Krispy Kreme Announces First Quarter Fiscal 2009 Results

WINSTON-SALEM, N.C., June 9 // PRNewswire-FirstCall // -- Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the first quarter of fiscal 2009, ended May 4, 2008.

Net income for the first quarter was $4.0 million, or $0.06 per diluted share, compared to a net loss of $7.4 million, or $0.12 per diluted share, in the first quarter last year. While a number of factors affected results for the first quarter compared to the first quarter of last year as disclosed in the Company's Quarterly Report on Form 10-Q filed this morning, the largest single factor was that results for the first quarter of last year included a charge of $9.6 million related to the refinancing of long-term debt.

"We are pleased to report improved bottom line results in the first quarter of fiscal 2009 compared to the first quarter of last year," said Jim Morgan, Chairman, President and Chief Executive Officer. "Much work remains to be done to achieve the consistent profitability and sustainable growth we envision. While we continue to face many challenges, I believe more than ever there also are many opportunities ahead of us. Although our near term results may be uneven, our employees are working hard to implement the further improvements necessary for us to be successful for the long term."

Among the other factors that affected the Company's results for the first quarter of fiscal 2009 were a $930,000 non-cash gain on the disposal of equity interests in two franchisees and the related release of the Company's guarantees of certain debt and leases, as well as a net credit in impairment and lease termination costs of $645,000 resulting from changes in estimated sublease rentals on a closed store and the realization of proceeds on the assignment of another closed store lease.

Company revenues for the first quarter decreased 6.6% to $103.6 million compared to $110.9 million in the first quarter last year. The decline in revenues reflects a 10.3% decrease in Company Stores revenues to $72.2 million and a 2.0% decrease in KK Supply Chain revenues to $24.9 million, partially offset by a 30.2% increase in Franchise revenues to $6.5 million. As of May 4, 2008, the Company's consolidated balance sheet reflects cash and debt of approximately $29.2 million and $75.7 million, respectively.

During the first quarter of fiscal 2009, 28 new Krispy Kreme stores, comprised of four factory stores and 24 satellites, were opened systemwide, and seven stores, comprised of six factory stores and one satellite, were closed systemwide. This brings the total number of stores systemwide at quarter end to 470, consisting of 289 factory stores and 181 satellites. The net increase of 21 stores in the quarter reflects a net increase of 27 international stores and a net decrease of six domestic stores. Approximately 75% of total stores are operated by franchisees, and half are located outside the United States.

First quarter systemwide sales increased 2.4% from the first quarter of last year. The growth in systemwide sales was entirely attributable to growth in sales by international franchisees; the domestic component of systemwide sales fell in the first quarter compared to the first quarter last year, principally due to store closures over the past 12 months.

Many factors could adversely affect the Company's business. In particular, the Company is vulnerable to further increases in the cost of raw materials, which could adversely affect the Company's operating results and cash flows. The Company has guaranteed approximately $14 million of obligations of franchisees in which it has an equity interest, and the aggregate recorded liability for estimated payments under such guarantees was $3.4 million as of May 4, 2008. Franchisees opened 28 stores and closed seven stores in the first quarter of fiscal 2009. The Company believes franchisees will close additional stores in the future, and the number of such closures may be significant. Royalty revenues and most of KK Supply Chain revenues are directly correlated to sales by franchise stores and, accordingly, franchise store closures have an adverse effect on the Company's revenues, results of operations and cash flows.

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.

Management will host a conference call to review first quarter results this afternoon at 4:30 p.m. (ET). A live webcast of the conference call will be available at To access the archived replay of the call, dial 888-286-8010 and enter the passcode 23048700. International callers may access the replay by dialing 617-801-6888 and entering passcode 23048700. The audio replay will be available through June 13, 2008.

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, including by the Securities and Exchange Commission (the "SEC") 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; 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 and refranchising 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 government regulations relating to food products and franchising; our relationships with wholesale customers; our ability to protect our trademarks; risks associated with our high levels of indebtedness; restrictions on our operations and compliance with covenants contained in our secured credit facilities; changes in customer preferences and perceptions; significant changes in our management; risks associated with competition; and other factors discussed in Krispy Kreme's Annual Report on Form 10-K for fiscal 2008 and other periodic reports filed with the SEC.



(In thousands)

May 4, Feb. 3,
2008 2008

Cash and cash equivalents $29,187 $24,735
Receivables 23,825 22,991
Accounts and notes receivable -
equity method franchisees 1,532 2,637
Inventories 20,457 19,987
Deferred income taxes 83 83
Other current assets 3,979 5,647
Total current assets 79,063 76,080
Property and equipment 89,316 90,996
Investments in equity method franchisees 2,852 1,950
Goodwill and other intangible assets 23,856 23,856
Other assets 9,575 9,469
Total assets $204,662 $202,351

Current maturities of long-term debt $1,488 $1,557
Accounts payable 5,074 5,712
Accrued liabilities 35,460 35,949
Total current liabilities 42,022 43,218
Long-term debt, less current maturities 74,176 75,156
Deferred income taxes 83 83
Other long-term obligations 26,413 27,270

Commitments and contingencies

Preferred stock, no par value - -
Common stock, no par value 356,870 355,615
Accumulated other comprehensive income 136 81
Accumulated deficit (295,038) (299,072)
Total shareholders' equity 61,968 56,624
Total liabilities and shareholders' equity $204,662 $202,351



(In thousands, except per share amounts)

Three Months Ended
May 4, Apr. 29,
2008 2007

Revenues $103,641 $110,918
Operating expenses:
Direct operating expenses
(exclusive of depreciation and amortization
shown below) 89,479 96,995
General and administrative expenses 6,847 6,822
Depreciation and amortization expense 2,236 4,688
Impairment charges and lease termination costs (645) 12,663
Settlement of litigation - (14,930)
Other operating (income) and expense, net 111 (285)
Operating income 5,613 4,965
Interest income 126 438
Interest expense (2,063) (2,520)
Loss on extinguishment of debt - (9,622)
Equity in losses of equity method franchisees (268) (221)
Other non-operating income and (expense), net 924 23
Income (loss) before income taxes 4,332 (6,937)
Provision for income taxes 298 461
Net income (loss) $4,034 $(7,398)

Income (loss) per common share:
Basic $.06 $(.12)

Diluted $.06 $(.12)

Basic - weighted average shares outstanding 64,703 63,151

Diluted - weighted average shares outstanding 66,101 63,151



(In thousands)

Three Months Ended
May 4, Apr. 29,
2008 2007

Net income (loss) $4,034 $(7,398)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 2,236 4,688
Deferred income taxes (36) 172
Impairment charges 158 12,438
Settlement of litigation - (14,930)
Accrued rent expense 157 75
(Gain) loss on disposal of property and equipment 40 (444)
Gain on disposal of equity method franchisee (931) -
Change in unrealized loss on interest rate
derivatives (597) -
Share-based compensation 1,223 2,156
Provision for doubtful accounts (760) 1,230
Amortization of deferred financing costs 452 5,603
Equity in losses of equity method franchisees 268 221
Other 139 171
Change in assets and liabilities:
Receivables 541 2,027
Inventories (476) (2,585)
Other current and non-current assets 1,609 2,113
Accounts payable and accrued liabilities (533) (3,789)
Other long-term obligations (1,019) (411)
Net cash provided by operating activities 6,505 1,337
Purchase of property and equipment (718) (2,077)
Proceeds from disposals of property and equipment 125 4,726
Decrease in other assets 4 27
Net cash provided by (used for) investing
activities (589) 2,676
Proceeds from issuance of long-term debt - 110,000
Repayment of long-term debt (1,050) (116,681)
Deferred financing costs (434) (2,771)
Proceeds from exercise of stock options 52 175
Other (20) -
Net cash used for financing activities (1,452) (9,277)
Effect of exchange rate changes on cash (12) 3
Net increase (decrease) in cash and cash
equivalents 4,452 (5,261)
Cash and cash equivalents at beginning of period 24,735 36,242
Cash and cash equivalents at end of period $29,187 $30,981


Store Count


Three months ended May 4, 2008:
FEBRUARY 3, 2008 295 154 449
Opened 4 24 28
Closed (6) (1) (7)
Converted to satellites (4) 4 -
MAY 4, 2008 289 181 470



(Dollars in thousands)

Three Months Ended
May 4, Apr. 29,
2008 2007

Year over year percentage change in systemwide
sales (1) 2.4% (2.8%)

Average weekly sales per store (2):
Company $53.7 $55.3
Systemwide $35.3 $39.3

Store operating weeks (3):
Company 1,339 1,456
Systemwide 5,699 5,009

Change in same store sales (on-premises only) (4):
Company 1.2% 0.1%
Systemwide (3.9%) (2.4%)

Company off-premises sales (5):
Change in average weekly number of doors (6.7%) 1.3%
Change in average weekly sales per door (8.6%) (4.3%)

(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 both
factory and satellite stores divided by the number of operating weeks
for both factory and satellite stores.

(3) Represents, on a Company and systemwide basis, the aggregate number of
operating weeks for both factory and satellite stores.

(4) 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.

(5) 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.



(In thousands)

Three Months Ended
May 4, Apr. 29,
2008 2007
Company Stores $72,182 $80,452
Franchise 6,512 5,000
KK Supply Chain:
Total revenues 50,719 52,729
Less- intersegment sales elimination (25,772) (27,263)
External KK Supply Chain revenues 24,947 25,466
Total revenues $103,641 $110,918

Operating income:
Company Stores $(294) $(168)
Franchise 4,442 3,293
KK Supply Chain 7,992 6,695
Unallocated general and administrative
expenses (7,172) (7,122)
Impairment charges and lease termination costs 645 (12,663)
Settlement of litigation - 14,930
Total operating income $5,613 $4,965

Depreciation and amortization expense:
Company Stores $1,628 $3,492
Franchise 21 24
KK Supply Chain 262 872
Corporate administration 325 300
Total depreciation and amortization expense $2,236 $4,688

SOURCE: Krispy Kreme Doughnuts, Inc.



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