Krispy Kreme Fourth Quarter Revenues Increased 15.9%

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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