Krispy Kreme Raises Outlook for Fiscal 2012

Krispy Kreme Doughnuts, Inc. (NYSE:   KKD) (the "Company") reported financial results for the third quarter of fiscal 2012, ended October 30, 2011.  The Company also raised its outlook for fiscal 2012 and provided preliminary guidance for fiscal 2013.

Third Quarter Fiscal 2012 Highlights Compared to the Year-Ago Period:

• Revenues increased 9.4% to $98.7 million from $90.2 million
• Company same store sales rose 4.0%, the twelfth consecutive quarterly increase
• Operating income rose 36.2% to $5.6 million from $4.1 million
• Net income was $4.7 million ($0.07 per share diluted) compared to $2.4 million ($0.03 per share diluted) in the third quarter last year
• Cash provided by operating activities was $10.2 million compared to $7.4 million in the third quarter last year

The Company ended the third quarter of fiscal 2012 with a total of 678 Krispy Kreme stores systemwide, a net increase of nine shops during the quarter.  As of October 30, 2011, there were 89 Company stores and 589 franchise locations.

Chief Executive Officer James H. Morgan commented:  "Our third quarter performance reflects continued progress in strengthening our financial condition and realizing our vision for the Krispy Kreme brand.  We generated a healthy increase in revenues, recorded our twelfth consecutive quarter of positive same store sales at Company stores, and delivered substantial improvements in both profitability and operating cash flow.  Despite economic headwinds and input cost challenges, we now project fiscal 2012 consolidated operating income, exclusive of impairment charges and lease termination costs, of $24 to $26 million, which would represent at least 25% growth over fiscal 2011."

Morgan continued, "While we are encouraged by our near-term results, we also believe that maintaining a longer term perspective is critical to building shareholder value.  We are therefore working on a number of initiatives to improve profitability in the Company Stores segment in the years ahead.  In addition, within our franchise segments, we are expanding our international franchisee pipeline to expand our geographic reach and market penetration, developing plans to reintroduce domestic franchise marketing, and improving support to our existing franchisees throughout the world.  In summary, fiscal 2012 is proving to be an exciting year at Krispy Kreme, both strategically and as a result of our financial performance, and we continue to position the Company to build shareholder value for the long term."

Third Quarter Fiscal 2012 Results

Consolidated Results

For the third quarter ended October 30, 2011, revenues increased 9.4% to $98.7 million from $90.2 million.  Year-over-year revenue increases were generated in all four business segments.

Direct operating expenses increased to $85.9 million from $79.2 million in the same period last year, but as a percentage of total revenues, fell to 87.0% from 87.7%.  General and administrative expenses increased to $4.9 million from $4.8 million in the year-ago period but, as a percentage of total revenues, decreased to 5.0% from 5.3%.

Operating income increased to $5.6 million from $4.1 million.

Interest expense decreased to $385,000 from $1.6 million, reflecting lower interest rates as a result of the January 2011 refinancing of the Company's credit facilities, as well as the reduced level of indebtedness.

Net income was $4.7 million ($0.07 per share diluted) compared to $2.4 million ($0.03 per share diluted), in the third quarter last year.

Segment Results

Company Stores revenues increased 9.8% to $67.6 million from $61.6 million.  Same store sales at Company stores rose 4.0%, the twelfth consecutive quarterly increase.  Price increases instituted to help offset higher input costs drove the increase, but were partially offset by a decrease in customer traffic.  The Company believes that expected cannibalization by new store openings in expansion markets adversely affected same store sales in the third quarter.  The Company Stores segment posted an operating loss of $574,000, compared to an operating loss of $1.4 million in the third quarter last year. 

Domestic Franchise revenues increased 14.1% to $2.3 million from $2.0 million, reflecting an 11.7% rise in sales by domestic franchisees.  Same store sales rose 7.9% at domestic franchise stores.  Domestic Franchisee segment operating income improved to $1.1 million, compared to $499,000 in the third quarter last year.

International Franchise revenues increased 22.4% to $5.4 million from $4.4 million, driven by higher royalty revenues.  Sales by international franchise stores rose 9.4%, and provisions for uncollectible royalties fell almost $700,000 from the third quarter last year.  Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 12.2%, reflecting, among other things, honeymoon effects from the over 300 stores opened internationally since the beginning of fiscal 2009, as well as cannibalization as markets develop.  The International Franchise segment generated operating income of $3.3 million, up from $3.0 million in the third quarter last year.

KK Supply Chain revenues (including sales to Company stores) increased 11.7% to $50.3 million from $45.0 million in the same period last year, driven by selling price increases.  External KK Supply Chain revenues rose 5.2% to $23.4 million from $22.2 million in the year-ago period.  KK Supply Chain generated operating income of $7.0 million in the third quarter of fiscal 2012, down slightly from $7.3 million in the third quarter last year.  KK Supply Chain has raised selling prices to recover rising input costs resulting from higher agricultural commodity prices, but generally has not marked up those higher costs; accordingly, KK Supply Chain's operating margin declined in the third quarter of fiscal 2012 compared to the third quarter last year.


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