Krispy Kreme Fourth Quarter Revenues Increased 15.9%

2013-03-19
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  • Krispy Kreme Operating income rose 60% to $8.5 million from $5.3 million

    Krispy Kreme Doughnuts, Inc. (NYSE:   KKD) reported financial results for the fourth quarter and fiscal year ended February 3, 2013, and raised its guidance for fiscal 2014. 

    Fiscal Year

    The fourth quarter and fiscal year ended February 3, 2013 included 14 and 53 weeks, respectively, compared to 13 and 52 weeks, respectively, for the fourth quarter and fiscal year ended January 29, 2012.  Accordingly, financial results for the fiscal 2013 periods are not directly comparable to those of the corresponding fiscal 2012 periods.  The Company's fiscal year ends on the Sunday closest to January 31, which periodically results in a 53-week year. 

    Fourth Quarter Fiscal 2013 Highlights Compared to the Year-Ago Period (Tables 1 and 2):

    • Revenues increased 15.9% to $118.1 million from $102.0 million
    • Operating income rose 60% to $8.5 million from $5.3 million
    • Adjusted net income increased 85% to $7.4 million ($0.11 per share) from $4.0 million ($0.06 per share); adjusted net income and adjusted EPS reflect income tax expense only to the extent currently payable in cash; adjusted net income and adjusted EPS are non-GAAP measures (see the reconciliation of all adjusted earnings measures to the related GAAP amounts in Table 6 accompanying this release)
    • Net income was $4.8 million ($0.07 per share) compared to $143.5 million ($2.01 per share) in the fourth quarter last year; net income for the fourth quarter of last year included an unusual credit of $139.6 million ($1.95 per share) from the reversal of valuation allowances on deferred income tax assets
    • Cash provided by operating activities was $21.3 million compared to $10.9 million in the fourth quarter last year

    To facilitate comparisons, the following highlights compare the 13 weeks ended January 27, 2013 to the 13 weeks ended January 29, 2012:

    • Revenues increased 7.0% to $109.1 million from $102.0 million
    • Company same store sales rose 7.5%, the seventeenth consecutive quarterly increase
    • Operating income increased 35% to $7.2 million from $5.3 million
    • Adjusted net income rose 53% to $6.1 million ($0.09 per share) from $4.0 million ($0.06 per share)

    Fiscal 2013 Highlights Compared to Fiscal 2012 (Tables 1 and 3):

    • Revenues increased 8.1% to $435.8 million from $403.2 million
    • Operating income rose 48% to $37.7 million from $25.6 million
    • Adjusted net income increased 54% to $34.2 million ($0.49 per share) from $22.2 million ($0.31 per share); adjusted net income and adjusted EPS reflect income tax expense only to the extent currently payable in cash and, in fiscal 2012, exclude the gain on the Company's sale of its 30% equity interest in KK Mexico
    • Net income was $20.8 million ($0.30 per share) compared to $166.3 million ($2.33 per share) last year; net income in fiscal 2012 included an unusual credit of $139.6 million ($1.95 per share) from the reversal of valuation allowances on deferred income tax assets and a $4.7 million after tax gain ($0.06 per share) on the Company's sale of its 30% equity interest in KK Mexico
    • Cash provided by operating activities was $59.3 million compared to $33.9 million in fiscal 2012

    To facilitate comparisons, the following highlights compare the 52 weeks ended January 27, 2013 to the 52 weeks ended January 29, 2012:

    • Revenues increased 5.9% to $426.8 million from $403.2 million
    • Company same store sales rose 5.5%
    • Operating income increased 43% to $36.4 million from $25.6 million
    • Adjusted net income rose 49% to $32.9 million ($0.47 per share) from $22.2 million ($0.31 per share)

    James H. Morgan, Chairman and Chief Executive Officer, commented:  "In the fourth quarter, Krispy Kreme not only achieved earnings at the top end of our November guidance, but also posted its best fourth quarter results since fiscal 2004.  The year as a whole also was our best since fiscal 2004, and demonstrated again the strength of our business model and affirmed our confidence in achieving our goal of sustainable and profitable growth for years to come.  Going forward, the Krispy Kreme investment thesis will no longer be predicated solely on the progress we have made in building a strong foundation for our business, but also on our ability to execute our long-term growth plans.  Based upon the strength of these results and the momentum we have carried into the new year, we are pleased to increase our fiscal 2014 earnings guidance.

    "Krispy Kreme is truly blessed with four attributes most companies spend a lifetime trying to achieve:  a brand that is beloved worldwide, best-in-class products, compelling strategies, and incredibly capable and energized franchisees and team members.  We are committed to doing everything in our power to continue improving our profitability while expanding our system to 1,300 stores by fiscal 2017 through Company and domestic and international franchise development.  We are gratified by our accomplishments and are optimistic that we can build on them to achieve our long-term aspirations, and those of our shareholders." 

    Results For the 13 Weeks Ended January 27, 2013 (Tables 2 and 8)

    To facilitate comparisons, the following discussion compares the 13 weeks ended January 27, 2013 with the 13 weeks ended January 29, 2012.

    Consolidated Results

    For the 13 weeks ended January 27, 2013, revenues increased 7.0% to $109.1 million.  All four business segments reported year-over-year revenue growth.

    Direct operating expenses increased to $91.0 million from $87.9 million, but as a percentage of total revenues, decreased to 83.4% from 86.2%.  General and administrative expenses increased to $8.4 million from $6.7 million in the same period last year.  General and administrative expenses in the fourth quarter of last year included a non-recurring credit of approximately $840,000.  Excluding that item, general and administrative expenses were 7.7% of revenues compared to 7.4% last year. 

    Operating income rose 35% to $7.2 million from $5.3 million.

    Adjusted net income was $6.1 million ($0.09 per share) compared to $4.0 million ($0.06 per share), in the fourth quarter last year.  Adjusted net income and EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in Table 6 accompanying this release).

    Segment Results

    For the 13 weeks ended January 27, 2013, Company Stores revenues increased 9.6% to $75.2 million.  Same store sales at Company stores rose 7.5%, the seventeenth consecutive quarterly increase, driven by higher traffic.  The Company Stores segment posted operating income of $3.0 million compared to an operating loss of $0.3 million last year.

    Domestic Franchise revenues increased 4.2% to $2.5 million.  Higher royalties from an 8.3% increase in sales by domestic franchisees were partially offset by a reduction in other franchise revenue.  Same store sales rose 9.6% at domestic franchise stores.  During the quarter, we added new personnel and took additional steps to begin execution of our domestic franchise expansion programs.  Domestic Franchise segment operating income was $1.3 million in the fourth quarter of both years.

    International Franchise revenues increased 6.3% to $6.7 million.  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.  International Franchise costs and expenses in the quarter included an increase of almost $200,000 compared to the prior year quarter in trademark protection costs, a provision of approximately $185,000 for potential uncollectible accounts and higher personnel and personnel-related costs to support continued and anticipated international growth.  The International Franchise segment generated operating income of $4.0 million compared to $4.2 million in the fourth quarter last year.

    Total KK Supply Chain revenues (including sales to Company stores) increased 1.8% to $52.9 million.  KK Supply Chain generated operating income of $7.5 million compared to $7.1 million in the fourth quarter last year.

    Fiscal 2014 Outlook

    In fiscal 2014, management estimates that the Company and its domestic franchisees will each open approximately 10 Krispy Kreme shops, and that international franchisees will open approximately 75 locations.  Although the Company looks for continued organic same store sales growth in its domestic stores, international franchise same store sales will likely remain pressured by the substantial growth in international markets in recent years.

    Based on these factors, management currently expects fiscal 2014 operating income in the range of $41 million to $44 million, which would represent an increase of 13% to 21% from the $36.4 million operating income for fiscal 2013 measured on a 52-week basis.  Management estimates adjusted net income will be in the range of $37 million to $40 million and adjusted EPS will range from $0.53 to $0.57 per share based on a forecasted 70 million diluted shares outstanding.

    Adjusted net income and adjusted EPS are non-GAAP measures; see the reconciliation of GAAP to adjusted earnings in Table 6 accompanying this release.

    About Krispy Kreme

    Krispy Kreme is a leading branded specialty retailer and wholesaler of premium quality sweet treats and complementary products, including its signature Original Glazed® doughnut.  Headquartered in Winston-Salem, N.C., the Company has offered the highest quality doughnuts and great tasting coffee since it was founded in 1937.  Today, Krispy Kreme shops can be found in over 740 locations in 22 countries around the world. 

    TABLE 1

    KRISPY KREME DOUGHNUTS, INC

    CONSOLIDATED STATEMENT OF INCOME

    14 Weeks Ended

    13 Weeks Ended

    53 Weeks Ended

    52 Weeks Ended

    February 3,

    January 29,

    February 3,

    January 29,

    2013

    2012

    2013

    2012

    (In thousands, except per share amounts)

    Revenues

    $

    118,145

    $

    101,957

    $

    435,843

    $

    403,217

    Operating expenses:

    Direct operating expenses (exclusive of depreciation and

    amortization expense shown below) 

    98,260

    87,880

    362,828

    346,434

    General and administrative expenses 

    8,778

    6,673

    25,089

    22,188

    Depreciation and amortization expense

    2,653

    2,002

    9,891

    8,235

    Impairment charges and lease termination costs 

    4

    113

    306

    793

    Operating income 

    8,450

    5,289

    37,729

    25,567

    Interest income 

    12

    35

    114

    166

    Interest expense 

    (440)

    (390)

    (1,642)

    (1,666)

    Equity in losses of equity method franchisees 

    (52)

    (53)

    (202)

    (122)

    Gain on sale of interest in equity method franchisee

    -

    -

    -

    6,198

    Other non-operating income and (expense), net 

    80

    (46)

    317

    215

    Income before income taxes 

    8,050

    4,835

    36,316

    30,358

    Provision for income taxes 

    3,270

    (138,707)

    15,537

    (135,911)

    Net income

    $

    4,780

    $

    143,542

    $

    20,779

    $

    166,269

    Earnings per common share:

    Basic 

    $

    0.07

    $

    2.06

    $

    0.31

    $

    2.40

    Diluted  

    $

    0.07

    $

    2.01

    $

    0.30

    $

    2.33

    Weighted average shares outstanding:

    Basic 

    66,864

    69,542

    67,624

    69,145

    Diluted  

    69,520

    71,567

    69,896

    71,497

     

    TABLE 2

    KRISPY KREME DOUGHNUTS, INC

    CONSOLIDATED STATEMENT OF ADJUSTED INCOME - 13 WEEK BASIS

    14 Weeks Ended

    Less - Week

    Ended

    13 Weeks Ended

    13 Weeks Ended

    February 3,

    February 3,

    January 27,

    January 29,

    2013

    2013

    2013

    2012

    (In thousands, except per share amounts)

    Revenues

    $

    118,145

    $

    (9,023)

    $

    109,122

    $

    101,957

    Operating expenses:

    Direct operating expenses (exclusive of depreciation and

    amortization expense shown below) 

    98,260

    (7,213)

    91,047

    87,880

    General and administrative expenses 

    8,778

    (331)

    8,447

    6,673

    Depreciation and amortization expense 

    2,653

    (189)

    2,464

    2,002

    Impairment charges and lease termination costs 

    4

    -

    4

    113

    Operating income 

    8,450

    (1,290)

    7,160

    5,289

    Interest income 

    12

    -

    12

    35

    Interest expense 

    (440)

    12

    (428)

    (390)

    Equity in losses of equity method franchisees 

    (52)

    -

    (52)

    (53)

    Other non-operating income and (expense), net 

    80

    -

    80

    (46)

    Income before income taxes 

    8,050

    (1,278)

    6,772

    4,835

    Provision for current income taxes 

    681

    (5)

    676

    855

    Adjusted net income

    $

    7,369

     

    $

    (1,273)

    $

    6,096

    $

    3,980

    Adjusted earnings per common share:

    Basic 

    $

    0.11

    $

    0.09

    $

    0.06

    Diluted  

    $

    0.11

    $

    0.09

    $

    0.06

    Weighted average shares outstanding:

    Basic 

    66,864

    66,864

    69,542

    Diluted  

    69,520

    69,520

    71,567

    Note:  The fourth quarter of fiscal 2013 contained 14 weeks compared to 13 weeks in the fourth quarter of fiscal 2012.  The foregoing table presents fourth quarter fiscal 2013 results exclusive of results for the 14th week in order to facilitate comparison of fourth quarter fiscal 2013 results with results for the fourth quarter of fiscal 2012.

    Adjusted net income and adjusted EPS are non-GAAP measures.  See the reconciliation of GAAP to adjusted earnings in Table 6.

    TABLE 3

    KRISPY KREME DOUGHNUTS, INC

    CONSOLIDATED STATEMENT OF ADJUSTED INCOME - 52 WEEK BASIS

    53 Weeks Ended

    Less - Week

    Ended

    52 Weeks Ended

    52 Weeks Ended

    February 3,

    February 3,

    January 27,

    January 29,

    2013

    2013

    2013

    2012

    (In thousands, except per share amounts)

    Revenues

    $

    435,843

    $

    (9,023)

    $

    426,820

    $

    403,217

    Operating expenses:

    Direct operating expenses (exclusive of depreciation and

    amortization expense shown below) 

    362,828

    (7,213)

    355,615

    346,434

    General and administrative expenses 

    25,089

    (331)

    24,758

    22,188

    Depreciation and amortization expense 

    9,891

    (189)

    9,702

    8,235

    Impairment charges and lease termination costs 

    306

    -

    306

    793

    Operating income 

    37,729

    (1,290)

    36,439

    25,567

    Interest income 

    114

    -

    114

    166

    Interest expense 

    (1,642)

    12

    (1,630)

    (1,666)

    Equity in losses of equity method franchisees 

    (202)

    -

    (202)

    (122)

    Other non-operating income and (expense), net 

    317

    -

    317

    215

    Income before income taxes 

    36,316

    (1,278)

    35,038

    24,160

    Provision for current income taxes 

    2,124

    (5)

    2,119

    2,000

    Adjusted net income

    $

    34,192

    $

    (1,273)

    $

    32,919

    $

    22,160

    Adjusted earnings per common share:

    Basic 

    $

    0.51

    $

    0.49

    $

    0.32

    Diluted  

    $

    0.49

    $

    0.47

    $

    0.31

    Weighted average shares outstanding:

    Basic 

    67,624

    67,624

    69,145

    Diluted  

    69,896

    69,896

    71,497

    Note:  Fiscal 2013 contained 53 weeks compared to 52 weeks in fiscal 2012.  The foregoing table presents fiscal 2013 results exclusive of results for the 53rd week in order to facilitate comparison of fiscal 2013 results with results for fiscal 2012.

    Adjusted net income and adjusted EPS are non-GAAP measures.  See the reconciliation of GAAP to adjusted earnings in Table 6.

    TABLE 4

    KRISPY KREME DOUGHNUTS, INC.

    CONSOLIDATED BALANCE SHEET

    February 3,

    January 29,

    2013

    2012

    (In thousands)

                                         ASSETS

    CURRENT ASSETS:

    Cash and cash equivalents 

    $

    66,332

    $

    44,319

    Receivables 

    22,037

    21,616

    Receivables from equity method franchisees                         

    705

    655

    Inventories 

    15,948

    16,497

    Deferred income taxes

    23,323

    10,540

    Other current assets 

    6,439

    3,613

    Total current assets 

    134,784

    97,240

    Property and equipment 

    78,024

    75,466

    Investments in equity method franchisees 

    -

    -

    Goodwill and other intangible assets 

    24,195

    23,776

    Deferred income taxes

    93,088

    129,053

    Other assets 

    11,847

    9,413

    Total assets 

    $

    341,938

    $

    334,948

             LIABILITIES AND SHAREHOLDERS' EQUITY

    CURRENT LIABILITIES:

    Current maturities of long-term debt 

    $

    2,148

    $

    2,224

    Accounts payable 

    12,198

    10,494

    Accrued liabilities 

    32,330

    28,800

    Total current liabilities 

    46,676

    41,518

    Long-term debt, less current maturities 

    23,595

    25,369

    Other long-term obligations 

    25,235

    18,935

    Commitments and contingencies

    SHAREHOLDERS' EQUITY:

    Preferred stock, no par value 

    -

    -

    Common stock, no par value 

    354,068

    377,539

    Accumulated other comprehensive loss 

    (338)

    (336)

    Accumulated deficit 

    (107,298)

    (128,077)

    Total shareholders' equity 

    246,432

    249,126

    Total liabilities and shareholders' equity

    $

    341,938

    $

    334,948

    TABLE 5

    KRISPY KREME DOUGHNUTS, INC

    CONSOLIDATED STATEMENT OF CASH FLOWS

    53 Weeks Ended

    52 Weeks Ended

    February 3,

    January 29,

    2013

    2012

    (In thousands)

    CASH FLOW FROM OPERATING ACTIVITIES:

    Net income

    $

    20,779

    $

    166,269

    Adjustments to reconcile net income to net cash provided by operating activities:

        Depreciation and amortization expense

    9,891

    8,235

        Deferred income taxes

    13,413

    (139,403)

        Impairment charges

    -

    60

        Accrued rent expense

    585

    465

        Loss on disposal of property and equipment

    543

    414

        Gain on sale of interest in equity method franchisee

    -

    (6,198)

        Share-based compensation

    6,801

    6,699

        Provision for doubtful accounts

    194

    (374)

        Amortization of deferred financing costs

    398

    422

        Equity in losses of equity method franchisees

    202

    122

        Other

    (219)

    676

    Change in assets and liabilities:

        Receivables

    (509)

    (862)

        Inventories

    560

    (1,862)

        Other current and non-current assets

    (1,012)

    462

        Accounts payable and accrued liabilities

    4,740

    (168)

        Other long-term obligations

    2,944

    (1,096)

            Net cash provided by operating activities 

    59,310

    33,861

    CASH FLOW FROM INVESTING ACTIVITIES:

    Purchase of property and equipment

    (14,218)

    (11,884)

    Proceeds from disposals of property and equipment

    178

    44

    Acquisition of stores from franchisee

    (915)

    -

    Proceeds from sale of interest in equity method franchisee

    -

    7,723

    Escrow deposit recovery

    -

    1,800

    Other investing activities

    517

    (207)

            Net cash used for investing activities

    (14,438)

    (2,524)

    CASH FLOW FROM FINANCING ACTIVITIES:

    Repayment of long-term debt

    (2,346)

    (8,991)

    Deferred financing costs

    (11)

    (29)

    Proceeds from exercise of stock options

    247

    1,036

    Proceeds from exercise of warrants

    9

    -

    Repurchase of common shares

    (20,758)

    (1,004)

            Net cash used for financing activities

    (22,859)

    (8,988)

    Net increase in cash and cash equivalents

    22,013

    22,349

    Cash and cash equivalents at beginning of year

    44,319

    21,970

    Cash and cash equivalents at end of year

    $

    66,332

    $

    44,319

    Supplemental schedule of non-cash investing and financing activities:

        Assets acquired under capital leases

    $

    516

    $

    1,197

     

     

    TABLE 6

    KRISPY KREME DOUGHNUTS, INC.

    NON-GAAP FINANCIAL INFORMATION

    The Company has net deferred income tax assets of approximately $116 million, of which approximately $76 million relates to federal and state net operating loss carryovers.  The Company's federal net operating loss carryovers total approximately $206 million.

    In the quarter ended January 29, 2012, the Company reversed approximately $139.6 million of valuation allowances against its deferred income 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 reducing the Company's earnings beginning in fiscal 2013 as a result of an increase in the provision for income taxes.  This negative effect on earnings beginning in fiscal 2013 occurs because the reversal of the valuation allowance resulted in the recognition in fiscal 2012 of income tax benefits expected to be realized in later years; absent the reversal of the valuation allowance, any such tax benefits would have been recognized when realized in future periods upon the generation of taxable income.  Accordingly, beginning in 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 resulting from the reversal of a valuation allowance, the Company's income tax expense in fiscal 2013 is not comparable to income tax expense in fiscal 2012 and earlier years.  In addition, until such time as the Company's net operating loss carry



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