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

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

• Revenues increased 4.3% to $102.1 million from $98.0 million
• Company same store sales rose 5.4%, the fifteenth consecutive quarterly increase
• Operating income rose 87% to $9.2 million from $4.9 million
• Adjusted net income rose 95% to $8.2 million ($0.12 per share) from $4.2 million ($0.06 per share); adjusted net income and adjusted EPS reflect income tax expense only to the extent currently payable in cash and, in the second quarter of fiscal 2012, exclude the after-tax gain on the sale of the Company's 30% equity interest in KK Mexico; adjusted net income and adjusted EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release)
• Net income was $4.9 million ($0.07 per share) compared to $8.8 million ($0.12 per share) in the second quarter last year; net income for the second quarter of fiscal 2013 reflects a substantially higher book income tax rate compared to the second quarter of fiscal 2012 as more fully described below; net income for the second quarter of fiscal 2012 included an after-tax gain on the sale of the Company's 30% equity interest in KK Mexico of $4.7 million ($0.06 per share)
• Cash provided by operating activities was $12.6 million compared to $7.6 million in the second quarter last year
• The Company completed its $20 million share repurchase in the quarter, purchasing 2,858,000 shares at an average price of $6.35; cumulatively, the Company purchased 3,113,000 shares at an average price of $6.42

The Company ended the second quarter of fiscal 2013 with a total of 711 Krispy Kreme stores systemwide, a net increase of 19 shops during the quarter.  As of July 29, 2012, there were 93 Company stores and 618 franchise locations.

President and Chief Executive Officer James H. Morgan commented:  "We were very pleased with our quarterly performance, as we drove both solid same store sales growth and increased guest traffic.  The top-line momentum translated into significant year-over-year increases in both operating income and adjusted earnings per share.  The period was highlighted by our 75^th Birthday celebration and by National Doughnut Day, each of which provided consumers another reason to visit Krispy Kreme and create some lasting joyful memories."  Morgan continued, "Based on our performance to date, we are reiterating our operating income guidance for the full year of $29 to $33 million, although we now believe the high end of that range is increasingly achievable."

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 adjusted EPS, which includes income tax expense only the extent currently payable in cash, of between $0.36 and $0.42, compared to $0.31 in fiscal 2012; adjusted EPS for fiscal 2012 also excludes the gain on the sale of the Company's 30% equity interest in KK Mexico.  Adjusted net income and adjusted EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release).

Management expects fiscal 2013 GAAP EPS of between $0.22 and $0.25, 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.

The expected range for both fiscal 2013 adjusted and GAAP EPS is $0.01 per share higher than management's previous guidance and reflects the completion of the $20 million share repurchase.

Second Quarter Fiscal 2013 Results

Consolidated Results

For the second quarter ended July 29, 2012, revenues increased 4.3% to $102.1 million from $98.0 million.

Direct operating expenses were unchanged at $85.7 million, but as a percentage of total revenues fell to 83.9% from 87.5%.  General and administrative expenses decreased to $4.8 million from $4.9 million in the year-ago period and, as a percentage of total revenues, decreased to 4.7% from 5.0%.

Operating income increased to $9.2 million from $4.9 million. 

Adjusted net income was $8.2 million ($0.12 per share) compared to $4.2 million ($0.06 per share) in the second quarter last year.  Adjusted net income and adjusted EPS reflect income tax expense only to the extent currently payable in cash and, in the second quarter of last year, exclude the gain on the sale of the Company's 30% equity interest in KK Mexico.  Adjusted net income and adjusted EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release).

Net income was $4.9 million ($0.07 per share) compared to $8.8 million ($0.12 per share), in the second quarter last year.  Last year's results included an after tax gain of $4.7 million ($0.06 per share) on the sale of the Company's interest in KK Mexico.  In addition, net income and EPS for the second quarter of fiscal 2013 reflect a book tax rate of 45% compared to a rate of 12% in the second quarter last year (exclusive of the KK Mexico gain).  The increase reflects the reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012.  Accordingly, net income and EPS for the second quarter of fiscal 2013 are not comparable to those for the second quarter of fiscal 2012.

Segment Results

Company Stores revenues increased 5.1% to $69.3 million from $66.0 million.  Same store sales at Company stores rose 5.4%, the fifteenth consecutive quarterly increase, and were driven by higher traffic.  The Company Stores segment posted operating income of $338,000 compared to an operating loss of $1.0 million in the second quarter last year. 

Domestic Franchise revenues rose 3.4% to $2.4 million from $2.3 million, reflecting higher royalties partially offset by lower initial franchise fees.  Total sales by domestic franchisees rose 7.3%, while same store sales increased 6.7%.  Domestic Franchise segment operating income improved to $1.3 million compared to $216,000 in the second quarter last year.  Last year's results included a charge of $820,000 for estimated payments under a lease guarantee related to a franchisee whose franchise agreements were terminated in the second quarter of fiscal 2012.

International Franchise revenues increased 8.0% to $5.8 million from $5.4 million, driven by higher royalty revenues.  Sales by international franchise stores rose 7.1%.  Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 10.0%, 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 $4.2 million, up from $3.4 million in the second quarter last year.

KK Supply Chain revenues (including sales to Company stores) rose 2.2% to $51.5 million from $50.3 million in the same period last year.  External KK Supply Chain revenues rose 1.3% to $24.6 million from $24.3 million in the year-ago period.  KK Supply Chain generated operating income of $8.4 million in the second quarter of fiscal 2013, up from $7.7 million in the second quarter last year.  This year's results reflect favorable mark-to-market adjustments on agricultural derivatives of approximately $1.1 million.

Conference Call

The Company will host a conference call to review financial results for the second quarter of fiscal 2013 as well as its outlook this afternoon at 4:30 p.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) 299-7089 or, for international callers, by dialing (617) 801-9714.  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 63763489.  The audio replay will be available through August 29, 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 700 locations in 21 countries around the world.  Connect with Krispy Kreme at www.krispykreme.com and on Facebook, Foursquare, Twitter and YouTube.

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 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 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 two quarters of fiscal 2013 is not comparable to income tax expense in the first two quarters 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.

In addition, in the second quarter of fiscal 2012, the Company realized a pretax gain of $6.2 million ($4.7 million after tax, or $.06 per share) on the sale of its 30% ownership interest in KK Mexico, an equity method investee.  The Company does not expect to realize similar gains in the future.

The following non-GAAP financial information and related reconciliation to GAAP measures are provided to assist the reader in understanding the effects of the above transactions and events, which are expected to be non-recurring, on the Company's results of operations, and to facilitate comparisons of fiscal 2013 results with the Company's results for the comparable periods 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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