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

2013-12-04
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  • Krispy Kreme Revenues increased 6.7% to $114.2 million from $107.1 million - Company same store sales rose 3.7%, the twentieth consecutive quarterly increase

    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

     

    © 2014 Restaurant News Resource

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