Krispy Kreme Reports Net Income for the Fourth Quarter and Breakeven Results for the Fiscal Year Ended January 31, 2010

Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the fourth quarter and fiscal year ended January 31, 2010 ("fiscal 2010").

Fourth Quarter Fiscal 2010 Highlights Compared to the Year-Ago Period:

• Revenues decreased 5.6% to $86.8 million from $91.9 million; approximately $1 million of the decrease was due to refranchising
• Company same store sales rose 1.1%, the 5th consecutive quarterly increase
• Operating income increased 65% to $2.4 million from $1.5 million (the results reflect impairment charges and lease termination costs in both periods of $2.0 million and $1.2 million, respectively)
• Net income was $0.5 million compared to a net loss of $0.3 million

Fiscal Year 2010 Highlights Compared to the Year-Ago Period:

• Revenues decreased 10.1% to $346.5 million from $385.5 million; approximately $8 million of the decrease was due to refranchising
• Company same store sales rose 3.5%
• Operating income more than doubled to $11.8 million from $4.8 million (the results reflect impairment charges and lease termination costs in both periods of $5.9 million and $0.5 million, respectively)
• Net loss was $0.2 million compared to a net loss of $4.1 million
• Cash provided by operating activities increased to $19.8 million from $16.6 million
• Reduced total debt by $31.4 million, to $43.4 million at year end

The Company ended fiscal 2010 with a total of 582 Krispy Kreme stores systemwide, a net increase of 59 locations since February 1, 2009.  As of January 31, 2010, there were 83 Company stores and 499 franchise locations.

"During fiscal 2010, we made substantial progress in building a stronger foundation for our Company and improving our business model.  We generated positive Company same store sales in all four quarters despite the difficult economy, while also delivering substantially higher operating income.  In addition, we reduced our debt by over 40% during the year.  The improvements in our operating results and financial position are a testament to the soundness of our business strategy, and reflect our ongoing efforts to enhance shareholder value over the long term.  With the support of our team members and franchise partners, we intend to build on these accomplishments and look forward to continued momentum in fiscal 2011," said Jim Morgan, the Company's President and Chief Executive Officer.  

Fiscal 2011 Outlook

The Company expects consolidated revenues will stabilize in fiscal 2011 after years of decline due to store closings and other factors.  Excluding the effects of refranchising Company stores, consolidated revenues are expected to rise in fiscal 2011.

The Company is providing the following outlook with respect to its expectations for fiscal year 2011:

• Seven to ten Company stores and 35 to 45 domestic and international franchise shop openings are expected
• Total domestic store count is expected to rise for the first time since 2005
• Same store sales at Company stores are expected to rise in the low to mid single digits, inclusive of pricing
• Total revenues are expected to rise slightly, exclusive of the effects of refranchising
• Higher input costs, including sugar and fuel, are expected to increase operating costs by about $5 million
• Higher spending to support domestic and international franchisee growth and operations is expected to continue
• Consolidated operating income is expected to range from $10 million to $13 million, exclusive of any impairment charges and lease termination costs
• We expect to report a net profit for the year

"We are continuing to make targeted investments to build our operational capabilities to support future growth, despite those investments penalizing our results in the short term.  We are working vigorously to continue implementation of our strategic plans and, in doing so, we believe we are setting the stage for additional and more robust growth in revenues and earnings in fiscal 2012 and beyond."

Fourth Quarter Fiscal 2010 Results

For the fiscal quarter ended January 31, 2010, revenues decreased 5.6% to $86.8 million from $91.9 million, with year-over-year increases in domestic and international franchise revenue offset by decreases in Company Stores and KK Supply Chain revenues.  Direct operating expenses were $74.6 million compared to $80.2 million in the year-ago period, and as a percentage of total revenues, decreased to 86.0% from 87.3%.

General and administrative expenses were $5.5 million compared to $6.1 million in the same period last year and, as a percentage of total revenues, decreased to 6.3% from 6.6%.  The fourth quarter of fiscal 2010 included a non-recurring credit of $1.3 million from the receipt of additional insurance proceeds related to the securities class action suit that was settled in October 2006.  Impairment charges and lease termination costs were $2.0 million compared to $1.2 million in the year-ago period.  

Operating income increased 65% to $2.4 million from $1.5 million.  

Interest expense declined by $1.1 million to $2.3 million from $3.3 million.  The year-ago period included a charge of $0.9 million representing a mark-to-market adjustment on an interest rate derivative for which there was no comparable charge in the fourth quarter of 2010.  During the quarter, the Company reduced its outstanding debt by $5.6 million to $43.4 million.

Other non-operating income and expense in the fourth quarter of fiscal 2009 included a non-cash gain of $2.8 million relating to the refranchising of four Company stores in Eastern Canada.

The provision for income taxes in the fourth quarter of fiscal 2010 reflected a benefit of $560,000 from enactment of the Worker, Homeownership and Business Assistance Act of 2009.  The tax provision in the fourth quarter of fiscal 2009 included a $1.2 million charge related to the Canada refranchising gain.

Net income was $0.5 million, or $0.01 per diluted share, compared to a net loss of $0.3 million (less than $.01 per share) last year.

Segment Financial Results

Company Store revenues decreased 5.1% to $60.6 million; same store sales rose 1.1%, offset by locations that were closed or refranchised and lower off-premises sales to convenience stores.  The fourth quarter of 2010 included a charge of $950,000 for the settlement of wage/hour litigation in Northern California, which was more than offset by a $2.0 million favorable adjustment to self-insurance reserves (principally workers' compensation).  The comparable insurance adjustment in the fourth quarter last year was $1.0 million.  Company Stores generated an operating loss of $0.7 million compared to an operating loss of $0.8 million last year.

Domestic Franchise revenues increased 7.7% to $2.0 million, reflecting a slight rise in sales by domestic franchisees, while Domestic Franchise same store sales fell 0.4%.  The Domestic Franchise segment generated operating income of $0.8 million compared to operating income of $1.2 million, reflecting increased resources devoted to franchisee support and higher allocated management costs.

International Franchise revenues increased 12.1% to $4.6 million.  A decline in international franchise same store sales of 10.5% was offset by new store openings and more favorable exchange rates.  Adjusted to eliminate the effects of changes in foreign exchange rates, International Franchise same store sales fell 19.1%, reflecting waning honeymooon effects from the 281 stores opened internationally in the past three years, as well as anticipated cannibalization as markets develop.  The International Franchise segment generated operating income of $3.4 million compared to $2.8 million last year.

External KK Supply Chain revenues decreased 11.4% to $19.5 million, reflecting lower unit sales of doughnut mix and other ingredients due to lower sales by Company and domestic franchise stores, as well as lower selling prices of doughnut mix and shortening compared to last year resulting from lower agricultural commodity costs.  KK Supply Chain generated operating income of $6.6 million compared to $5.8 million in the fourth quarter last year reflecting, among other things, lower freight and other distribution costs.

Company Store and Franchise Development

During the fourth quarter, the Company opened one new Company small shop, while domestic franchisees opened two small shops and three factory stores.  International franchisees continued to expand, with a net increase of 17 locations in the quarter, including the first Krispy Kreme shop in China, located in Shanghai.


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