WINSTON-SALEM, N.C. - (BUSINESS WIRE) - Jun. 2, 2014 - Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the “Company”) today reported financial results for the first quarter of fiscal 2015, ended May 4, 2014. The Company also lowered its adjusted earnings per share guidance for the full year to a range of $0.69 to $0.74 from $0.73 to $0.79 per share.
First Quarter Fiscal 2015 Highlights Compared to the Year-Ago Period:
Executive Chairman James H. Morgan commented: “Today we reported our highest quarterly pretax earnings for a single quarter in over ten years, a remarkable achievement that reflects the collective efforts of our team members and franchise partners. We note, however, that severe winter weather adversely affected both on-premises and wholesale sales throughout our Company store base in the Southeast, and contributed to a 1.5% decline in same store sales at Company shops against a very tough 12.2% same store sales gain in the first quarter last year. Our domestic franchisees, however, who were less affected by weather, posted a gain in same store sales of 4.5% on top of an 11.8% rise in the first quarter last year.
“Notwithstanding the increase in first quarter earnings, we are revising our full-year outlook but still projecting a double-digit increase in adjusted earnings per share. The change reflects, among other things, our first quarter performance, higher than anticipated investment in a new enterprise resource planning system and higher costs than we had planned associated with executive management succession. Taking all these factors into account, we felt it was prudent to revise our expectations for the balance of the year.
“Finally, the appointment of Tony Thompson as President and Chief Executive Officer of Krispy Kreme provides us with the right leader for the next phase of our development and success. I am personally delighted to have someone of Tony’s caliber and record of achievement to succeed me as CEO, and am confident that Krispy Kreme’s future will be rewarding for all of our constituencies in the years ahead.”
For the first quarter ended May 4, 2014, revenues increased 0.8% to $121.6 million from $120.6 million. Excluding the effects of refranchising three stores in Kansas and Missouri and three stores in Dallas in February and July of 2013, respectively, revenues rose 2.1%.
Direct operating expenses were $95.2 million, representing 78.3% of revenues compared to 80.0% of revenues last year.
General and administrative expenses rose to $7.0 million from $6.1 million in the year-ago period, and as a percentage of revenues increased to 5.8% from 5.0%. The increase in general and administrative expenses in the first quarter of fiscal 2015 reflects, among other things, approximately $400,000 of incremental expenses related to the implementation of a new enterprise resource planning system.
Operating income rose 6.6% to $16.2 million from $15.2 million.
With the exception of the first quarter last year, Company Stores’ profitability in the quarter was the strongest of any quarter in years. Revenues decreased 1.8% to $80.4 million from $81.9 million. Exclusive of the effects of refranchising six stores in fiscal 2014, revenues increased 1.3%. Same store sales at Company shops declined 1.5% against an extremely robust gain of 12.2% in the first quarter last year. The Company Stores segment posted operating income of $4.4 million compared to $5.3 million last year.
Domestic Franchise revenues increased 21.9% to $3.5 million, reflecting higher royalties, initial franchise fees and ancillary revenues, including rental income on stores leased and subleased to two franchisees in connection with the fiscal 2014 refranchisings. Total sales by domestic franchisees rose 8.3%, of which approximately 1.9 percentage points reflects the fiscal 2014 refranchisings, while same store sales at Domestic Franchise shops increased 4.5%. Domestic Franchise segment operating income improved to $2.2 million from $1.4 million.
International Franchise revenues increased 2.1% to $6.6 million, driven by higher royalties. Sales by international franchise stores rose 3.9% to $115 million (5.9% excluding the effects of foreign exchange rate changes). Constant currency same store sales at international franchise stores fell 2.2%. The International Franchise segment generated operating income of $4.3 million compared to $4.5 million. The decline in International Franchise segment operating income reflects continuing deployment of increased resources to support current and anticipated future international growth.
KK Supply Chain revenues (including sales to Company stores) rose 0.8% to $60.3 million. External KK Supply Chain revenues rose 5.7% to $31.1 million. KK Supply Chain generated operating income of $12.8 million in the first quarter of fiscal 2015, up from $10.2 million. KK Supply Chain operating income in the first quarter of fiscal 2015 includes approximately $1.4 million of realized and unrealized gains on agricultural derivative positions, which increased adjusted earnings per share by $0.02.
Based on first quarter results and other current information, management is revising its forecast of adjusted net income for fiscal 2015 to between $48 million and $51 million ($0.69 and $0.74 per share) from $51 to $55 million ($0.73 to $0.79 per share). This reflects, among other things, an increase in estimated costs related to implementation of new technology systems, higher compensation costs related to management succession, an unfavorable variance to expected results in the first quarter, partially offset by lower forecasted current income tax expense. Achievement of the revised forecast would represent a year-over-year increase in adjusted earnings per share of between 13% and 21% from the $0.61 per share reported for fiscal 2014 which, was, in turn, up 30% from fiscal 2013.
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).
As previously announced, the Company has revised its methodology for computing its same store sales metric. Under the revised methodology, shops are included in the same store sales computation after 18 months of operation, compared to 13 months under the former methodology. The Company believes that deferring stores’ entry into the same store sales metric until week 79 results in a more meaningful measurement of comparable sales because, in most cases, substantially all of the elevated sales levels typically experienced in the initial weeks following the opening of a new Krispy Kreme shop will no longer be reflected in the metric.
All same store sales change metrics in this release and in the accompanying tables reflect the new methodology for all periods. The Company filed a Current Report on Form 8-K on May 8, 2014 providing quarterly tables showing the change in same store sales for Company, domestic franchise and international franchise shops for fiscal 2012 through fiscal 2014 calculated using the revised computational methodology and the former methodology.
The Company will host a conference call to review financial results for the first quarter of fiscal 2015 as well as its outlook for the balance of the year this afternoon at 4:30 p.m. (ET). A 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 43498784. The audio replay will be available through June 9, 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, NC, the Company has offered the highest quality doughnuts and great tasting coffee since it was founded in 1937. Today, there are over 850 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 the use and implementation of information technology. 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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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.
In the second quarter of fiscal 2014, the Company recorded a charge of $1.0 million related to the retirement 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 of adjusted net income to GAAP net income 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 78 consecutive weeks during the current year period (but only to the extent such sales occurred in the 79th 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 79 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
Krispy Kreme
Media Relations
336-726-8878
lwatson@krispykreme.com
Anita K. Booe
Krispy Kreme
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.