, in constant dollars (2)			(12.3)			(16.8)			(14.8)			(21.9)

Change in same store customer count - Company stores				2.5	%		N/A			3.1	%		N/A

Company stores off-premises sales (4):
	Grocers/mass merchants:
		Change in average weekly number of doors		2.0	%		(10.4)	%		(0.9)	%		(10.7)	%
		Change in average weekly sales per door		4.1			14.2			7.5			10.0
	Convenience stores:
		Change in average weekly number of doors		(1.5)	%		(12.0)	%		(4.8)	%		(11.1)	%
		Change in average weekly sales per door		(1.4)			(1.9)			(1.4)			(4.5)

(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 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.

KRISPY KREME DOUGHNUTS, INC. REVENUE RECONCILIATION A reconciliation of total revenues as reported to adjusted total revenues exclusive of the effects of refranchising follows:
		Three Months Ended				Nine Months Ended
		October 31,		November 1,		October 31,		November 1,
		2010		2009		2010		2009
		(In thousands)
Total revenues as reported		$	90,228	$	83,600	$	270,277	$	259,750
Sales by refranchised stores			-		(1,904)		-		(6,483)
Royalties from refranchised stores			(78)		(7)		(239)		(7)
KK Supply Chain sales to refranchised stores			(657)		-		(2,007)		-
	Adjusted total revenues exclusive of the effects of refranchising	$	89,493	$	81,689	$	268,031	$	253,260

The Company believes that adjusted total revenues exclusive of the effects of refranchising, a non-GAAP measure, is a useful measure because it enables comparisons of the Company's revenues that are unaffected by the Company's decisions to sell operating Krispy Kreme stores to franchisees instead of continuing to operate the stores as Company locations. In addition, this comparison is one of the performance metrics adopted by the compensation committee of the Company's board of directors to determine the amount of incentive compensation potentially payable to the Company's executive officers for fiscal 2011.

SOURCE Krispy Kreme Doughnuts, Inc.