Krispy Kreme Reports Earnings Per Share of $0.13 for the First Quarter of Fiscal 2012

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May 23, 2011, 06:30 ET

WINSTON-SALEM, N.C., May 23, 2011 /PRNewswire/ -- Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the first quarter of fiscal 2012, ended May 1, 2011.

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

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

Revenues increased 13.6% to $104.6 million from $92.1 million
Company same store sales rose 5.8%, the tenth consecutive quarterly increase
Operating income rose 61.7% to $9.8 million from $6.1 million
Operating income, excluding the effects of impairment charges and lease termination costs of $240,000 and $1.3 million in fiscal 2012 and 2011, respectively, rose 36.5% to $10.0 million from $7.4 million
Net income was $9.2 million ($0.13 per share diluted) compared to $4.5 million ($0.06 per share diluted) in the first quarter last year
Cash provided by operating activities was $5.1 million compared to $1.7 million in the first quarter last year

The Company ended the first quarter with a total of 652 Krispy Kreme stores systemwide, a net increase of 6 shops during the quarter. As of May 1, 2011, there were 86 Company stores and 566 franchise locations.

James H. Morgan, President and Chief Executive Officer, commented: "We delivered a strong performance in the first quarter, characterized by double-digit revenue growth, a significant increase in consolidated operating income, and our best quarterly net profit since the fourth quarter of fiscal 2004. Substantially improved results in the Company Stores segment were a major driver of our improved results. We also benefitted from lower impairment charges and lease termination costs and a significant reduction in interest expense resulting from the January 2011 refinancing of our credit facilities. While commodity costs created some headwinds, and will continue to do so for the remainder of the year, we believe we are off to a good start in fiscal 2012. We are pleased to reaffirm our outlook for consolidated operating income, exclusive of impairment charges and lease termination costs, of between $22 million and $24 million for the year, although we believe first quarter results make the high end of that range appear increasingly achievable."

First Quarter Fiscal 2012 Results

Consolidated Results

For the first quarter ended May 1, 2011, revenues increased 13.6% to $104.6 million from $92.1 million. Year-over-year revenue increases were generated in all four business segments.

Direct operating expenses increased to $87.0 million from $77.2 million in the same period last year, but as a percentage of total revenues, were down slightly to 83.2% from 83.8%. General and administrative expenses decreased to $5.6 million from $5.7 million in the same period last year and, as a percentage of total revenues, decreased to 5.4% from 6.2%. Impairment charges and lease termination costs were $240,000 compared to $1.3 million in the year-ago period.

Operating income increased to $9.8 million from $6.1 million.

Interest expense decreased to $480,000 from $1.9 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.

Net income was $9.2 million ($0.13 per share diluted) compared to $4.5 million ($0.06 per share diluted), in the first quarter last year.

Segment Results

Company Stores revenues increased 11.1% to $69.5 million from $62.5 million. Same store sales at Company stores rose 5.8%, the tenth consecutive quarterly increase. Price increases instituted during the first quarter to help offset higher input costs drove the increase, as higher customer traffic was offset by a decrease in the average guest check exclusive of pricing effects. The Company Stores segment posted an operating profit of $2.2 million, compared to breakeven results last year.

Domestic Franchise revenues increased 7.7% to $2.4 million from $2.2 million, reflecting a 6.8% rise in sales by domestic franchisees. Same store sales rose 4.6% at domestic franchise stores. The increase in revenues was offset by higher segment operating expenses, resulting in Domestic Franchisee segment operating income of $1.1 million in the first quarter of fiscal 2012, flat to last year.

International Franchise revenues increased 18.4% to $5.6 million from $4.8 million. A $500,000 reduction in initial franchise fees, reflecting 16 store openings in the first quarter of fiscal 2012 compared to 41 openings in the first quarter of fiscal 2011, was offset by higher royalty revenues reflecting a 16.4% 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 9.6%, 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. The rate of decline in constant dollar international franchise same store sales fell for the fifth consecutive quarter.

International Franchise revenues benefited from the recognition of approximately $375,000 of revenues related to Krispy Kreme Mexico which accrued in prior periods but which had not previously been recognized due to uncertainty about their collectibility. As previously announced, the Company sold its equity interest in KK Mexico on May 5, and in connection with the sale received payment of approximately $765,000 of past due amounts, consisting of approximately $375,000 of previously unrecognized revenues and approximately $390,000 of receivables for which reserves previously had been established. In light of the collection of the past due amounts in connection with the sale, the Company recorded the $375,000 of revenues and the $390,000 bad debt recovery in the first quarter of fiscal 2012. The Company will report a gain on the sale of its interest in KK Mexico currently estimated at $5.9 million ($4.4 million after Mexican taxes, or $0.06 per share) in the second quarter. The International Franchise segment generated operating income of $4.2 million compared to $3.5 million last year.

Total KK Supply Chain revenues (including sales to Company stores) increased 17.4% to $53.9 million from $45.9 million in the first quarter last year, largely driven by selling price increases in major product categories. External KK Supply Chain revenues rose 19.9% to $27.1 million from $22.6 million in the first quarter last year. KK Supply Chain generated operating income of $8.3 million in the first quarter of fiscal 2012 compared to $8.7 million in the first 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 Chains' gross profit and operating margins declined in the first quarter of fiscal 2012 compared to the first quarter of last year.

Conference Call

Management will host a conference call to review first quarter results as well as management's outlook this morning at 8:00 a.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 (877) 291-1289 or, for international callers, by dialing (631) 865-4991. To access an archived audio replay of the call, dial (800) 642-1687, or (706) 645-9291 for international callers; the passcode is 65595072. The audio replay will be available through May 30, 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 650 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
	May 1,		May 2,
	2011		2010
	(In thousands, except per share amounts)

Revenues	$	104,600	$	92,117
Operating expenses:
Direct operating expenses (exclusive of depreciation expense shown below)		86,983		77,155
General and administrative expenses		5,644		5,744
Depreciation expense		1,938		1,864
Impairment charges and lease termination costs		244		1,299
Operating income		9,791		6,055
Interest income		45		40
Interest expense		(477)		(1,871)
Equity in income (losses) of equity method franchisees		(9)		346
Other non-operating income and (expense), net		86		81
Income before income taxes		9,436		4,651
Provision for income taxes		265		183
Net income	$	9,171	$	4,468

Earnings per common share:
Basic	$	0.13	$	0.07
Diluted	$	0.13	$	0.06

Weighted average shares outstanding:
Basic		68,754		68,095
Diluted		71,169		69,230

KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED BALANCE SHEET


		May 1,			January 30,
		2011			2011
		(In thousands)
	ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$		24,701	$	21,970
Receivables				22,789		20,261
Receivables from equity method franchisees				691		586
Inventories				15,090		14,635
Other current assets				4,632		5,970
Total current assets				67,903		63,422
Property and equipment				70,932		71,163
Investments in equity method franchisees				1,787		1,663
Goodwill and other intangible assets				23,776		23,776
Other assets				11,267		9,902
Total assets		$		175,665	$	169,926

	LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt			$	2,507	$	2,513
Accounts payable				9,817		9,954
Accrued liabilities				25,373		28,379
Total current liabilities				37,697		40,846
Long-term debt, less current maturities				32,263		32,874
Other long-term obligations				19,339		19,778

Commitments and contingencies

SHAREHOLDERS' EQUITY:
Preferred stock, no par value				-		-
Common stock, no par value				371,644		370,808
Accumulated other comprehensive loss				(103)		(34)
Accumulated deficit				(285,175)		(294,346)
Total shareholders' equity				86,366		76,428
Total liabilities and shareholders' equity			$	175,665	$	169,926

KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS


	Three Months Ended
	May 1,		May 2,
	2011		2010
		(In thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income	$	9,171	$	4,468
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		1,938		1,864
Deferred income taxes		45		(92)
Impairment charges		-		849
Accrued rent expense		184		(16)
Loss on disposal of property and equipment		145		128
Share-based compensation		893		1,069
Provision for doubtful accounts		(295)		(230)
Amortization of deferred financing costs		102		148
Equity in income (losses) of equity method franchisees		9		(346)
Other		(56)		(81)
Change in assets and liabilities:
Receivables		(3,052)		(2,248)
Inventories		(455)		(266)
Other current and non-current assets		483		(1,353)
Accounts payable and accrued liabilities		(3,013)		(2,277)
Other long-term obligations		(1,033)		74
Net cash provided by operating activities		5,066		1,691
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(1,843)		(1,594)
Proceeds from disposals of property and equipment		-		54
Escrow deposit		200		-
Other investing activities		(9)		-
Net cash used for investing activities		(1,652)		(1,540)
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of long-term debt		(626)		(232)
Repurchase of common shares		(57)		(37)
Net cash used for financing activities		(683)		(269)
Net increase (decrease) in cash and cash equivalents		2,731		(118)
Cash and cash equivalents at beginning of period		21,970		20,215
Cash and cash equivalents at end of period	$	24,701	$	20,097

KRISPY KREME DOUGHNUTS, INC. SEGMENT INFORMATION

					Three Months Ended
					May 1,		May 2,
					2011		2010
					(In thousands)

Revenues:
	Company Stores:
		On-premises sales			$	32,861	$	30,053
		Off-premises sales				36,614		32,481
			Company Stores revenues			69,475		62,534
	Domestic Franchise					2,369		2,200
	International Franchise					5,636		4,760
	KK Supply Chain:
		Total revenues				53,883		45,905
		Less – intersegment sales elimination				(26,763)		(23,282)
			External KK Supply Chain revenues			27,120		22,623
				Total revenues	$	104,600	$	92,117

Operating income (loss):
	Company Stores				$	2,174	$	(31)
	Domestic Franchise					1,147		1,154
	International Franchise					4,171		3,486
	KK Supply Chain					8,342		8,690
		Total segment operating income				15,834		13,299
	Unallocated general and administrative expenses					(5,799)		(5,945)
	Impairment charges and lease termination costs					(244)		(1,299)
		Consolidated operating income			$	9,791	$	6,055

Depreciation expense:
	Company Stores				$	1,537	$	1,395
	Domestic Franchise					55		55
	International Franchise					2		1
	KK Supply Chain					189		212
	Corporate administration					155		201
		Total depreciation expense			$	1,938	$	1,864

KRISPY KREME DOUGHNUTS, INC. STORE COUNT

				NUMBER OF STORES
				DOMESTIC	INTERNATIONAL	TOTAL

Number of Stores at May 1, 2011
Company:
	Factory			69	-	69
	Satellite			17	-	17
		Total Company		86	-	86
Franchise:
	Factory			101	109	210
	Satellite			44	312	356
		Total franchise		145	421	566
			Total systemwide	231	421	652

				NUMBER OF STORES
				COMPANY	FRANCHISE	TOTAL
Quarter ended May 1, 2011
January 30, 2011				85	561	646
Opened				1	20	21
Closed				-	(15)	(15)
May 1, 2011				86	566	652

Quarter ended May 2, 2010
January 31, 2010				83	499	582
Opened				-	41	41
Closed				-	(7)	(7)
May 2, 2010				83	533	616

KRISPY KREME DOUGHNUTS, INC. SELECTED OPERATING STATISTICS

				Three Months Ended
				May 1,		May 2,
				2011		2010

Systemwide Sales (in thousands) (1):
		Company stores			69,027		62,188
		Domestic Franchise stores			66,697		62,478
		International Franchise stores			91,591		74,574
		International Franchise stores, in constant dollars (2)			91,591		78,703

Change in Same Store Sales (3):
	Company stores				5.8%		3.4%
	Domestic Franchise stores				4.6		2.7
	International Franchise stores				(4.3)		(7.7)
	International Franchise stores, in constant dollars (2)				(9.6)		(17.6)

Change in Same Store Customer Count - Company stores (retail sales only)					2.9%		2.3%

Company stores Off-Premises Sales (4):
	Grocers/mass merchants:
			Change in average weekly number of doors		6.7%		(6.1)%
			Change in average weekly sales per door		11.0%		11.4%
	Convenience stores:
			Change in average weekly number of doors		1.9%		(10.2)%
			Change in average weekly sales per door		3.8%		(1.9)%

(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.