Krispy Kreme Reports Financial Results For The Third Quarter Of Fiscal 2014

Revenues increased 6.7% to $114.2 million from $107.1 million - Company same store sales rose 3.7%, the twentieth consecutive quarterly increase

Dec 4, 2013 - 10:33

Krispy Kreme Doughnuts, Inc. (NYSE: KKD) reported financial results for the third quarter of fiscal 2014, ended November 3, 2013.  The Company also raised the lower end of its adjusted EPS guidance to a new range of $0.60 to $0.63 per share from $0.59 to $0.63 for fiscal 2014, and provided preliminary guidance for fiscal 2015.

Third Quarter Fiscal 2014 Highlights Compared to the Year-Ago Period:


  • Revenues increased 6.7% to $114.2 million from $107.1 million

  • Company same store sales rose 3.7%, the twentieth consecutive quarterly increase

  • Operating income rose 27.2% to $11.7 million from $9.2 million

  • Adjusted net income rose 33.8% to $11.2 million ($0.16 per share) from $8.3 million ($0.12 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 GAAP to adjusted earnings in the table accompanying this release)

  • Operating income and adjusted net income include a gain of $1.7 million on the sale of leasehold interests to a franchisee, which added $0.02 to adjusted EPS, and a lease termination charge of $1.5 million associated with litigation related to a lease of a former commissary facility, which reduced adjusted EPS by $0.02

  • Net income was $6.8 million ($0.09 per share) compared to $5.0 million ($0.07 per share) in the third quarter last year

  • Cash provided by operating activities was $13.5 million compared to $15.0 million in the third quarter last year


Chairman, President and Chief Executive Officer James H. Morgan commented:  "Our relentless focus on executing our long-term strategic plan is enabling us to strengthen our Company, gradually unlock our brand's full potential and create value for our shareholders.  During the third quarter, we extended our track record of positive same store sales at Company stores to 20 consecutive quarters.  We believe this is a remarkable distinction.  We are pleased to have increased our top-line at a healthy pace despite the tepid consumer spending environment.  Most importantly, we demonstrated the attractive leverage opportunities inherent within our business model as evidenced by achieving a higher rate of growth in operating income and adjusted EPS than in revenues."

Morgan continued, "Our third quarter financial performance was consistent with our expectations.  We are pleased to be raising the lower end of our expected range of adjusted EPS for fiscal 2014 to a new range of $0.60 to $0.63 from $0.59 to $0.63.  If achieved, this would represent growth of from 28% to 34% compared to last year on a 52-week basis.  Our preliminary expectation of adjusted EPS for fiscal 2015 is in the range of $0.71 to $0.76 per share."

Morgan concluded, "We are fortunate to have several means at our disposal through which to optimize returns, including deploying capital on Company store development, supporting domestic and international franchise growth, and repurchasing outstanding shares.  We believe these attributes both set us apart, and provide Krispy Kreme with a uniquely bright long-term future.  We will continue working hard every day for the benefit of our franchisees, our customers and guests, and our shareholders."

Third Quarter Fiscal 2014 Results

Consolidated Results

For the third quarter ended November 3, 2013, revenues increased 6.7% to $114.2 million from $107.1 million.

Exclusive of the $1.7 million gain on the sale of leasehold interests, direct operating expenses were $94.1 million, or 82.4% of revenues compared to 84.2% of revenues last year.  General and administrative expenses rose to $5.7 million from $5.1 million in the year-ago period, and as a percentage of total revenues increased to 5.0% from 4.7%.  Impairment and lease termination costs for the quarter include a $1.5 million provision related to litigation with the landlord at the Company's former commissary in Lorton, Virginia.

Exclusive of the $1.7 million gain from the sale of leasehold interests and the $1.5 million lease termination accrual, operating income rose 25.7% to $11.6 million from $9.2 million.

Adjusted net income was $11.2 million ($0.16 per share) compared to $8.3 million ($0.12 per share) in the third quarter last year.

Net income was $6.8 million ($0.09 per share) compared to $5.0 million ($0.07 per share), in the third quarter last year.

Segment Results

Company Stores revenues increased 3.3% to $74.9 million from $72.5 million.  Same store sales at Company stores rose 3.7%, the twentieth consecutive quarterly increase, driven principally by retail price increases.  The Company Stores segment posted operating income of $2.6 million compared to $2.0 million in the third quarter last year.

Domestic Franchise revenues rose $0.5 million to $3.0 million, with higher royalties accounting for the majority of the increase.  Total sales by domestic franchisees rose 12.7%; approximately 4.0 percentage points of the increase reflects the refranchising in fiscal 2014 of a total of six stores in Kansas, Missouri and Texas.  Same store sales at Domestic Franchise shops increased 10.7%.  Exclusive of the $1.7 million gain from the sale of leasehold interests, Domestic Franchise segment operating income improved to $1.5 million from $1.2 million in the third quarter last year.

International Franchise revenues increased 3.0% to $6.2 million from $6.0 million, driven by higher royalties.  Sales by international franchise stores rose 4.1%.  Changes in the rates of exchange between the U.S. dollar and the foreign currencies in which the Company's international franchisees do business decreased sales by international franchisees measured in U.S. dollars by approximately $5.8 million in the third quarter of fiscal 2014 compared to last year, which adversely affected international royalty revenues by approximately $350,000.  Excluding the effects of exchange rate changes, sales by international franchisees rose 9.8%.  Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 3.1%, reflecting, among other things, honeymoon effects from the substantial number of international store openings in recent years, as well as cannibalization as markets develop.  The International Franchise segment generated operating income of $4.4 million compared to $4.3 million in the third quarter last year, reflecting the deployment of increased resources to support current and anticipated future international growth.

KK Supply Chain revenues (including sales to Company stores) rose 10.4% to $58.3 million from $52.8 million in the same period last year, driven principally by higher unit volumes of doughnut mixes and other ingredients compared to last year.  External KK Supply Chain revenues rose 15.5% to $30.1 million from $26.1 million in the year-ago period.  KK Supply Chain generated operating income of $9.1 million in the third quarter of fiscal 2014, up from $7.3 million in the third quarter last year.

Outlook

Based on third quarter and fiscal year-to-date results and other current information, management is raising the low end of its expected adjusted EPS range for the year by $0.01 per share and leaving the high end of the range unchanged.  The new range of from $0.60 to $0.63 per share, if achieved, would represent a year-over-year increase in adjusted EPS of between 28% and 34% from the $0.47 per share reported on a 52-week basis for fiscal 2013.

For fiscal 2015, the Company anticipates opening 10 to 15 Company stores, 20 to 25 domestic franchise stores, and about 85 international franchise stores.  Although the Company looks for continued organic same store sales growth in its domestic stores, international franchise same store sales will likely continue to be negative due to the substantial growth in international markets in recent years.

Based on these factors, the Company's preliminary fiscal 2015 guidance is for adjusted EPS of between $0.71 and $0.76 per share.  The foregoing adjusted EPS range reflects estimated adjusted income tax expense of $3 million; adjusted income tax expense consists solely of taxes currently payable in cash.  Because the Company has substantial net operating loss carryovers, the amount of taxes payable in cash is expected to remain insignificant for the foreseeable future.

Adjusted net income, adjusted income tax expense and adjusted EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table 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, NC, 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 810 locations in 23 countries around the world.  




































































































































































































































































































































































































































































KRISPY KREME DOUGHNUTS, INC
















CONSOLIDATED STATEMENT OF INCOME





















Three Months Ended




Nine Months Ended





November 3,



October 28,



November 3,



October 28,





2013



2012



2013



2012





(In thousands, except per share amounts)
















Revenues


$


114,231



$


107,087



$


347,585



$


317,698


Operating expenses:














Direct operating expenses (exclusive of depreciation and















amortization expense shown below)



92,466




90,220




282,830




264,568



General and administrative expenses 



5,730




5,083




17,440




16,311



Depreciation and amortization expense 



2,788




2,357




8,272




7,238



Impairment charges and lease termination costs 



1,531




216




1,543




302


Operating income 



11,716




9,211




37,500




29,279


Interest income 



341




14




472




102


Interest expense 



(131)




(384)




(922)




(1,202)


Loss on refinancing of debt



-




-




(967)




-


Equity in losses of equity method franchisees 



(61)




(47)




(174)




(150)


Other non-operating income, net 



29




80




23




237


Income before income taxes 



11,894




8,874




35,932




28,266


Provision for income taxes 



5,114




3,830




16,436




12,267


Net income


$


6,780



$


5,044



$


19,496



$


15,999
















Earnings per common share:














Basic 


$


0.10



$


0.08



$


0.29



$


0.24



Diluted  


$


0.09



$


0.07



$


0.27



$


0.23
















Weighted average shares outstanding:














Basic 



67,543




66,668




67,274




67,897



Diluted  



71,506




68,803




71,058




70,041


 

 


















































































































































































































































































































































KRISPY KREME DOUGHNUTS, INC










CONSOLIDATED BALANCE SHEET














November 3,



February 3,




2013



2013





(In thousands)



ASSETS


CURRENT ASSETS:







Cash and cash equivalents 


$


66,745



$


66,332


Receivables 



28,111




25,627


Receivables from equity method franchisees 



683




705


Inventories 



14,818




12,358


Deferred income taxes



23,067




23,323


Other current assets 



6,349




6,439



Total current assets 



139,773




134,784


Property and equipment 



87,678




78,024


Investments in equity method franchisees 



-




-


Goodwill and other intangible assets 



24,112




24,195


Deferred income taxes



78,693




93,088


Other assets 



11,940




11,847



Total assets 


$


342,196



$


341,938





LIABILITIES AND SHAREHOLDERS' EQUITY


CURRENT LIABILITIES:







Current maturities of long-term debt 


$


365



$


2,148


Accounts payable 



14,427




12,198


Accrued liabilities 



29,781




32,330



Total current liabilities 



44,573




46,676


Long-term debt, less current maturities 



1,632




23,595


Other long-term obligations and deferred credits



27,063




25,235










Commitments and contingencies















SHAREHOLDERS' EQUITY:







Preferred stock, no par value 



-




-


Common stock, no par value 



356,730




354,068


Accumulated other comprehensive loss 



-




(338)


Accumulated deficit 



(87,802)




(107,298)



Total shareholders' equity 



268,928




246,432




Total liabilities and shareholders' equity


$


342,196



$


341,938











 

 



























































































































































































































































































































































































KRISPY KREME DOUGHNUTS, INC












CONSOLIDATED STATEMENT OF CASH FLOWS


















Nine Months Ended







November 3,



October 28,







2013



2012








(In thousands)


CASH FLOWS FROM OPERATING ACTIVITIES:







Net income


$


19,496



$


15,999


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







   Depreciation and amortization expense



8,272




7,238


   Deferred income taxes



14,438




10,824


   Accrued rent expense



578




369


   Loss on refinancing of debt



967




-


   (Gain) loss on disposal of property and equipment



(1,930)




468


   (Gain) on refranchising



(876)




-


   Share-based compensation



3,160




3,570


   Provision for doubtful accounts



(82)




65


   Amortization of deferred financing costs



258




300


   Equity in losses of equity method franchisees



174




150


   Other



(109)




(1,075)


Change in assets and liabilities:







   Receivables



(2,523)




(1,950)


   Inventories



(2,621)




314


   Other current and non-current assets



1,393




(1,499)


   Accounts payable and accrued liabilities



(947)




690


   Other long-term obligations and deferred credits



1,363




2,515


      Net cash provided by operating activities 



41,011




37,978


CASH FLOWS FROM INVESTING ACTIVITIES:







Purchase of property and equipment



(18,089)




(9,480)


Proceeds from disposals of property and equipment



1,681




66


Proceeds from refranchising



681




-


Acquisition of stores from franchisee



-




(915)


Other investing activities



305




347


      Net cash used for investing activities



(15,422)




(9,982)


CASH FLOWS FROM FINANCING ACTIVITIES:







Repayment of long-term debt



(24,546)




(1,652)


Deferred financing costs



(132)




(11)


Proceeds from exercise of stock options



2,155




-


Proceeds from exercise of warrants



-




9


Repurchase of common shares



(2,653)




(20,758)


      Net cash used for financing activities



(25,176)




(22,412)


Net increase in cash and cash equivalents



413




5,584


Cash and cash equivalents at beginning of period



66,332




44,319


Cash and cash equivalents at end of period


$


66,745



$


49,903


 

KRISPY KREME DOUGHNUTS, INC.

NON-GAAP FINANCIAL INFORMATION

As of February 3, 2013, the Company had net deferred income tax assets of approximately $116 million, of which approximately$76 million related to federal and state net operating loss carryovers.  The Company's federal net operating loss carryovers totaled approximately $206 million.

The Company has reported cumulative pretax income of over $100 million since the beginning of fiscal 2010, and the Company also has generated significant taxable income during this period.  However, because of the Company's utilization of its federal and state net operating loss carryovers and other deferred tax assets, the Company's cash payments for income taxes have been relatively insignificant during this period.  As a result, the provision for income tax expense has substantially exceeded cash payments for income taxes.  Until such time as the Company's net operating loss carryovers are exhausted or expire, GAAP income tax expense is expected to continue to substantially exceed the amount of cash income taxes payable by the Company.

The Company's fiscal year ends on the Sunday closest to January 31, which periodically results in a 53-week year.  Fiscal 2013 contained 53 weeks, while fiscal 2014 will contain 52 weeks.

In the second quarter of fiscal 2014, the Company recorded a charge of $1.0 million related to the refinancing of its secured credit facilities, consisting principally of the writeoff of deferred financing costs related to the Company's term loan, which was retired in full, and the termination of an interest rate hedge related to the term loan.  Charges of this nature are not expected to recur on a regular basis.

The following non-GAAP financial information and related reconciliation to GAAP measures are provided to assist the reader in understanding the effects of the above facts and transactions on the Company's results of operations.  In addition, the non-GAAP financial information is intended to illustrate the material difference between the Company's income tax expense and income taxes currently payable.  These non-GAAP performance measures are consistent with other measurements made by management in the operation of the business which do not consider income taxes except to the extent to which those taxes currently are payable, for example, capital allocation decisions and incentive compensation measurements that are made on a pretax basis.

 

 










































































































































































































































































































































































































































Historical Periods





Three Months Ended



Nine Months Ended



Year Ended





November 3,



October 28,



November 3,



October 28,



February 3,





2013



2012



2013



2012



2013





(In thousands, except per share amounts)



















Net income, as reported


$


6,780



$


5,044



$


19,496



$


15,999



$


20,779


Loss on refinancing of debt



-




-




967




-




-


Provision for deferred income taxes



4,388




3,300




14,438




10,824




13,413


Adjusted net income



11,168




8,344




34,901




26,823




34,192


Earnings for the 53rd week



-




-




-




-




(1,273)


Adjusted net income - 52 week basis


$


11,168



$


8,344



$


34,901



$


26,823



$


32,919



















Adjusted earnings per common share:
















   Basic


$


0.17



$


0.13



$


0.52



$


0.40



$


0.51


   Diluted


$


0.16



$


0.12



$


0.49



$


0.38



$


0.49



















Adjusted earnings per common share - 52 week basis:
















   Basic


$


0.17



$


0.13



$


0.52



$


0.40



$


0.49


   Diluted


$


0.16



$


0.12



$


0.49



$


0.38



$


0.47



















Weighted average shares outstanding:
















   Basic



67,543




66,668




67,274




67,897




67,624


   Diluted



71,506




68,803




71,058




70,041




69,896


 

 










































































































































































































































Management's Earnings Guidance





Year Ending





February 1, 2015



February 2, 2014





From



To



From



To





(In thousands, except per share amounts)
















Net income, as reported


$


31,300



$


33,600



$


24,500



$


25,800


Loss on refinancing of debt



-




-




1,000




1,000


Provision for deferred income taxes



19,700




21,400




17,100




18,200


Adjusted net income


$


51,000



$


55,000



$


42,600



$


45,000
















Adjusted earnings per common share:













   Basic


$


0.75



$


0.81



$


0.63



$


0.67


   Diluted


$


0.71



$


0.76



$


0.60



$


0.63
















Weighted average shares outstanding:













   Basic



68,000




68,000




67,300




67,300


   Diluted



72,000




72,000




71,200




71,200


 










































































































































































































































































































































































































































































































































































































































































KRISPY KREME DOUGHNUTS, INC




















SEGMENT INFORMATION


















Three Months Ended



Nine Months Ended









November 3,



October 28,



November 3,



October 28,









2013



2012



2013



2012









(In thousands)


Revenues:














Company Stores: 















On-premises sales:
















Retail sales


$


32,733



$


31,039



$


102,331



$


90,697





Fundraising sales



4,473




4,260




11,809




11,791






Total on-premises sales



37,206




35,299




114,140




102,488




Wholesale sales



37,680




37,194




118,356




112,684







 Company Stores revenues 



74,886




72,493




232,496




215,172



Domestic Franchise 



3,026




2,498




8,696




7,561



International Franchise 



6,205




6,024




18,707




17,832



KK Supply Chain:

















Total revenues 



58,304




52,825




175,316




158,075






Less – intersegment sales elimination 



(28,190)




(26,753)




(87,630)




(80,942)







 External KK Supply Chain revenues 



30,114




26,072




87,686




77,133








Total revenues 


$


114,231



$


107,087



$


347,585



$


317,698




















Operating income:














Company Stores 


$


2,599



$


1,985



$


9,703



$


5,271



Domestic Franchise 



3,156




1,174




6,121




4,072



International Franchise 



4,449




4,301




13,219




12,957



KK Supply Chain 



9,098




7,312




28,336




24,181






Total segment operating income 



19,302




14,772




57,379




46,481



Unallocated general and administrative expenses 



(5,730)




(5,083)




(17,440)




(16,311)



Corporate depreciation and amortization expense



(325)




(262)




(896)




(589)



Impairment charges and lease termination costs 



(1,531)




(216)




(1,543)




(302)






Consolidated operating income 


$


11,716



$


9,211



$


37,500



$


29,279




















Depreciation and amortization expense:














Company Stores 


$


2,255



$


1,880



$


6,783



$


5,921



Domestic Franchise 



36




40




72




150



International Franchise 



2




3




6




9



KK Supply Chain 



170




172




515




569



Corporate administration 



325




262




896




589






Total depreciation and amortization expense 


$


2,788



$


2,357



$


8,272



$


7,238


 

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