Krispy Kreme Reports Financial Results for the First Quarter of Fiscal 2013

WINSTON-SALEM, N.C., May 21, 2012 /PRNewswire/ -- Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the first quarter of fiscal 2013, ended April 29, 2012. 

First Quarter Fiscal 2013 Highlights Compared to the Year-Ago Period:

• Revenues increased 3.7% to $108.5 million from $104.6 million
• Company same store sales rose 2.1%, the fourteenth consecutive quarterly increase
• Operating income increased to $10.8 million from $9.8 million
• Adjusted net income, which reflects income tax expense only to the extent payable in cash, was $10.3 million ($0.14 per share) compared to adjusted net income of $9.2 million ($0.13 per share) in the first quarter last year; adjusted net income and diluted earnings per share ("EPS") are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release)
• Net income was $6.0 million ($0.08 per share) compared to $9.2 million ($0.13 per share); net income and EPS for the first quarter of fiscal 2013 reflect a book tax rate of 43% compared to a rate of 3% in the first quarter last year due to the required reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012; accordingly, net income and EPS for the first quarter of fiscal 2013 are not comparable to those for the first quarter of fiscal 2012
• Cash provided by operating activities increased to $10.4 million from $5.1 million
• The Company repurchased 255,000 of its common shares at an average price of $7.27 per share

Chief Executive Officer James H. Morgan commented:  "We got off to a good start in fiscal 2013 as operating income rose 11% on a 4% increase in revenues.  All four of our business segments reported improved operating results compared to last year.  Based on these results and other factors, we expect our business model to generate healthy cash flows and financial returns for investors, and we remain confident in our previous outlook for the full year."

Fiscal 2013 Full Year Outlook

Management expects fiscal 2013 operating income of between $29 and $33 million, compared to $25.6 million in fiscal 2012, and fiscal 2013 EPS of between $0.21 and $0.24, reflecting an estimated tax rate of 45%.  The higher tax rate compared to fiscal 2012 is a result of the required reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012, as described in the Company's March 20, 2012 earnings release and in the Company's annual report on Form 10-K filed on March 30, 2012.  Because the Company has substantial net operating loss carryovers, the amount of taxes payable in cash is expected to remain insignificant for the foreseeable future.

Management estimates fiscal 2013 adjusted EPS of between $0.35 and $0.41, which includes income tax expense only to the extent expected to be currently payable, compared to $0.31 in fiscal 2012.  Fiscal 2012 adjusted EPS also excludes a gain of $0.06 per share from the sale of the Company's interest in KK Mexico.  Adjusted EPS is a non-GAAP measure (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release).

First Quarter Fiscal 2013 Results

Consolidated Results

For the first quarter ended April 29, 2012, revenues increased 3.7% to $108.5 million from $104.6 million in the same period last year.

Direct operating expenses increased to $88.7 million from $87.0 million in the same period last year, but as a percentage of total revenues, fell to 81.7% from 83.2%.  General and administrative expenses increased to $6.5 million from $5.6 million in the year-ago period, and as a percentage of total revenues, increased to 6.0% from 5.4%.

Operating income increased to $10.8 million from $9.8 million.

Net income was $6.0 million ($0.08 per share) compared to $9.2 million ($0.13 per share), in the first quarter last year.

Net income and EPS for the first quarter of fiscal 2013 reflect a book tax rate of 43% compared to a rate of 3% in the first quarter last year due to the reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012.  Accordingly, net income and EPS for the first quarter of fiscal 2013 are not comparable to those for the first quarter of fiscal 2012.

Excluding the deferred income tax effects from both years' results, adjusted net income, which reflects income taxes only to the extent currently payable in cash, was $10.3 million ($0.14 per share) compared to $9.2 million ($0.13 per share) in the first quarter last year.  Cash provided by operating activities rose to $10.4 million, and continues to reflect the fact that cash taxes payable remain very small despite the higher reported tax rate in the first quarter.  Adjusted net income and EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release).

Segment Results

Company Stores revenues increased 5.6% to $73.3 million from $69.5 million.  Same store sales at Company stores rose 2.1%, the fourteenth consecutive quarterly increase.  Higher customer traffic and fiscal 2012 retail price increases contributed 1.1% and 2.6%, respectively, to the improvement, partially offset by coffee and doughnut promotional pricing which reduced the average guest check.  The Company lapped last year's retail pricing in early March.  The Company Stores segment posted operating income of $2.9 million, up 35.6% from the first quarter last year.

Domestic Franchise revenues increased 11.1% to $2.6 million from $2.4 million, reflecting a 7.9% rise in sales by domestic franchisees.  Same store sales rose 5.8% at domestic franchise stores.  Domestic Franchisee segment operating income improved to $1.6 million from $1.1 million in the first quarter last year.

International Franchise revenues increased 6.9% to $6.0 million from $5.6 million, driven by higher royalty revenues.  Sales by international franchise stores rose 14.6%.  Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 7.4%, reflecting, among other things, honeymoon effects from the substantial number of international store openings in recent years, as well as cannibalization as markets develop.  The International Franchise segment generated operating income of $4.5 million compared to $4.2 million reported in the first quarter last year.  Last year's results included almost $800,000 of credits related to the Company's equity interest in KK Mexico, which the Company sold in the second quarter of last year.

KK Supply Chain revenues (including sales to Company stores) were essentially flat at $53.8 million.  External KK Supply Chain revenues fell slightly to $26.5 million from $27.1 million in the year-ago period.  KK Supply Chain generated operating income of $8.5 million in the first quarter, compared to $8.3 million in the first quarter last year.

Share Repurchases

The Company repurchased 255,000 of its common shares during the first quarter for total consideration of $1.9 million.  The average price paid was $7.27 per share.  Currently, the Company's stock repurchase program is being executed pursuant to a Rule 10b5-1 plan executed between the Company and a brokerage firm.  Under the 10b5-1 plan, the brokerage is executing purchases of the Company's common shares pursuant to standing instructions issued by the Company, and such repurchase activity is not interrupted during blackout periods imposed under the Company's securities trading policy.

Conference Call

The Company will host a conference call to review financial results for the first quarter as well as management's outlook for the balance of the year this morning at 8:00 a.m. (ET).

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 (800) 510-9691 or, for international callers, by dialing (617) 614-3453.  An archived replay of the call will be available shortly after its conclusion by dialing (888) 286-8010, or (617) 801-6888 for international callers; the passcode is 64579253.  The audio replay will be available through May 28, 2012.  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 690 locations in 21 countries around the world.  Connect with Krispy Kreme at krispykreme.com and on Facebook, Foursquare, Twitter and YouTube.

Defined Terms

"Honeymoon effect" means the common pattern for many start-up restaurants in which a flurry of activity due to start-up publicity and natural curiosity is followed by a decline during which a steady repeat customer base develops.  "Cannibalization" means the tendency for new stores to become successful, in part or in whole, by "shifting" sales from existing stores in the same market. 

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," "would," "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 small shop operating model; political, economic, currency and other risks associated with our international operations; the price and availability of raw materials needed to produce doughnut mixes and other ingredients, and the price of motor fuel; our relationships with wholesale customers; our ability to protect our trademarks and trade secrets; 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; compliance with government regulations relating to food products and franchising; 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.

NON-GAAP FINANCIAL INFORMATION

As of January 29, 2012, the Company had net deferred income tax assets of approximately $139.6 million, including approximately $90 million of tax assets related to federal and state net operating loss carryovers.  The Company's federal net operating loss carryovers totaled approximately $240 million.

In the quarter ended January 29, 2012, the Company reversed $139.6 million of valuation allowances against deferred tax assets because management concluded that realization of such assets was more likely than not.  While such reversal, which was required by GAAP, increased the Company's earnings by $139.6 million in fiscal 2012, the reversal has the effect of increasing the provision for income taxes, and therefore decreasing net income, beginning in the first quarter of fiscal 2013.  The reversal had no effect on the Company's cash payments for income taxes.  This negative effect on earnings occurs because the reversal of the valuation allowances resulted in the recognition in fiscal 2012 of income tax benefits expected to be realized in later years.  Absent the reversal of the valuation allowances, any such tax benefits would have been recognized when realized in future periods upon the generation of taxable income.  Accordingly, beginning in the first quarter of fiscal 2013, the Company's effective income tax rate, which in fiscal 2012 and earlier years bore little or no relationship to pretax income, more closely reflects the blended federal and state income tax rates in jurisdictions in which the Company operates.

Because of the increase in the Company's effective income tax rate as described above, the Company's income tax expense in the first quarter of fiscal 2013 is not comparable to income tax expense in the first quarter of fiscal 2012.  In addition, until such time as the Company's net operating loss carryovers are exhausted or expire, GAAP income tax expense is expected to substantially exceed the amount of cash income taxes payable by the Company, which are expected to remain insignificant for the foreseeable future.

The following non-GAAP financial information and related reconciliation to GAAP measures are provided to assist the reader in understanding the effect of the fiscal 2012 reversal of the valuation allowances on the Company's results of operations for fiscal 2013, and to facilitate comparisons of fiscal 2013 results with the Company's results for the first quarter of fiscal 2012.  In addition, the non-GAAP financial information is intended to illustrate the material difference between the Company's income tax expense and income taxes currently payable.   Adjusted net income and adjusted EPS reflect income tax expense only to the extent such expense is currently payable in cash.  These non-GAAP performance measures are consistent with other measurements made by management in the operation of the business which do not consider income taxes except to the extent to which those taxes currently are payable, for example, capital allocation decisions and incentive compensation measurements that are made on a pretax basis.

SOURCE Krispy Kreme Doughnut Corporation

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