Krispy Kreme Reports First Profitable Year Since Fiscal 2004

WINSTON-SALEM, N.C., March 31, 2011 /PRNewswire/ -- Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the fourth quarter and fiscal year 2011, ended January 30, 2011.  

(Logo:  http://photos.prnewswire.com/prnh/19991216/NYTH146 )

Fiscal Year 2011 Highlights Compared to Last Year:

• Revenues increased 4.5% to $362.0 million from $346.5 million
• Company same store sales rose 4.0%, the second consecutive annual increase
• Operating income increased to $15.2 million from $11.8 million, including the effects of impairment charges and lease termination costs of $4.1 million and $5.9 million, respectively
• Net income was $7.6 million, or $0.11 per share diluted, compared to a net loss of $0.2 million, or $0.00 per share
• Total outstanding debt fell by $8.1 million to $35.4 million
• Cash provided by operating activities increased to $20.5 million from $19.8 million

Fourth Quarter Fiscal 2011 Highlights Compared to the Year-Ago Period:

• Revenues increased 5.7% to $91.7 million from $86.8 million
• Company same store sales rose 2.2%, the ninth consecutive quarterly increase, despite severe weather conditions in January
• Operating income decreased to $0.9 million from $2.4 million, reflecting a $600,000 increase in impairment charges and lease termination costs and an $800,000 reduction in favorable insurance adjustments compared to last year
• The fourth quarter of fiscal 2011 reflects a $1.0 million charge related to debt refinancing, while last year's fourth quarter included a one-time income tax credit of $600,000
• The net loss was $1.5 million, or $0.02 per share, compared to net income of $0.5 million, or $0.01 per share diluted

The Company ended the year with a total of 646 Krispy Kreme stores systemwide, consisting of 85 Company stores and 561 franchise locations.

James H. Morgan, President and Chief Executive Officer, commented:  "In fiscal 2011, Krispy Kreme generated operating income, excluding impairment and lease termination costs, of $19.2 million, which was at the high end of our $17 million to $20 million estimated range.  We also posted our first year-over-year growth in revenues since fiscal 2005, and completed our second consecutive year of same store sales growth at Company stores.  These factors, among others, led to our first profitable year since fiscal 2004."  

"In terms of fourth quarter results, there were a number of unusual items in both periods that affected our comparisons.  Adjusted for unusual items, our results were up nicely year-over-year, and if you normalize for the weather as well, you will conclude we had a pretty solid quarter.  With fiscal 2012 underway, we are hopeful that we can build upon this momentum and further position the Company to drive long-term value for our shareholders," Morgan continued.

Fiscal Year 2012 Outlook

"For the new fiscal year, we are maintaining our previously communicated outlook for store development, same store sales and operating income.  We anticipate opening 5 to 10 Company stores, 5 to 15 domestic franchise stores, and more than 30 international franchise stores.  We expect growth in same store sales at domestic stores, and hope to see continued improvement in international franchise trends, although international same store sales comparisons will remain under pressure due to the substantial expansion in recent years.  Not surprisingly, commodity costs are poised to rise significantly compared to fiscal 2011, and we are therefore implementing various price increases to largely offset higher input costs.  Assuming we can mostly offset higher overall costs through pricing and other measures, we estimate fiscal 2012 operating income, exclusive of impairment and lease termination costs, will be in the range of $22 million to $24 million, which would represent an increase of 15% to 25% from our fiscal 2011 results," Morgan concluded.

Fourth Quarter Fiscal 2011 Results

Consolidated Results

For the fourth quarter ended January 30, 2011, revenues increased 5.7% to $91.7 million from $86.8 million.  Year-over-year revenue increases were generated in all four business segments.

Direct operating expenses increased to $80.1 million from $74.8 million, and as a percentage of total revenues, increased to 87.4% from 86.2 %.  General and administrative expenses increased to $6.4 million from $5.5 million in the same period last year and, as a percentage of total revenues, increased to 6.9% from 6.4%.  Impairment charges and lease termination costs were $2.6 million compared to $2.0 million in the year-ago period.  

Operating income decreased to $0.9 million from $2.4 million.  Among the major reasons for the decline were a $0.9 million increase in incentive compensation costs compared to last year, and a decline in the magnitude of favorable adjustments to reserves for prior years' self-insurance claims, which were only $1.2 million compared to $2.0 million in the fourth quarter last year.

Interest expense decreased to $1.3 million from $2.3 million, principally reflecting the Company's reduced level of indebtedness.  The Company recorded a charge of $1.0 million in the fourth quarter of fiscal 2011 for costs related to the recently completed refinancing of the Company's secured credit facilities.

Last year's fourth quarter results included a $600,000 one-time income tax benefit.

The Company incurred a net loss of $1.5 million, or $0.02 per share, for the quarter compared to net income of $0.5 million, or $0.01 per share diluted, in the fourth quarter last year.

Segment Results

Company Stores revenues increased 1.9% to $61.8 million from $60.6 million.  Higher same store sales and off-premises sales were partially offset by the effects of stores that were either closed or refranchised.  Same store sales at Company stores rose 2.2%, the ninth consecutive quarterly increase.  Same store sales for the month of January fell 1.8% due to very inclement weather; same store sales for November and December rose 4.5% and 4.3%, respectively.  The Company Stores segment posted an operating loss of $1.0 million compared to an operating loss of $0.7 million last year.  Results for the fourth quarter of last year include a charge of $1.0 million for the settlement of litigation and related legal costs.  Favorable adjustments related to self-insurance programs were $1.2 million in the fourth quarter this year, compared to $2.0 million in last year's fourth quarter.

Domestic Franchise revenues increased 10.2% to $2.2 million from $2.0 million, reflecting a 6.8% increase in sales by domestic franchisees.  Excluding the effects of refranchising, sales by domestic franchisees rose 5.2%.  Same store sales rose 4.6% at domestic franchise stores.  The Domestic Franchise segment generated operating income of approximately $0.8 million in both periods.

International Franchise revenues increased 10.4% to $5.1 million from $4.6 million, reflecting increased royalties from higher sales by international franchise stores, as a decline in international franchise same store sales was offset by new store openings in fiscal 2011.  Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 11.1%, reflecting, among other things, waning honeymoon effects from the approximately 300 stores opened internationally in the past three years, as well as anticipated cannibalization as markets develop.  The International Franchise segment generated operating income of $3.3 million compared to $3.4 million in the fourth quarter last year.  International franchisees opened 20 stores in the fourth quarter, offset by the closure of 24 stores in Australia related to the franchisee's voluntary administration process (similar to a bankruptcy filing in the U.S.), which concluded during the quarter.

Total KK Supply Chain revenues (including sales to Company stores) increased 13.9% to $45.8 million from $40.2 million, driven by selling price increases in major product categories and generally higher unit volumes.  External KK Supply Chain revenues rose 15.9% to $22.6 million from $19.5 million in the fourth quarter last year.  KK Supply Chain generated operating income of $6.9 million compared to $6.6 million in the fourth quarter last year reflecting, among other things, higher revenues as well as lower freight and other distribution costs.

Conference Call

Management will host a conference call to review fourth quarter and fiscal 2011 results as well as management's outlook for fiscal 2012 this afternoon at 4:30 p.m. (ET).  A live webcast of the conference call will be available at the Company's website at www.KrispyKreme.com.  The call also can be accessed live by dialing (877) 291-1289 or, for international callers, by dialing (631) 865-4991.  A replay will be available after the call and can be accessed by dialing (800) 642-1687 and entering the passcode 48302796.  International callers may access the replay by dialing (706) 645-9291 and entering passcode 48302796.  The audio replay will be available through April 7, 2011.  A transcript of the conference call also will be available at the Company's 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 645 locations in 21 countries around the world.  Visit us at www.KrispyKreme.com.

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 "stealing" 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," "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.