Adjusted Net Income Rises 37% for the Quarter and 31% for the Year
Raises Fiscal 2015 Diluted EPS Guidance to Reflect Growth of 20% to 30%
Increases Share Repurchase Authorization to $80 Million
WINSTON-SALEM, N.C. - (BUSINESS WIRE) - Mar. 12, 2014 - Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the fourth quarter and fiscal year ended February 2, 2014, and raised its diluted EPS guidance for fiscal 2015 to reflect fewer forecasted shares outstanding as a result of share repurchases. The Company also announced that its Board of Directors increased the Company’s current share repurchase authorization from $50 million to $80 million.
The fourth quarter and fiscal year ended February 2, 2014 included 13 and 52 weeks, respectively, compared to 14 and 53 weeks, respectively, for the fourth quarter and fiscal year ended February 3, 2013. Accordingly, financial results for the fiscal 2014 periods are not directly comparable to those of the corresponding fiscal 2013 periods. The Company’s fiscal year ends on the Sunday closest to January 31, which periodically results in a 53-week year.
Fourth Quarter Fiscal 2014 Highlights Compared to the Year-Ago Period (Table 2):
To facilitate comparisons, the following highlights compare the 13 weeks ended February 2, 2014 to the 13 weeks ended January 27, 2013:
Fiscal 2014 Highlights Compared to Last Year (Table 2):
To facilitate comparisons, the following highlights compare the 52 weeks ended February 2, 2014 to the 52 weeks ended January 27, 2013:
James H. Morgan, Chairman and Chief Executive Officer, commented: "Fiscal 2014 was an outstanding year at Krispy Kreme, and we thank our Company team members and our franchise partners for their outstanding contributions. Among the significant achievements were:
"Krispy Kreme ranks among the fastest growing brands in QSR, and we have significant potential to further expand our system both domestically and internationally. Our worldwide store count grew by more than 10% in fiscal 2014, and we are projecting similar net unit growth in fiscal 2015. Company development this year will focus exclusively on our small free-standing factory shops, which have shown very encouraging results since we opened the first of these new format shops in January 2013. Domestic franchise development is expected to consist of a mix of small factory and satellite locations, while internationally, we expect to enter several new markets, including Colombia and Guangdong, China. Our goal remains to have 1,300 domestic and international shops in operation by January 2017.
"Our cash flow generation and strong balance sheet provide us with the resources to pursue an exciting but disciplined organic growth strategy, and complement those efforts with ongoing actions that we believe will create additional value for our shareholders. To that end, the Board of Directors has increased the size of our current share repurchase authorization from $50 million to $80 million and, to date, we have repurchased approximately 1.6 million shares for a total of approximately $30 million, including $9.3 million in purchases since the end of the fourth quarter.
"To summarize, fiscal 2014 represented the best financial results for Krispy Kreme since fiscal 2004, and the foundation has clearly been laid for many years of sustainable growth."
Results for the Quarter Ended February 2, 2014 (Tables 2 and 7)
To facilitate comparisons, the following discussion compares the 13 weeks ended February 2, 2014 to the 13 weeks ended January 27, 2013.
For the quarter ended February 2, 2014, revenues rose 3.3% to $112.7 million.
Direct operating expenses increased to $93.3 million from $91.0 million, but as a percentage of total revenues decreased to 82.8% from 83.4%. General and administrative expenses declined to $7.7 million from $8.4 million in the same period last year, and as a percentage of revenues fell to 6.8% from 7.7%. The decrease in general and administrative expenses in the fourth quarter of fiscal 2014 reflects, among other things, lower incentive compensation costs and a reduction in legal costs compared to the prior year. In addition, general and administrative expenses in the fourth quarter last year included a charge of $225,000 for the settlement of nuisance litigation.
Operating income rose 27% to $9.1 million from $7.2 million.
Adjusted net income rose 37% to $8.3 million ($0.12 per share) compared to $6.1 million ($0.09 per share), in the fourth quarter last year. Adjusted net income and adjusted EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in Table 5 accompanying this release).
For the quarter ended February 2, 2014, Company Stores revenues declined 1.1% to $74.3 million. Exclusive of the effects of refranchising six stores in Kansas, Missouri and Texas during fiscal 2014, Company Stores revenues increased 4.3%. Same store sales at Company stores rose 1.6%, the 21st consecutive quarterly increase. The Company Stores segment posted operating income of $1.6 million compared to $3.0 million last year. The decline in Company Stores’ operating income reflects, among other things, higher consumer incentives, an increase in marketing costs, and the negative effects of adverse weather conditions compared to last year.
Domestic Franchise revenues increased 24.7% to $3.1 million. Higher royalties from a 13.6% increase in sales by domestic franchisees (of which 3.8% reflects the six refranchised stores) accounted for substantially all of the revenue gain. Same store sales rose 6.2% at domestic franchise stores. Domestic Franchise segment operating income was $2.0 million compared to $1.3 million last year.
International Franchise revenues increased 3.7% to $6.9 million. 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 $6.9 million in the fourth quarter of fiscal 2014 compared to last year, which adversely affected international royalty revenues by approximately $410,000. Excluding the effects of exchange rate changes, sales by international franchisees rose 10.0%. Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 3.4%, 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 $4.8 million compared to $4.0 million in the fourth quarter last year. The improvement in segment operating income reflects lower share-based compensation due to the departure of an executive officer, as well as a reduction in trademark protection costs compared to the prior year. In addition, last year’s results reflected a provision of approximately $185,000 for potential uncollectible accounts.
Total KK Supply Chain revenues (including sales to Company stores) increased 5.7% to $55.9 million. KK Supply Chain generated operating income of $8.6 million compared to $7.5 million in the fourth quarter last year. The gain in operating margin in the fourth quarter was driven largely by economies of scale.
In fiscal 2015, the Company expects to open between 10 and 15 small, free-standing factory shops, and estimates the Company’s domestic franchisees will open between 20 and 25 Krispy Kreme shops, including both small factory and satellite locations. The Company forecasts that international franchisees will open approximately 85 locations. Allowing for anticipated normal shop closings across the system, management estimates that the total systemwide store count will rise over 10% in fiscal 2015. The Company’s goal is to achieve modest organic same store sales growth in its Company shops in fiscal 2015 driven by traffic, with modest pricing action incremental to that. The Company forecasts that international franchise same store sales will continue the improving trend of recent years.
Based on these factors, management currently expects fiscal 2015 adjusted net income will be in the range of $51 million to $55 million and adjusted EPS will range from $0.73 to $0.79 per share based on a forecasted 70 million diluted shares outstanding. This range reflects a two million share reduction in the forecasted number of diluted shares outstanding from our prior guidance principally to give effect to our share repurchases to date. If achieved, this forecast would represent year-over-year growth in adjusted earnings per share of 20% to 30%. On a GAAP basis, management expects fiscal 2015 net income will be in the range of $32.4 million to $34.8 million.
Adjusted net income and adjusted EPS are non-GAAP measures; see the reconciliation of GAAP to adjusted earnings in Table 5 accompanying this release.
Beginning in fiscal 2015, the Company plans to revise its computational methodology for same store sales to more accurately reflect overall comparable stores sales performance. Under the new methodology, shops will be included in the same store sales computation after 18 months of operation, compared to 13 months under the current methodology. Because Krispy Kreme shops typically open with an extended honeymoon period of elevated sales levels, under the current methodology most shops will report negative comparisons as they enter the same stores metric at week 57. Deferring stores’ entering the same store sales metric until week 79 is expected to result in a more meaningful measurement of comparable sales because, in most cases, substantially all of the honeymoon sales period will no longer be reflected in the metric.
The Company plans to provide quarterly tables for same store sales calculations for Company, domestic franchise and international franchise shops for fiscal 2012 through fiscal 2014 using the new computational methodology prior to release of its results for the first quarter of fiscal 2015.
The Company will host a conference call to review fiscal 2014 fourth quarter and annual results, as well as management’s outlook for 2015, 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 89378591. The audio replay will be available through March 29, 2014. A transcript of the conference call also will be available on the Company’s website.
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, N.C., the Company has offered the highest quality doughnuts and great tasting coffee since it was founded in 1937. Today, there are over 800 Krispy Kreme shops in more than 20 countries around the world. Connect with Krispy Kreme 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," "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.
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TABLE 5
KRISPY KREME DOUGHNUTS, INC.
NON-GAAP FINANCIAL INFORMATION
As of February 2, 2014, the Company had net deferred income tax assets of approximately $107 million, of which approximately $58 million related to federal and state net operating loss carryovers. The Company’s federal net operating loss carryovers totaled approximately $174 million.
The Company has reported cumulative pretax income of over $120 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 contained 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.
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(1) Systemwide sales, a non-GAAP financial measure, include sales by both Company and franchise Krispy Kreme stores. The Company believes systemwide sales data are useful in assessing consumer demand for the Company’s products, the overall success of the Krispy Kreme brand and, ultimately, the performance of the Company. All of the Company’s royalty revenues are computed as percentages of sales made by the Company’s domestic and international franchisees, and substantially all of KK Supply Chain’s external sales of doughnut mixes and other ingredients ultimately are determined by demand for the Company’s products at franchise stores. Accordingly, sales by the Company’s franchisees have a direct effect on the Company’s royalty and KK Supply Chain revenues, and therefore on the Company’s profitability. The Company’s consolidated financial statements appearing elsewhere herein include sales by Company stores, sales to franchisees by the KK Supply Chain business segment, and royalties and fees received from franchise stores based on their sales, but exclude sales by franchise stores to their customers.
(2) Computed on a pro forma basis assuming the average rate of exchange between the U.S. dollar and each of the foreign currencies in which the Company’s international franchisees conduct business had been the same in the comparable prior year period.
(3) The change in “same store sales” represents the aggregate on-premises sales (including fundraising sales) during the current year period for all stores which had been open for more than 56 consecutive weeks during the current year period (but only to the extent such sales occurred in the 57th or later week of each store’s operation) divided by the aggregate on-premises sales of such stores for the comparable weeks in the preceding year period. Once a store has been open for at least 57 consecutive weeks, its sales are included in the computation of same stores sales for all subsequent periods. In the event a store is closed temporarily (for example, for remodeling) and has no sales during one or more weeks, such store’s sales for the comparable weeks during the earlier or subsequent period are excluded from the same store sales computation. The change in “same store customer count” is similarly computed, but is based upon the number of retail transactions reported in the Company’s point-of-sale system.
(4) For Company wholesale sales, “average weekly number of doors” represents the average number of customer locations to which product deliveries are made during a week by Company Stores, and “average weekly sales per door” represents the average weekly sales to each such location by Company Stores.
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Source: Krispy Kreme Doughnuts, Inc.
Lafeea Watson
Media
336-726-8878
lwatson@krispykreme.com
Anita K. Booe,
Investor Relations
336-703-6902
abooe@krispykreme.com
Krispy Kreme is a global retailer of premium-quality sweet treats, including its signature Original Glazed® doughnut.