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

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

SOURCE Krispy Kreme Doughnuts, Inc.