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

WINSTON-SALEM, N.C., Nov. 30, 2011 /PRNewswire/ -- Krispy Kreme Doughnuts, Inc. (NYSE:  KKD) (the "Company") today reported financial results for the third quarter of fiscal 2012, ended October 30, 2011.  The Company also raised its outlook for fiscal 2012 and provided preliminary guidance for fiscal 2013.

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

• Revenues increased 9.4% to $98.7 million from $90.2 million
• Company same store sales rose 4.0%, the twelfth consecutive quarterly increase
• Operating income rose 36.2% to $5.6 million from $4.1 million
• Net income was $4.7 million ($0.07 per share diluted) compared to $2.4 million ($0.03 per share diluted) in the third quarter last year
• Cash provided by operating activities was $10.2 million compared to $7.4 million in the third quarter last year

The Company ended the third quarter of fiscal 2012 with a total of 678 Krispy Kreme stores systemwide, a net increase of nine shops during the quarter.  As of October 30, 2011, there were 89 Company stores and 589 franchise locations.

Chief Executive Officer James H. Morgan commented:  "Our third quarter performance reflects continued progress in strengthening our financial condition and realizing our vision for the Krispy Kreme brand.  We generated a healthy increase in revenues, recorded our twelfth consecutive quarter of positive same store sales at Company stores, and delivered substantial improvements in both profitability and operating cash flow.  Despite economic headwinds and input cost challenges, we now project fiscal 2012 consolidated operating income, exclusive of impairment charges and lease termination costs, of $24 to $26 million, which would represent at least 25% growth over fiscal 2011."

Morgan continued, "While we are encouraged by our near-term results, we also believe that maintaining a longer term perspective is critical to building shareholder value.  We are therefore working on a number of initiatives to improve profitability in the Company Stores segment in the years ahead.  In addition, within our franchise segments, we are expanding our international franchisee pipeline to expand our geographic reach and market penetration, developing plans to reintroduce domestic franchise marketing, and improving support to our existing franchisees throughout the world.  In summary, fiscal 2012 is proving to be an exciting year at Krispy Kreme, both strategically and as a result of our financial performance, and we continue to position the Company to build shareholder value for the long term."

Third Quarter Fiscal 2012 Results

Consolidated Results

For the third quarter ended October 30, 2011, revenues increased 9.4% to $98.7 million from $90.2 million.  Year-over-year revenue increases were generated in all four business segments.

Direct operating expenses increased to $85.9 million from $79.2 million in the same period last year, but as a percentage of total revenues, fell to 87.0% from 87.7%.  General and administrative expenses increased to $4.9 million from $4.8 million in the year-ago period but, as a percentage of total revenues, decreased to 5.0% from 5.3%.

Operating income increased to $5.6 million from $4.1 million.

Interest expense decreased to $385,000 from $1.6 million, 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 $4.7 million ($0.07 per share diluted) compared to $2.4 million ($0.03 per share diluted), in the third quarter last year.

Segment Results

Company Stores revenues increased 9.8% to $67.6 million from $61.6 million.  Same store sales at Company stores rose 4.0%, the twelfth consecutive quarterly increase.  Price increases instituted to help offset higher input costs drove the increase, but were partially offset by a decrease in customer traffic.  The Company believes that expected cannibalization by new store openings in expansion markets adversely affected same store sales in the third quarter.  The Company Stores segment posted an operating loss of $574,000, compared to an operating loss of $1.4 million in the third quarter last year. 

Domestic Franchise revenues increased 14.1% to $2.3 million from $2.0 million, reflecting an 11.7% rise in sales by domestic franchisees.  Same store sales rose 7.9% at domestic franchise stores.  Domestic Franchisee segment operating income improved to $1.1 million, compared to $499,000 in the third quarter last year.

International Franchise revenues increased 22.4% to $5.4 million from $4.4 million, driven by higher royalty revenues.  Sales by international franchise stores rose 9.4%, and provisions for uncollectible royalties fell almost $700,000 from the third quarter last year.  Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 12.2%, reflecting, among other things, honeymoon effects from the over 300 stores opened internationally since the beginning of fiscal 2009, as well as cannibalization as markets develop.  The International Franchise segment generated operating income of $3.3 million, up from $3.0 million in the third quarter last year.

KK Supply Chain revenues (including sales to Company stores) increased 11.7% to $50.3 million from $45.0 million in the same period last year, driven by selling price increases.  External KK Supply Chain revenues rose 5.2% to $23.4 million from $22.2 million in the year-ago period.  KK Supply Chain generated operating income of $7.0 million in the third quarter of fiscal 2012, down slightly from $7.3 million in the third 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 third quarter of fiscal 2012 compared to the third quarter last year.

Outlook

Given our third quarter and fiscal year-to-date results, along with other current information, the Company is raising its fiscal 2012 outlook for consolidated operating income, exclusive of impairment charges and lease termination costs, to between $24 and $26 million from between $22 million and $24 million previously. 

For fiscal 2013, the Company anticipates opening 5 to 10 Company stores, between 10 and 15 domestic franchise stores, and more than 60 international franchise stores.  Although the Company looks for continued organic same store sales growth in its domestic stores, international franchise same store sales will likely continue to be pressured by the substantial growth in international markets in recent years.  In addition, as prices of agricultural and other commodities are expected to remain volatile, the Company will continue working to reduce its consumption of certain key ingredients while taking other measures to combat the rise in input costs the Company has experienced over the past year. 

Based on these factors, our preliminary guidance is for fiscal 2013 operating income in the range of $29 to $33 million, inclusive of estimated impairment and lease termination costs.  In addition, we are also going to start expressing our guidance in terms of diluted earnings per share in order to conform to prevailing practice in the industry.  Our preliminary estimate of diluted EPS for fiscal 2013 is in the range of $0.35 to $0.41 per share.  The foregoing range assumes income tax expense for fiscal 2013 of approximately $2 million, which would give us an effective income tax rate of approximately 7%.  The estimated range does not give effect to the increase in the Company's effective income tax rate for fiscal 2013 which would result from a conclusion that some or all of the Company's deferred income tax assets are more likely than not to be realized. 

As of the end of fiscal 2011, the Company had a valuation allowance of approximately $160 million, equal to the entire balance of its net deferred income tax assets.  If, based on additional evidence, the Company concludes that some or all of such valuation allowance should be released to earnings in the fourth quarter, then the Company's effective income tax rate for years after fiscal 2012 would rise substantially.  Management currently estimates that its annual effective income tax rate subsequent to any reversal of the deferred income tax valuation allowance would be approximately 40%.  Any reversal of the valuation allowance will have no effect on the Company's actual income tax payments or other cash flows, notwithstanding the fact that the Company's reported earnings would be reduced subsequent to any such reversal.

Conference Call

The Company will host a conference call to review financial results for the third quarter of fiscal 2012 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 (866) 700-6293 or, for international callers, by dialing (617) 213-8835; the participant passcode is Krispy Kreme.  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 12931664.  The audio replay will be available through December 7, 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 675 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.