Krispy Kreme Reports Financial Results for the First Quarter of Fiscal 2013

May 21, 2012 · 0 Comments

WINSTON-SALEM, N.C., May 21, 2012 (www.hospitalitybusinessnews.com) — Krispy Kreme Doughnuts, Inc. today reported financial results for the first quarter of fiscal 2013, ended April 29, 2012.

First Quarter Fiscal 2013 Highlights Compared to the Year-Ago Period:

Revenues increased 3.7% to $108.5 million from $104.6 million
Company same store sales rose 2.1%, the fourteenth consecutive quarterly increase
Operating income increased to $10.8 million from $9.8 million
Adjusted net income, which reflects income tax expense only to the extent payable in cash, was $10.3 million ($0.14 per share) compared to adjusted net income of $9.2 million ($0.13 per share) in the first quarter last year; adjusted net income and diluted earnings per share (“EPS”) are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release)
Net income was $6.0 million ($0.08 per share) compared to $9.2 million ($0.13 per share); net income and EPS for the first quarter of fiscal 2013 reflect a book tax rate of 43% compared to a rate of 3% in the first quarter last year due to the required reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012; accordingly, net income and EPS for the first quarter of fiscal 2013 are not comparable to those for the first quarter of fiscal 2012
Cash provided by operating activities increased to $10.4 million from $5.1 million
The Company repurchased 255,000 of its common shares at an average price of $7.27 per share

Chief Executive Officer James H. Morgan commented: “We got off to a good start in fiscal 2013 as operating income rose 11% on a 4% increase in revenues. All four of our business segments reported improved operating results compared to last year. Based on these results and other factors, we expect our business model to generate healthy cash flows and financial returns for investors, and we remain confident in our previous outlook for the full year.”

Fiscal 2013 Full Year Outlook

Management expects fiscal 2013 operating income of between $29 and $33 million, compared to $25.6 million in fiscal 2012, and fiscal 2013 EPS of between $0.21 and $0.24, reflecting an estimated tax rate of 45%. The higher tax rate compared to fiscal 2012 is a result of the required reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012, as described in the Company’s March 20, 2012 earnings release and in the Company’s annual report on Form 10-K filed on March 30, 2012. Because the Company has substantial net operating loss carryovers, the amount of taxes payable in cash is expected to remain insignificant for the foreseeable future.

Management estimates fiscal 2013 adjusted EPS of between $0.35 and $0.41, which includes income tax expense only to the extent expected to be currently payable, compared to $0.31 in fiscal 2012. Fiscal 2012 adjusted EPS also excludes a gain of $0.06 per share from the sale of the Company’s interest in KK Mexico. Adjusted EPS is a non-GAAP measure (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release).

First Quarter Fiscal 2013 Results

Consolidated Results

For the first quarter ended April 29, 2012, revenues increased 3.7% to $108.5 million from $104.6 million in the same period last year.

Direct operating expenses increased to $88.7 million from $87.0 million in the same period last year, but as a percentage of total revenues, fell to 81.7% from 83.2%. General and administrative expenses increased to $6.5 million from $5.6 million in the year-ago period, and as a percentage of total revenues, increased to 6.0% from 5.4%.

Operating income increased to $10.8 million from $9.8 million.

Net income was $6.0 million ($0.08 per share) compared to $9.2 million ($0.13 per share), in the first quarter last year.

Net income and EPS for the first quarter of fiscal 2013 reflect a book tax rate of 43% compared to a rate of 3% in the first quarter last year due to the reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012. Accordingly, net income and EPS for the first quarter of fiscal 2013 are not comparable to those for the first quarter of fiscal 2012.

Excluding the deferred income tax effects from both years’ results, adjusted net income, which reflects income taxes only to the extent currently payable in cash, was $10.3 million ($0.14 per share) compared to $9.2 million ($0.13 per share) in the first quarter last year. Cash provided by operating activities rose to $10.4 million, and continues to reflect the fact that cash taxes payable remain very small despite the higher reported tax rate in the first quarter. Adjusted net income and EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release).

Segment Results

Company Stores revenues increased 5.6% to $73.3 million from $69.5 million. Same store sales at Company stores rose 2.1%, the fourteenth consecutive quarterly increase. Higher customer traffic and fiscal 2012 retail price increases contributed 1.1% and 2.6%, respectively, to the improvement, partially offset by coffee and doughnut promotional pricing which reduced the average guest check. The Company lapped last year’s retail pricing in early March. The Company Stores segment posted operating income of $2.9 million, up 35.6% from the first quarter last year.

Domestic Franchise revenues increased 11.1% to $2.6 million from $2.4 million, reflecting a 7.9% rise in sales by domestic franchisees. Same store sales rose 5.8% at domestic franchise stores. Domestic Franchisee segment operating income improved to $1.6 million from $1.1 million in the first quarter last year.

International Franchise revenues increased 6.9% to $6.0 million from $5.6 million, driven by higher royalty revenues. Sales by international franchise stores rose 14.6%. Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 7.4%, 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 Interna
tional Franchise segment generated operating income of $4.5 million compared to $4.2 million reported in the first quarter last year. Last year’s results included almost $800,000 of credits related to the Company’s equity interest in KK Mexico, which the Company sold in the second quarter of last year.

KK Supply Chain revenues (including sales to Company stores) were essentially flat at $53.8 million. External KK Supply Chain revenues fell slightly to $26.5 million from $27.1 million in the year-ago period. KK Supply Chain generated operating income of $8.5 million in the first quarter, compared to $8.3 million in the first quarter last year.

Share Repurchases

The Company repurchased 255,000 of its common shares during the first quarter for total consideration of $1.9 million. The average price paid was $7.27 per share. Currently, the Company’s stock repurchase program is being executed pursuant to a Rule 10b5-1 plan executed between the Company and a brokerage firm. Under the 10b5-1 plan, the brokerage is executing purchases of the Company’s common shares pursuant to standing instructions issued by the Company, and such repurchase activity is not interrupted during blackout periods imposed under the Company’s securities trading policy.

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS


		Three Months Ended
		April 29,		May 1,
		2012		2011
		(In thousands, except per share amounts)

Revenues		$	108,496	$	104,600
Operating expenses:
	Direct operating expenses (exclusive of depreciation expense
	shown below		88,691		86,983
	General and administrative expenses		6,458		5,644
	Depreciation expense		2,482		1,938
	Impairment charges and lease termination costs		31		244
Operating income			10,834		9,791
Interest income			27		45
Interest expense			(398)		(477)
Equity in losses of equity method franchisees			(50)		(9)
Other non-operating income and (expense), net			78		86
Income before income taxes			10,491		9,436
Provision for income taxes			4,465		265
Net income		$	6,026	$	9,171

Earnings per common share:
	Basic	$	0.09	$	0.13
	Diluted	$	0.08	$	0.13

Weighted average shares outstanding:
	Basic		69,562		68,754
	Diluted		71,888		71,169

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED BALANCE SHEET


			April 29,		January 29,
			2012		2012
			(In thousands)
	ASSETS
CURRENT ASSETS:
Cash and cash equivalents			$	51,524	$	44,319
Receivables				21,665		21,616
Receivables from equity method franchisees				876		655
Inventories				15,909		16,497
Deferred income taxes				10,540		10,540
Other current assets				3,135		3,613
	Total current assets			103,649		97,240
Property and equipment				74,515		75,466
Investments in equity method franchisees				-		-
Goodwill and other intangible assets				23,776		23,776
Deferred income taxes				117,644		129,053
Other assets				9,937		9,413
	Total assets		$	329,521	$	334,948

	LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt			$	2,195	$	2,224
Accounts payable				11,170		10,494
Accrued liabilities				23,990		28,800
	Total current liabilities			37,355		41,518
Long-term debt, less current maturities				24,812		25,369
Other long-term obligations				19,843		18,935

Commitments and contingencies

SHAREHOLDERS’ EQUITY:
Preferred stock, no par value				-		-
Common stock, no par value				369,897		377,539
Accumulated other comprehensive loss				(335)		(336)
Accumulated deficit				(122,051)		(128,077)
	Total shareholders’ equity			247,511		249,126
		Total liabilities and shareholders’ equity	$	329,521	$	334,948

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS


			Three Months Ended
			April 29,			May 1,
			2012			2011
				(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income			$	6,026		$	9,171
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation expense			2,482			1,938
	Deferred income taxes			4,234			45
	Accrued rent expense			114			184
	Loss on disposal of property and equipment			229			145
	Share-based compensation			1,377	&nb sp;		893
	Provision for doubtful accounts			48			(295)
	Amortization of deferred financing costs			103			102
	Equity in losses of equity method franchisees			50			9
	Other			(67)			(56)
Change in assets and liabilities:
	Receivables			(261)			(3,052)
	Inventories			588			(455)
	Other current and non-current assets			540			483
	Accounts payable and accrued liabilities			(5,131)			(3,013)
	Other long-term obligations			32			(1,033) d>
		Net cash provided by operating activities		10,364			5,066
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment				(1,317)			(1,843)
Proceeds from disposals of property and equipment				41			-
Escrow deposit recovery				-			200
Other investing activities				style="MARGIN: 0in">(36)			(9)
		Net cash used for investing activities		(1,312)			(1,652)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt				(545)			(626)
Deferred financing costs				(11)			-
Proceeds from exercise of warrants				9			-
Repurchase of common shares				(1,300)			(57)
		Net cash used for financing activities		(1,847)			(683)
Net increase in cash and cash equivalents				7,205			2,731
Cash and cash equivalents at beginning of period				44,319			21,970
Cash and cash equivalents at end of period			$	51,524		$	24,701

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KRISPY KREME DOUGHNUTS, INC.

SEGMENT INFORMATION

					Three Months Ended
					April 29,		May 1,
					2012		2011
					(In thousands)

Revenues:
	Company Stores:
		On-premises sales			$	35,476	$	32,861
		Wholesale sales				37,865		36,614
			Company Stores revenues			73,341		69,475
	Domestic Franchise					2,633		2,369
	International Franchise					6,027		5,636
	KK Supply Chain:
		"MARGIN: 0in">Total revenues				53,785		53,883
		Less – intersegment sales elimination				(27,290)		(26,763)
			External KK Supply Chain revenues			26,495		27,120
				Total revenues	$	108,496	$	104,600

Operating income:
	Company Stores				$	2,948	$	2,174
	Domestic Franchise					1,569		1,147
	International Franchise					4,494		4,171
	KK Supply Chain				&nbs p;	8,477		8,342
		Total segment operating income				17,488		15,834
	Unallocated general and administrative expenses					(6,623)		(5,799)
	Impairment charges and lease termination costs					(31)		(244)
		Consolidated operating income			$	10,834	$	9,791

Depreciation expense:
	Company Stores				$	2,097	$	1,537
	Domestic Franchise					55		55
	International Franchise					3		2
	KK Supply Chain					162		189
	Corporate administration					165		155
		Total depreciation expense			$	2,482	$	1,938

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KRISPY KREME DOUGHNUTS, INC.

STORE COUNT

				NUMBER OF STORES
				DOMESTIC	INTERNATIONAL	TOTAL

Number of Stores Open at April 29, 2012:
Company:
	Factory			72	-	72
	Satellite			20	-	20
		Total Company		92	-	92
Franchise:
	Factory			102	115	217
	Satellite			40	343	383
		Total franchise		142	458	600
			Total systemwide	234	458	692

				NUMBER OF STORES
				COMPANY	FRANCHISE	TOTAL
Quarter ended April 29, 2012
January 29, 2012				92	602	694
Opened				-	23	23
Closed				-	(25)	(25)
April 29, 2012				92	600	692

Quarter ended May 1, 2011
January 30, 2011				85	561	646
Opened				1	20	21
Closed				-	(15)	(15)
May 1, 2011				86	566	652

KRISPY KREME DOUGHNUTS, INC.

SELECTED OPERATING STATISTICS

			Three Months Ended
			April 29,			May 1,
			2012			2011

Systemwide Sales (in thousands):(1)
	Company stores		$	72,805		$	69,027
	Domestic Franchise stores			71,972			66,697
	International Franchise stores			104,920			91,591
	International Franchise stores, in constant dollars(2)			104,920			91,144

Change in Same Store Sales (on-premises sales only):(3)
	Company stores			2.1	%		5.8	%
	Domestic Franchise stores			5.8	%		4.6	%
	International Franchise stores			(7.9)	%		(4.3)	%
	International Franchise stores, in constant dollars(2)			(7.4)	%	td>	(9.6)	%

Change in Same Store Customer Count – Company stores
	(retail sales only)			1.3	%		2.9	%

Wholesale Metrics – Company stores:(4)
	Grocers/mass merchants:
		Change in average weekly number of doors		(4.5)	%		6.7	%
		Change in average weekly sales per door		8.2	%		11.0	%
	Convenience stores:
		Change in average weekly number of doors		(10.6)	%		1.9	%
		Change in average weekly sales per door		14.8	%		3.8	%

(1) Systemwide sales, a non-GAAP financial measure, include the sales by both Company and franchise stores but excludes sales among 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 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.

KRISPY KREME DOUGHNUTS, INC.

NON-GAAP FINANCIAL INFORMATION

As of January 29, 2012, the Company had net deferred income tax assets of approximately $139.6 million, including approximately $90 million of tax assets related to federal and state net operating loss carryovers. The Company’s federal net operating loss carryovers totaled approximately $240 million.

In the quarter ended January 29, 2012, the Company reversed $139.6 million of valuation allowances against deferred tax assets because management concluded that realization of such assets was more likely than not. While such reversal, which was required by GAAP, increased the Company’s earnings by $139.6 million in fiscal 2012, the reversal has the effect of increasing the provision for income taxes, and therefore decreasing net income, beginning in the first quarter of fiscal 2013. The reversal had no effect on the Company’s cash payments for income taxes. This negative effect on earnings occurs because the reversal of the valuation allowances resulted in the recognition in fiscal 2012 of income tax benefits expected to be realized in later years. Absent the reversal of the valuation allowances, any such tax benefits would have been recognized when realized in future periods upon the generation of taxable income. Accordingly, beginning in the first quarter of fiscal 2013, the Company’s effective income tax rate, which in fiscal 2012 and earlier years bore little or no relationship to pretax income, more closely reflects the blended federal and state income tax rates in jurisdictions in which the Company operates.

Because of the increase in the Company’s effective income tax rate as described above, the Company’s income tax expense in the first quarter of fiscal 2013 is not comparable to income tax expense in the first quarter of fiscal 2012. In addition, until such time as the Company’s net operating loss carryovers are exhausted or expire, GAAP income tax expense is expected to substantially exceed the amount of cash income taxes payable by the Company, which are expected to remain insignificant for the foreseeable future.

The following non-GAAP financial information and related reconciliation to GAAP measures are provided to assist the reader in understanding the effect of the fiscal 2012 reversal of the valuation allowances on the Company’s results of operations for fiscal 2013, and to facilitate comparisons of fiscal 2013 results with the Company’s results for the first quarter of fiscal 2012. 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. Adjusted net income and adjusted EPS reflect income tax expense only to the extent such expense is currently payable in cash. 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 w
hich those taxes currently are payable, for example, capital allocation decisions and incentive compensation measurements that are made on a pretax basis.


		Management’s				Historical Periods
		Earnings Guidance				Three Months Ended				Year Ended
		Year Ending February 3, 2013				April 29,		May 1,		January 29,
		From		To		2012		2011		2012
		(In thousands, except per share amounts)

Net income, as reported		$	15,000	$	17,200	$	6,026	$	9,171	$	166,269
Provision for deferred income taxes			10,200		12,000		4,234		45		(139,403)
Gain on sale of interest in KK Mexico (net of
	income taxes of $1,492)		-		-		-		-		(4,706)
Adjusted net income		$	25,200	$	29,200	$	10,260	$	9,216	$	22,160

Adjusted earnings per common share:
	Basic	$	>0.36	$	0.42	$	0.15	$	0.13	$	0.32
	Diluted	$	0.35	$	0.41	$	0.14	$	0.13	$	0.31

Weighted average shares outstanding:
	Basic		69,600		69,600		69,562		68,754		69,145
	Diluted		71,600		71,600		71,888		71,169		71,497

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