Krispy Kreme Reports Financial Results For The Third Quarter Of Fiscal 2014

WINSTON-SALEM, N.C., Dec. 2, 2013 /PRNewswire/ -- Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the third quarter of fiscal 2014, ended November 3, 2013.  The Company also raised the lower end of its adjusted EPS guidance to a new range of $0.60 to $0.63 per share from $0.59 to $0.63 for fiscal 2014, and provided preliminary guidance for fiscal 2015.

Third Quarter Fiscal 2014 Highlights Compared to the Year-Ago Period:

• Revenues increased 6.7% to $114.2 million from $107.1 million
• Company same store sales rose 3.7%, the twentieth consecutive quarterly increase
• Operating income rose 27.2% to $11.7 million from $9.2 million
• Adjusted net income rose 33.8% to $11.2 million ($0.16 per share) from $8.3 million ($0.12 per share); adjusted net income and adjusted EPS reflect income tax expense only to the extent currently payable in cash; adjusted net income and adjusted EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release)
• Operating income and adjusted net income include a gain of $1.7 million on the sale of leasehold interests to a franchisee, which added $0.02 to adjusted EPS, and a lease termination charge of $1.5 million associated with litigation related to a lease of a former commissary facility, which reduced adjusted EPS by $0.02
• Net income was $6.8 million ($0.09 per share) compared to $5.0 million ($0.07 per share) in the third quarter last year
• Cash provided by operating activities was $13.5 million compared to $15.0 million in the third quarter last year

Chairman, President and Chief Executive Officer James H. Morgan commented:  "Our relentless focus on executing our long-term strategic plan is enabling us to strengthen our Company, gradually unlock our brand's full potential and create value for our shareholders.  During the third quarter, we extended our track record of positive same store sales at Company stores to 20 consecutive quarters.  We believe this is a remarkable distinction.  We are pleased to have increased our top-line at a healthy pace despite the tepid consumer spending environment.  Most importantly, we demonstrated the attractive leverage opportunities inherent within our business model as evidenced by achieving a higher rate of growth in operating income and adjusted EPS than in revenues."

Morgan continued, "Our third quarter financial performance was consistent with our expectations.  We are pleased to be raising the lower end of our expected range of adjusted EPS for fiscal 2014 to a new range of $0.60 to $0.63 from $0.59 to $0.63.  If achieved, this would represent growth of from 28% to 34% compared to last year on a 52-week basis.  Our preliminary expectation of adjusted EPS for fiscal 2015 is in the range of $0.71 to $0.76 per share."

Morgan concluded, "We are fortunate to have several means at our disposal through which to optimize returns, including deploying capital on Company store development, supporting domestic and international franchise growth, and repurchasing outstanding shares.  We believe these attributes both set us apart, and provide Krispy Kreme with a uniquely bright long-term future.  We will continue working hard every day for the benefit of our franchisees, our customers and guests, and our shareholders."

Third Quarter Fiscal 2014 Results

Consolidated Results

For the third quarter ended November 3, 2013, revenues increased 6.7% to $114.2 million from $107.1 million.

Exclusive of the $1.7 million gain on the sale of leasehold interests, direct operating expenses were $94.1 million, or 82.4% of revenues compared to 84.2% of revenues last year.  General and administrative expenses rose to $5.7 million from $5.1 million in the year-ago period, and as a percentage of total revenues increased to 5.0% from 4.7%.  Impairment and lease termination costs for the quarter include a $1.5 million provision related to litigation with the landlord at the Company's former commissary in Lorton, Virginia.

Exclusive of the $1.7 million gain from the sale of leasehold interests and the $1.5 million lease termination accrual, operating income rose 25.7% to $11.6 million from $9.2 million.

Adjusted net income was $11.2 million ($0.16 per share) compared to $8.3 million ($0.12 per share) in the third quarter last year.

Net income was $6.8 million ($0.09 per share) compared to $5.0 million ($0.07 per share), in the third quarter last year.

Segment Results

Company Stores revenues increased 3.3% to $74.9 million from $72.5 million.  Same store sales at Company stores rose 3.7%, the twentieth consecutive quarterly increase, driven principally by retail price increases.  The Company Stores segment posted operating income of $2.6 million compared to $2.0 million in the third quarter last year.

Domestic Franchise revenues rose $0.5 million to $3.0 million, with higher royalties accounting for the majority of the increase.  Total sales by domestic franchisees rose 12.7%; approximately 4.0 percentage points of the increase reflects the refranchising in fiscal 2014 of a total of six stores in Kansas, Missouri and Texas.  Same store sales at Domestic Franchise shops increased 10.7%.  Exclusive of the $1.7 million gain from the sale of leasehold interests, Domestic Franchise segment operating income improved to $1.5 million from $1.2 million in the third quarter last year.

International Franchise revenues increased 3.0% to $6.2 million from $6.0 million, driven by higher royalties.  Sales by international franchise stores rose 4.1%.  Changes in the rates of exchange between the U.S. dollar and the foreign currencies in which the Company's international franchisees do business decreased sales by international franchisees measured in U.S. dollars by approximately $5.8 million in the third quarter of fiscal 2014 compared to last year, which adversely affected international royalty revenues by approximately $350,000.  Excluding the effects of exchange rate changes, sales by international franchisees rose 9.8%.  Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 3.1%, 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 $4.4 million compared to $4.3 million in the third quarter last year, reflecting the deployment of increased resources to support current and anticipated future international growth.

KK Supply Chain revenues (including sales to Company stores) rose 10.4% to $58.3 million from $52.8 million in the same period last year, driven principally by higher unit volumes of doughnut mixes and other ingredients compared to last year.  External KK Supply Chain revenues rose 15.5% to $30.1 million from $26.1 million in the year-ago period.  KK Supply Chain generated operating income of $9.1 million in the third quarter of fiscal 2014, up from $7.3 million in the third quarter last year.

Outlook

Based on third quarter and fiscal year-to-date results and other current information, management is raising the low end of its expected adjusted EPS range for the year by $0.01 per share and leaving the high end of the range unchanged.  The new range of from $0.60 to $0.63 per share, if achieved, would represent a year-over-year increase in adjusted EPS of between 28% and 34% from the $0.47 per share reported on a 52-week basis for fiscal 2013.

For fiscal 2015, the Company anticipates opening 10 to 15 Company stores, 20 to 25 domestic franchise stores, and about 85 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 negative due to the substantial growth in international markets in recent years.

Based on these factors, the Company's preliminary fiscal 2015 guidance is for adjusted EPS of between $0.71 and $0.76 per share.  The foregoing adjusted EPS range reflects estimated adjusted income tax expense of $3 million; adjusted income tax expense consists solely of taxes currently payable in cash.  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.

Adjusted net income, adjusted income tax expense and adjusted EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release).

Conference Call

The Company will host a conference call to review financial results for the third quarter of fiscal 2014 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 (877) 312-5514 or, for international callers, by dialing (970) 315-0452.  An archived replay of the call will be available shortly after its conclusion by dialing (855) 859-2056, or (404) 537-3406 for international callers; the passcode is 10360752.  The audio replay will be available through December 9, 2013.  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 810 locations in 23 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," "forecast," "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 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; increased costs or other effects of new government regulations relating to healthcare benefits; and risks associated with implementation of new technology platforms.  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, performance or achievements 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 February 3, 2013, the Company had net deferred income tax assets of approximately $116 million, of which approximately $76 million related to federal and state net operating loss carryovers.  The Company's federal net operating loss carryovers totaled approximately $206 million.

The Company has reported cumulative pretax income of over $100 million since the beginning of fiscal 2010, and the Company also has generated significant taxable income during this period.  However, because of the Company's utilization of its federal and state net operating loss carryovers and other deferred tax assets, the Company's cash payments for income taxes have been relatively insignificant during this period.  As a result, the provision for income tax expense has substantially exceeded cash payments for income taxes.  Until such time as the Company's net operating loss carryovers are exhausted or expire, GAAP income tax expense is expected to continue to substantially exceed the amount of cash income taxes payable by the Company.

The Company's fiscal year ends on the Sunday closest to January 31, which periodically results in a 53-week year.  Fiscal 2013 contained 53 weeks, while fiscal 2014 will contain 52 weeks.

In the second quarter of fiscal 2014, the Company recorded a charge of $1.0 million related to the refinancing of its secured credit facilities, consisting principally of the writeoff of deferred financing costs related to the Company's term loan, which was retired in full, and the termination of an interest rate hedge related to the term loan.  Charges of this nature are not expected to recur on a regular basis.

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 facts and transactions on the Company's results of operations.  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.  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