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

WINSTON-SALEM, N.C., Aug. 29, 2013 /PRNewswire/ -- Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the "Company") today reported financial results for the second quarter of fiscal 2014, ended August 4, 2013.  The Company also reaffirmed its adjusted earnings per share guidance in the range of $0.59 to $0.63 per share for the full year.

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

• Revenues increased 10.4% to $112.7 million from $102.1 million
• Company same store sales rose 10.0%, the nineteenth consecutive quarterly increase
• Operating income rose 14.8% to $10.6 million from $9.2 million
• Adjusted net income rose 17.2% to $9.6 million ($0.14 per share) from $8.2 million ($0.12 per share); adjusted net income and adjusted EPS reflect income tax expense only to the extent currently payable in cash and, in the second quarter of fiscal 2014, exclude a charge of $1.0 million for the refinancing of the Company's credit facilities and the retirement of the remaining balance of the Company's term loan; adjusted net income and adjusted EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release)
• The GAAP income tax provision for the quarter includes a non-cash charge of approximately $685,000 ($0.01 per share) to reduce the carrying value of deferred income tax assets as a result of the enactment in the second quarter of lower corporate income tax rates in North Carolina
• Net income was $4.7 million ($0.07 per share) compared to $4.9 million ($0.07 per share) in the second quarter last year
• Cash provided by operating activities was $13.1 million compared to $12.6 million in the second quarter last year

Chairman, President and Chief Executive Officer James H. Morgan commented:  "This was an outstanding quarter for us, and results exceeded our expectations, despite unusual items that in the aggregate negatively affected our earnings by about $0.01 per adjusted share. Those items, combined with a $0.02 adverse swing in gains and losses on derivative positions, penalized the year-over-year comparison by $0.03 per adjusted share.

"Our dramatic same store sales gain was driven primarily through higher traffic counts as customers found more reasons to treat themselves to our unique products, while improvements in our Company Stores and Supply Chain segments drove an increase in consolidated operating margin.  Fiscal 2014 is proving to be an exciting year for our business, and we continue to forecast year-over-year growth in adjusted earnings per share approaching or exceeding 30%. Attaining the high end of our forecasted earnings guidance appears increasingly achievable.

"Of particular significance, we are very pleased with the initial sales and operating results from the five new small factories we have opened since January.  While we are looking forward to gaining additional experience with these shops and the four to five small factories we plan to open in the remainder of fiscal 2014, we are now sufficiently confident about the model to encourage our franchisees, new and old, to incorporate this format into their expansion plans.  We expect the success of this new smaller and more efficient model will greatly enhance our long-term global expansion potential.

"In July, we were delighted to sign a 15-store development agreement for the Dallas market with an experienced multi-concept operator, which included the sale of our three existing stores in the market.  This agreement represents a key step in our previously announced plan to significantly increase the pace of our U.S. store expansion.

"During the second quarter, we took advantage of a robust credit market and our steadily improving results to refinance our credit facilities and retire our $22 million term loan balance.  We ended the quarter with over $60 million in cash and basically no debt, and reduced our interest expense going forward.  We also announced a $50 million common stock buyback authorization.  We are very gratified to have the resources to implement and expand the scope of our growth plans, further strengthen our balance sheet, and potentially complement this cash deployment with other ways to enhance shareholder returns.

Morgan concluded:  "We accomplished much this past quarter.  While continuing to execute on our strategic vision, we made investments in our long-term future and, at the same time, delivered strong operating and financial results for our shareholders."

Second Quarter Fiscal 2014 Results

Consolidated Results

For the second quarter ended August 4, 2013, revenues increased 10.4% to $112.7 million from $102.1 million.

Direct operating expenses increased to $93.8 million from $85.7 million, but as a percentage of total revenues fell to 83.2% from 83.9%.  General and administrative expenses rose to $5.7 million from $4.8 million in the year-ago period and, as a percentage of total revenues, increased to 5.0% from 4.7%.

Operating income increased to $10.6 million from $9.2 million.  Operating income in the second quarter last year included gains related to agricultural derivatives of approximately $1.1 million compared to losses in the current year of $410,000.

Adjusted net income was $9.6 million ($0.14 per share) compared to $8.2 million ($0.12 per share) in the second quarter last year.

As previously announced, on July 12, 2013, the Company refinanced its secured credit facilities.  In connection with the refinancing, the Company retired in full the $22 million remaining balance of its term loan and increased the size of its revolving credit commitments from $25 million to $40 million.  The refinancing and the retirement of the term loan are expected to result in a decrease in interest expense of approximately $1.0 million in the first twelve months following the transaction.  The Company recorded a non-cash charge for the transaction of $1.0 million in the second quarter, consisting principally of the write-off of the deferred financing costs related to the retired term loan and the termination of a related interest rate hedge.

The GAAP effective tax rate for the second quarter was 49%.  Included in GAAP income tax expense for the quarter is a charge of approximately $685,000 to revalue the Company's North Carolina deferred income tax assets to reflect a reduction in the corporate income tax rate enacted by the state legislature during the quarter.

Net income was $4.7 million ($0.07 per share) compared to $4.9 million ($0.07 per share), in the second quarter last year.

Segment Results

Company Stores revenues increased 9.2% to $75.7 million from $69.3 million.  Same store sales at Company stores rose 10.0%, the nineteenth consecutive quarterly increase, driven principally by higher traffic.  The Company Stores segment posted operating income of $1.8 million compared to $338,000 in the second quarter last year.

As previously announced, during the second quarter the Company completed the refranchising of the Dallas market.  The refranchising included the sale to the new franchisee of three Company shops and the execution of a development agreement pursuant to which the new franchisee has agreed to develop an additional 15 Krispy Kreme shops in the market over the next five years.  The Company realized a gain of approximately $880,000 on the refranchising transaction, which is included in the Company Stores segment's results for the second quarter.  For the 52 weeks ended January 27, 2013, the three refranchised stores had sales of approximately $6.9 million, and for fiscal 2014 prior to the refranchising the stores had sales of approximately $3.4 million.  Approximately 45% of those amounts represented wholesale sales.  The franchise agreements entered into with the new Dallas franchisee do not include wholesale distribution rights.

Domestic Franchise revenues rose 15.2% to $2.8 million from $2.4 million, reflecting higher royalties.  Total sales by domestic franchisees rose 13.1%; approximately 2.7 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 11.5%.  Domestic Franchise segment operating income improved to $1.5 million from $1.3 million in the second quarter last year.

International Franchise revenues increased 4.8% to $6.1 million from $5.8 million, driven by higher royalties.  Sales by international franchise stores rose 0.5%.  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 $4.8 million in the second quarter of fiscal 2014 compared to last year, which adversely affected international royalty revenues by approximately $290,000.  Excluding the effects of exchange rate changes, sales by international franchisees rose 5.2%.  International Franchise segment revenue for the quarter included approximately $320,000 of royalties collected in the quarter related to franchisee sales in prior periods which had not previously been recorded due to uncertainty surrounding their collection.  Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 8.6%, 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 slight degradation in currency adjusted comps compared to the first quarter appears to have been influenced by a change in the timing of observance of a major holiday in many of our markets relative to last year, as well as by unseasonably warm weather in the United Kingdom in July.  The International Franchise segment generated operating income of $4.2 million, unchanged from the second 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 11.1% to $57.2 million from $51.5 million in the same period last year, driven principally by higher doughnut mix volume and higher mix selling prices compared to last year.  External KK Supply Chain revenues rose 14.7% to $28.2 million from $24.6 million in the year-ago period.  KK Supply Chain generated operating income of $9.0 million in the second quarter of fiscal 2014, up from $8.4 million in the second quarter last year.  KK Supply Chain's results of operations for the second quarter last year included gains on agricultural derivatives of approximately $1.1 million compared to losses in the current year of $410,000.

Outlook

Based on year-to-date results and other current information, management is reaffirming its forecast of adjusted net income for fiscal 2014 of between $42 million and $45 million, or between $0.59 and $0.63 per share.  Achievement of this forecast would represent a year-over-year increase in adjusted earnings per share of between 26% to 34% from the $0.47 per share reported on a 52-week basis for fiscal 2013.

Conference Call

The Company will host a conference call to review financial results for the second quarter of fiscal 2014 as well as its outlook this afternoon at 4:30 p.m. (ET).

A live webcast of the conference call will be available at www.krispykreme.com.  The conference call also can be accessed over the phone by dialing (877) 280-4954 or, for international callers, by dialing (857) 244-7311.  An archived replay of the call will be available shortly after its conclusion by dialing (888) 286-8010, or (617) 801-6888 for international callers; the passcode is 39406842.  The audio replay will be available through September 5, 2013.  A transcript of the conference call also will be available on the Company website.

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 790 locations in 22 countries around the world.  Connect with Krispy Kreme at www.krispykreme.com and on Facebook, Foursquare, Twitter and YouTube.

Information contained in this press release, other than historical information, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on management's beliefs, assumptions and expectations of our future economic performance, considering the information currently available to management.  These statements are not statements of historical fact.  Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to differ materially from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements.  The words "believe," "may," "forecast," "could," "will," "should," "would," "anticipate," "estimate," "expect," "intend," "objective," "seek," "strive" or similar words, or the negative of these words, identify forward-looking statements.  Factors that could contribute to these differences include, but are not limited to:  the quality of Company and franchise store operations; our ability, and our dependence on the ability of our franchisees, to execute on our and their business plans; our relationships with our franchisees; our ability to implement our international growth strategy; our ability to implement our domestic small shop operating model; political, economic, currency and other risks associated with our international operations; the price and availability of raw materials needed to produce doughnut mixes and other ingredients, and the price of motor fuel; our relationships with wholesale customers; our ability to protect our trademarks and trade secrets; changes in customer preferences and perceptions; risks associated with competition; risks related to the food service industry, including food safety and protection of personal information; compliance with government regulations relating to food products and franchising; increased costs or other effects of new government regulations relating to healthcare benefits; and risks associated with implementation of new technology platforms.  These and other risks and uncertainties, which are described in more detail in the Company's most recent Annual Report on Form 10-K and other reports and statements filed with the United States Securities and Exchange Commission, are difficult to predict, involve uncertainties that may materially affect actual results and may be beyond the Company's control, and could cause actual results, performance or achievements to be materially different from those expressed or implied by any of these forward-looking statements.  New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the impact of each such factor on the Company.  Any forward-looking statement speaks only as of the date on which such statement is made, and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

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 approximately $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 Company's provisions for income tax expense have substantially exceeded its 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.