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Krispy Kreme Reports Earnings Per Share of $.06 for the First Quarter of Fiscal 2011

2010-06-03

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Krispy Kreme Raises Fiscal 2011 Earnings Outlook

Krispy Kreme Doughnuts, Inc. (NYSE: KKD) today reported financial results for the first quarter of fiscal 2011, ended May 2, 2010. The Company also raised its earnings outlook for fiscal 2011 as a whole.

First Quarter Fiscal 2011 Highlights Compared to the Year-Ago Period:

Revenues decreased 1.4% to $92.1 million from $93.4 million
Excluding the effects of refranchising Company stores, revenues rose 0.4%
Company same store sales rose 3.4%, the sixth consecutive quarterly increase
Operating income increased 4.8% to $6.1 million from $5.8 million
Net income was $4.5 million, or $0.06 per share diluted, compared to $1.9 million, or $0.03 per share diluted in the first quarter last year

The Company ended the first quarter of fiscal 2011 with a total of 616 Krispy Kreme stores systemwide, a net increase of 34 locations since January 31, 2010. As of May 2, 2010, there were 83 Company stores and 533 franchise locations.

"We were pleased with the improvement in our first quarter performance, which included healthy Company same store sales growth and improvements in both consolidated operating income and net income compared to the year-ago period. This improvement reflects our continued progress in implementing our strategic initiatives. We look forward to continued success with our transition and believe that our shareholders will increasingly be positioned to benefit as we move forward," said Jim Morgan, the Company's President and Chief Executive Officer.

Fiscal 2011 Outlook

"In our fiscal 2010 fourth quarter earnings release on April 15, we indicated that we expected operating income, exclusive of impairment charges and lease termination costs, to range from $10 million to $13 million for fiscal 2011. Based on our results for the first quarter, which exceeded our expectations, and other current information, we are raising that outlook. We currently estimate that fiscal 2011 operating income, exclusive of impairment charges and lease termination costs, will range from $11 million to $15 million. As part of this outlook, we continue to believe the total domestic store count will increase for the first time since 2005," Morgan continued. The Company noted that in each of the last three fiscal years, the first quarter has been the strongest quarter of the year in terms of operating income exclusive of charges.

"As we stated in April, we view fiscal 2011 as a period of continued investment in our business and execution of our strategic plan. We are working diligently to further improve Company operations while providing better support for our franchise partners both domestically and internationally. These efforts are critical to building a strong foundation for our business and should position us for accelerated growth in both revenues and earnings over the long-term," Morgan concluded. "We believe that we are only beginning to unlock the potential of the Krispy Kreme brand for our guests, customers, franchisees, team members and shareholders."

First Quarter Fiscal 2011 Results

Consolidated Results

For the first quarter ended May 2, 2010, revenues decreased 1.4% to $92.1 million from $93.4 million. Year-over-year revenue increases in the domestic and international franchise segments and at KK Supply Chain were offset by a decline in revenue in Company Stores. Excluding the effects of refranchising Company stores, revenues rose 0.4%.

Direct operating expenses remained flat at $77.0 million year over year, and as a percentage of total revenues, increased to 83.6% from 82.4%. General and administrative expenses were $5.8 million compared to $6.3 million in the same period last year and, as a percentage of total revenues, decreased to 6.2% from 6.8%. Impairment charges and lease termination costs were $1.3 million compared to $2.4 million in the year-ago period.

Operating income increased 4.8% to $6.1 million from $5.8 million.

Interest expense declined by half to $1.9 million from $3.8 million. Interest expense in the first quarter of last year included approximately $1.0 million of fees and expenses associated with amendments to the Company's secured credit facilities, as well as approximately $600,000 of charges related to interest rate derivatives which expired in the first quarter of fiscal 2011.

Net income was $4.5 million, or $0.06 per diluted share, compared to $1.9 million, or $0.03 per diluted share, in the first quarter of last year.

Segment Results

Company Store revenues decreased 5.0% to $62.5 million. Higher same store sales and off-premises sales to grocers/mass merchants were offset by locations that were closed or refranchised and by lower off-premises sales to convenience stores. Excluding the effects of refranchising, Company Stores revenues fell 1.5%. Same store sales at Company stores rose 3.4%, the sixth consecutive quarterly increase.

Domestic Franchise revenues increased 7.3% to $2.2 million, reflecting a 7.7% rise in sales by domestic franchisees. Excluding the effects of refranchising, sales by domestic franchisees rose 3.4%. On-premises same stores sales rose 2.7% at domestic franchisees. The Domestic Franchise segment generated operating income of $1.2 million in both periods, reflecting improved underlying performance, offset by increased resources devoted to franchisee support.

International Franchise revenues increased 22.7% to $4.8 million. A year-over-year increase in the number of international franchise store openings accounted for over half the increase. A decline in international franchise same store sales 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 17.6%, reflecting waning honeymoon effects from the 310 stores opened internationally in the past three years, as well as anticipated cannibalization as markets develop. The International Franchise segment generated operating income of $3.5 million compared to $2.4 million last year. International franchisees continued to expand, with a net increase of 35 locations in the period.

Total KK Supply Chain revenues rose 2.3% to $45.9 million, driven by selling price increases in major product categories. External KK Supply Chain revenues rose 4.6% to $22.6 million compared to $21.6 million in the first quarter last year. KK Supply Chain generated operating income of $8.7 million compared to $8.1 million in the first quarter last year reflecting, among other things, lower freight and other distribution costs.

KRISPY KREME DOUGHNUTS, INC. SELECTED OPERATING STATISTICS
	Three Months Ended
	May 2, 2010	May 3, 2009

Year over year percentage change in systemwide sales (1)	7.6%	(8.0)%
Year over year percentage change in systemwide sales, in constant dollars (2)	3.8%	(3.1)%

Change in same store sales (3):
Company stores	3.4%	2.1%
Domestic Franchise stores	2.7%	2.4%
International Franchise stores	(7.7)%	(38.2)%
International Franchise stores, in constant dollars (2)	(17.6)%	(24.6)%

Company off-premises sales (4):
Grocers/mass merchants:
Change in average weekly number of doors	(6.1)%	(9.8)%
Change in average weekly sales per door	11.4%	4.0%
Convenience stores:
Change in average weekly number of doors	(10.2)%	(8.6)%
Change in average weekly sales per door	(1.9)%	(6.6)%

(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. (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. (4) 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.