Krispy Kreme Reports Earnings Per Share of $0.03 for the Second Quarter of Fiscal 2011

Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") reported financial results for the second quarter of fiscal 2011, ended August 1, 2010.  The Company also raised its earnings outlook for fiscal 2011 as a whole.

The Company ended the second quarter of fiscal 2011 with a total of 633 Krispy Kreme stores systemwide, a net increase of 17 shops during the quarter.  As of August 1, 2010, there were 84 Company stores and 549 franchise locations.

"Our financial results improved from the year ago period, as we realized revenue growth in all business segments, increased our consolidated operating income by roughly half, and delivered positive net income for the third consecutive quarter.  We are encouraged by the same store sales momentum at our Company stores, but also recognize that we must strengthen our execution so that top-line performance can more directly impact bottom-line profitability," said Jim Morgan, the Company's President and Chief Executive Officer.

Fiscal 2011 Outlook

"In our first quarter earnings release on June 3, we indicated that we expected operating income, exclusive of impairment charges and lease termination costs, to range from $11 million to $15 million for fiscal 2011.  Based on our results for the first half of the year, which exceeded our expectations, and other current information, we are raising that outlook.  We now estimate that fiscal 2011 operating income, exclusive of impairment charges and lease termination costs, will range from $13 million to $17 million," Morgan continued.

"As we look ahead, we will continue working diligently to implement our strategic initiatives with the intention of maximizing shareholder value.  Our transition is an ongoing process, and we are confident we can build an even stronger foundation for the future by continuing to both invest in our businesses and support our domestic and international franchisees.  These steps are critical to accelerating long-term growth in both revenues and earnings.  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," Morgan concluded.

Second Quarter Fiscal 2011 Results

Consolidated Results

For the second quarter ended August 1, 2010, revenues increased 6.3% to $87.9 million from $82.7 million.  Year-over-year revenue increases were generated in all four business segments.

Direct operating expenses increased to $76.9 million from $71.3 million, and as a percentage of total revenues, increased to 87.5% from 86.1%.  General and administrative expenses were $4.9 million compared to $4.8 million in the same period last year and, as a percentage of total revenues, decreased to 5.6% from 5.8%.  General and administrative expenses in the year-ago period included a non-recurring credit of $1.1 million from additional insurance proceeds related to litigation settled in October 2006.  Impairment charges and lease termination costs were a credit of $216,000 compared to a charge of $1.5 million in the year-ago period.  

Operating income increased 41.2% to $4.2 million from $2.9 million.  

Interest expense decreased to $1.6 million from $2.3 million, principally reflecting the Company's reduced level of indebtedness.

Net income was $2.2 million, or $0.03 per diluted share, compared to a net loss of $157,000, or nil per share, in the second quarter of last year.

Segment Results

Company Stores revenues were essentially flat at approximately $60 million.  Higher same store sales and off-premises sales to grocers/mass merchants were offset by locations that were either closed or refranchised along with lower off-premises sales to convenience stores.  Excluding the effects of refranchising, Company Stores revenues rose 4.0%.  Same store sales at Company stores rose 5.7%, the seventh consecutive quarterly increase.

Domestic Franchise revenues increased 15.1% to $2.1 million, reflecting an 8.8% rise in sales by domestic franchisees.  Excluding the effects of refranchising, sales by domestic franchisees rose 4.2%.  Same store sales rose 5.0% at domestic franchise stores.  The Domestic Franchise segment generated operating income of $1.0 million compared to $434,000 last year.  

International Franchise revenues increased 5.3% to $4.0 million, reflecting higher royalties from increased sales by international franchise stores.  A decline in international franchise same store sales was offset by new store openings.  Adjusted to eliminate the effects of changes in foreign exchange rates, International Franchise same store sales fell 14.3%, reflecting waning honeymoon effects from the 313 stores opened internationally in the past three years, as well as anticipated cannibalization as markets develop.  The International Franchise segment generated operating income of $2.5 million compared to $1.9 million last year.  International franchisees continued to expand, with a net increase of 16 locations in the second quarter.  

Total KK Supply Chain revenues (including sales to Company stores) rose 18.9% to $44.9 million, driven by selling price increases in major product categories and by higher unit volumes.  External KK Supply Chain revenues rose 26.7% to $21.9 million compared to $17.3 million in the second quarter last year.  KK Supply Chain generated operating income of $7.3 million compared to $5.7 million in the second quarter last year reflecting, among other things, higher revenues as well as lower freight and other distribution costs.


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