Krispy Kreme Releases Third Quarter Fiscal 2008 Results

WINSTON-SALEM, N.C., Dec. 6 // PRNewswire-FirstCall // -- Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the third fiscal quarter ended October 28, 2007.

During the third quarter of fiscal 2008, 29 new Krispy Kreme stores, comprised of 8 factory stores and 21 satellites, were opened systemwide, and 17 Krispy Kreme factory stores were closed systemwide. This brings the total number of stores systemwide at the end of the third quarter of fiscal 2008 to 423, consisting of 290 factory stores and 133 satellites. The net increase of 12 stores in the quarter reflects a net increase of 24 international stores and a net decrease of 12 domestic stores.

Third quarter systemwide sales decreased approximately 2.6% from the third quarter of last year. Satellite stores made up 31% of the total systemwide store count as of October 28, 2007 compared to 23% at October 29, 2006. Systemwide average weekly sales per store are lower than Company average weekly sales per store principally because satellite stores, which have lower average weekly sales than factory stores, are operated almost exclusively by franchisees. Systemwide average weekly sales per store decreased approximately 9.2% to approximately $36,400. Company Stores average weekly sales per store decreased 0.4% to approximately $52,900.

Company revenues for the third quarter of fiscal 2008 decreased 11.7% to $103.4 million compared to $117.1 million in the third quarter of last year. Company Stores revenues decreased 11.3% to $72.8 million, Franchise revenues were flat at $5.7 million and KK Supply Chain revenues decreased 15.1% to $24.9 million.

The net loss for the third quarter of fiscal 2008 was $798,000, or $0.01 per diluted share, compared to a net loss of $7.2 million, or $0.12 per diluted share, in the comparable period last year.

The Company recorded a net credit to impairment charges and lease termination costs of $268,000 in the third quarter this year, compared to a charge of $5.4 million in the third quarter of fiscal 2007. Most of the prior year charge relates to underperforming stores, including stores closed and likely to be closed.

As of October 28, 2007, the Company's consolidated balance sheet reflects cash and indebtedness of approximately $23 million and $88 million, respectively. The maximum additional indebtedness permitted under the Company's credit facilities (and the amount of additional borrowings available to the Company under those facilities) was approximately $11 million at that date. During the first nine months of fiscal 2008, the Company prepaid approximately $21.9 million under the Company's $110 million term loan entered into in February 2007. A substantial portion of these prepayments was made in order to reduce the likelihood of violation of the financial covenants contained in the Company's credit facilities.

Several franchisees have been experiencing financial pressures which, in certain instances, appear to have become more exacerbated during fiscal 2008. Franchisees closed 25 stores in the first nine months of fiscal 2008. The Company believes franchisees will close additional stores in the foreseeable future, and the number of such closures is likely to be significant. Royalty revenues and most of KK Supply Chain revenues are directly correlated to sales by franchise stores and, accordingly, store closures have an adverse effect on the Company's revenues and results of operations.

"Although we still have much to do, performance improved in the third quarter compared to the second quarter, and the organization made progress on the transformation steps previously announced," said Daryl Brewster, the Company's President and Chief Executive Officer. Since the end of the second quarter, we have:

# Closed an additional five underperforming Company stores;
# Opened over 20 new satellites systemwide as part of our hub and spoke strategy, including converting an additional Company-owned factory store to a non-producing hot shop;
# Reduced Supply Chain costs by outsourcing our coffee supply and announcing the planned closure of a manufacturing and distribution facility;
# Increased international franchisee sales 48% year-over-year;
# Realigned Company Stores and Franchise management with experienced leadership;
# Continued to reduce G&A costs; and
# Completed an amended Franchise Disclosure Document (formerly called a Uniform Franchise Offering Circular).

"As we look past the third quarter, we continue to focus on improving Company shop performance, driving the hub and spoke model, growing our international franchise business, refranchising certain domestic markets and reducing costs to help offset rising commodity prices," Brewster added.

Systemwide sales, a non-GAAP financial measure, include sales by both Company and franchise stores. The Company believes systemwide sales data are useful in assessing the overall performance of the Krispy Kreme brand and, ultimately, the performance of the Company. The Company's consolidated financial statements include sales by Company stores, sales to franchisees by the KK Supply Chain business segment, and royalties and fees received from franchisees, but exclude sales by franchise stores to their customers.

Krispy Kreme management will host a conference call to review third quarter results on December 6, 2007 at 4:30 p.m. (ET). A live webcast of the conference call will be available at www.KrispyKreme.com/investorrelations.html and www.Streetevents.com. An archived audio replay will be available shortly following the conference call. To access the telephone replay dial 888-286-8010 and enter the passcode number 45888585. International callers may access the replay by dialing 617-801-6888 and entering passcode 45888585. The audio replay will be available through December 13, 2007. The conference call webcast will be archived and accessible for one month following the date of the conference call.

Information contained in this press release, other than historical information, should be considered forward-looking. Forward-looking statements are subject to various risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on Krispy Kreme's operating results, performance or financial condition are the outcome of pending governmental investigations and litigation, including governmental investigations by the United States Securities and Exchange Commission and the United States Attorney's Office for the Southern District of New York; potential indemnification obligations and limitations of our director and officer liability insurance; material weaknesses in our internal control over financial reporting; our ability to implement remedial measures necessary to improve our processes and procedures; negative publicity; significant changes in our management; our ability, and our dependence on the ability of our franchisees, to execute our and their business plans; our ability to implement our international growth strategy; 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 governmental regulations relating to food products and franchising; our relationships with wholesale customers; our ability to protect our trademarks; restrictions on our operations and compliance with covenants contained in our secured credit facilities; changes in customer preferences and perceptions; risks associated with competition; and other factors discussed in Krispy Kreme's Annual Report on Form 10-K for fiscal 2007 and other periodic reports filed with the United States Securities and Exchange Commission.



KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED BALANCE SHEET
(Unaudited)

(In thousands)

Oct. 28, Jan. 28,
2007 2007

ASSETS
CURRENT ASSETS:
Cash and cash equivalents $23,419 $36,242
Receivables 22,943 26,769
Accounts and notes receivable - equity method
franchisees 2,276 834
Inventories 23,340 21,006
Insurance recovery receivable - 34,967
Other current assets 5,681 12,000
Total current assets 77,659 131,818
Property and equipment 129,759 168,654
Investments in equity method franchisees 2,201 3,224
Goodwill and other intangible assets 28,534 28,934
Deferred income taxes 20 20
Other assets 10,616 16,842
Total assets $248,789 $349,492

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $1,707 $1,730
Accounts payable 8,359 7,874
Accrued litigation settlement - 86,772
Deferred income taxes 20 20
Other accrued liabilities 35,429 38,474
Total current liabilities 45,515 134,870
Long-term debt, less current maturities 86,423 105,966
Other long-term obligations 28,228 29,694

Commitments and contingencies

SHAREHOLDERS' EQUITY:
Preferred stock, no par value - -
Common stock, no par value 354,753 310,942
Accumulated other comprehensive income 1,127 1,266
Accumulated deficit (267,257) (233,246)
Total shareholders' equity 88,623 78,962
Total liabilities and shareholders' equity $248,789 $349,492



KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

(In thousands, except per share amounts)

Three Months Ended Nine Months Ended
Oct. 28, Oct. 29, Oct. 28, Oct. 29,
2007 2006 2007 2006

Revenues $103,355 $117,107 $318,371 $349,007
Operating expenses:
Direct operating expenses
(exclusive of depreciation
and amortization shown below) 90,911 96,192 283,239 290,325
General and administrative
expenses 5,650 12,457 19,394 41,218
Depreciation and amortization
expense 4,868 5,177 13,642 16,114
Impairment charges and lease
termination costs (268) 5,423 34,504 6,560
Settlement of litigation - - (14,930) -
Other operating (income) and
expense, net 196 (105) (73) (5)
Operating income (loss) 1,998 (2,037) (17,405) (5,205)
Interest income 379 460 1,224 1,168
Interest expense (2,274) (5,196) (7,429) (15,365)
Loss on extinguishment of debt - - (9,622) -
Equity in (losses) of equity
method franchisees (216) (65) (695) (924)
Other non-operating income and
(expense), net (309) 68 (263) 3,287
(Loss) before income taxes (422) (6,770) (34,190) (17,039)
Provision for income taxes 376 431 1,046 781
Net (loss) $(798) $(7,201) $(35,236) $(17,820)

(Loss) per common share:
Basic $(.01) $(.12) $(.55) $(.29)

Diluted $(.01) $(.12) $(.55) $(.29)

Weighted average shares
outstanding 63,934 61,879 63,652 61,857



KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

(In thousands)

Nine Months Ended
Oct. 28, Oct. 29,
2007 2006

CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) $(35,236) $(17,820)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 13,642 16,114
Deferred income taxes 206 (95)
Impairment charges 33,671 5,243
Settlement of litigation (14,930) -
Accrued rent expense (830) 775
(Gain) on disposal of property and equipment (316) (44)
(Gain) on sale of interest in equity method
franchisee - (3,580)
Share-based compensation 6,646 8,175
Provision for doubtful accounts 755 1,638
Amortization of deferred financing costs 5,856 2,074
Equity in losses of equity method franchisees 695 924
Other 828 317
Change in assets and liabilities:
Receivables 1,543 (4,633)
Inventories (2,297) 2,174
Other current and non-current assets 1,227 3,916
Accounts payable and accrued liabilities (2,788) (369)
Other long-term obligations (572) 1,592
Net cash provided by operating
activities 8,100 16,401
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,928) (2,839)
Proceeds from disposals of property and
equipment 6,751 6,219
Investments in and advances to franchise
investees - (1,100)
Recovery of investments in and advances to
franchise investee - 2,500
Sale of interest in equity method franchisee - 5,982
Acquisition of stores from franchisee - (2,900)
Decrease (increase) in other assets 10 (3)
Net cash provided by investing activities 1,833 7,859
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of short-term debt - 2,984
Repayment of short-term debt - (2,389)
Proceeds from issuance of long-term debt 110,000 -
Repayment of long-term debt (130,238) (4,589)
Deferred financing costs (2,891) -
Proceeds from exercise of stock options 290 -
Net change in book overdraft - (60)
Net cash (used for) financing activities (22,839) (4,054)
Effect of exchange rate changes on cash 83 27
Cash balances of subsidiary at date of
deconsolidation - (1,413)
Net increase (decrease) in cash and cash
equivalents (12,823) 18,820
Cash and cash equivalents at beginning of
period 36,242 16,980
Cash and cash equivalents at end of period $23,419 $35,800
Supplemental schedule of non-cash investing
and financing activities:
Assets acquired under capital leases $672 $41




KRISPY KREME DOUGHNUTS, INC.

Store Count

NUMBER OF STORES
FACTORY SATELLITE TOTAL
Three months ended October 28, 2007:
JULY 29, 2007 299 112 411
Opened 8 21 29
Closed (17) - (17)
OCTOBER 28, 2007 290 133 423

Nine months ended October 28, 2007:
JANUARY 28, 2007 296 99 395
Opened 20 41 61
Closed (26) (7) (33)
OCTOBER 28, 2007 290 133 423




KRISPY KREME DOUGHNUTS, INC.

SELECTED OPERATING STATISTICS

(Dollars in thousands)

Three Months Ended Nine Months Ended
Oct. 28, Oct. 29, Oct. 28, Oct. 29,
2007 2006 2007 2006

Year over year percentage change
in systemwide sales (1) (2.6)% (8.9)% (2.0)% (13.6)%

Average weekly sales per factory
store (2):
Company $54.5 $55.0 $54.9 $54.3
Systemwide $51.8 $50.7 $51.3 $49.3

Factory store operating
weeks (3):
Company 1,334 1,491 4,162 4,488
Systemwide 3,640 3,820 11,265 11,950

Average weekly sales per
store (4):
Company $52.9 $53.1 $53.4 $52.5
Systemwide $36.4 $40.1 $37.7 $39.5

Store operating weeks (5):
Company 1,373 1,543 4,279 4,636
Systemwide 5,174 4,825 15,310 14,898

On-premises sales (6):
Company change in same store
sales (2.9)% (0.4)%
Systemwide change in same
store sales (6.0)% (3.4)%

Company off-premises sales (7):
Change in average weekly
number of doors (5.7)% (2.1)%
Change in average weekly
sales per door (7.4)% (5.9)%

(1) Systemwide sales, a non-GAAP financial measure, include the sales by
both Company and franchise stores. The Company believes systemwide
sales data is useful in assessing the overall performance of the
Krispy Kreme brand and, ultimately, the performance of the Company.
(2) Represents, on a Company and systemwide basis, total sales of all
stores divided by the number of operating weeks for factory stores.
(3) Represents, on a Company and systemwide basis, the aggregate number
of operating weeks for factory stores.
(4) Represents, on a Company and systemwide basis, total sales of all
stores divided by the number of operating weeks for both factory and
satellite stores.
(5) Represents, on a Company and systemwide basis, the aggregate number
of operating weeks for both factory and satellite stores.
(6) The change in "same store sales" represents, on a Company and
systemwide basis, 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.
(7) For Company off-premises 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.



KRISPY KREME DOUGHNUTS, INC.

SEGMENT INFORMATION

(Dollars in thousands)

Three Months Ended Nine Months Ended
Oct. 28, Oct. 29, Oct. 28, Oct. 29,
2007 2006 2007 2006

Revenues:
Company Stores $72,787 $82,078 $228,504 $247,013
Franchise 5,679 5,716 15,773 15,319
KK Supply Chain:
Total revenues 48,933 55,531 150,415 167,609
Less- intersegment
elimination (24,044) (26,218) (76,321) (80,934)
External KK Supply
Chain revenues 24,889 29,313 74,094 86,675
Total revenues $103,355 $117,107 $318,371 $349,007
Operating income (loss):
Company Stores $(1,855) $2,110 $(7,187) $3,879
Franchise 3,793 4,727 9,997 12,566
KK Supply Chain 5,735 9,346 19,681 27,246
Unallocated general and
administrative expenses (5,943) (12,797) (20,322) (42,336)
Impairment charges and
lease termination costs 268 (5,423) (34,504) (6,560)
Settlement of litigation - - 14,930 -
Total operating income
(loss) $1,998 $(2,037) $(17,405) $(5,205)
Depreciation and amortization
expense:
Company Stores $2,603 $3,937 $9,018 $12,259
Franchise 22 32 70 95
KK Supply Chain 1,960 868 3,671 2,613
Corporate administration 283 340 883 1,147
Total depreciation and
amortization expense $4,868 $5,177 $13,642 $16,114

SOURCE Krispy Kreme Doughnuts, Inc.

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