Industry News | December 11, 2008

Another Quarter Loss for Krispy Kreme

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Krispy Kreme Doughnuts, Inc. (NYSE: KKD - News; the "company") today reported financial results for the third quarter of fiscal 2009, ended November 2, 2008.

The company incurred a net loss in the third quarter of $5.9 million, or $0.09 per diluted share, compared to a net loss of $798,000, or $0.01 per diluted share, in the third quarter last year. A number of factors affected results for the quarter compared to the third quarter of last year, which are discussed in detail in the company's Quarterly Report on Form 10-Q filed this morning. The higher cost of doughnut mix and shortening resulting from higher agricultural commodity costs compared to last year and higher gasoline prices adversely affected results. Recent economic developments have resulted in a significant decline in the price of agricultural commodities, which should benefit both Company and franchise stores in the fourth quarter. In mid-October, the average price of gasoline fell below that of last year's third quarter, and the company expects to see a reduction in its fuel costs in the fourth quarter.

Total revenues for the third quarter decreased 8.7% to $94.3 million compared to $103.4 million in the third quarter last year. The decline in revenues reflects decreases in company stores and KK supply chain revenues, partially offset by an increase in franchise revenues. Company stores revenues were $64.7 million, down $8.1 million (11.1%) from last year, of which approximately $2.0 million reflects store closings. Within this segment, on-premises revenues fell 5.4% in total (1.3% on a same-store basis) and off-premises revenues fell 15.3% compared to the third quarter last year. KK supply chain revenues declined 6.6% to $23.2 million while Franchise revenues rose 12.6% to $6.4 million.

During the third quarter of fiscal 2009, 37 new Krispy Kreme stores were opened systemwide and 22 stores were closed systemwide. This brings the total number of stores systemwide at quarter end to 509, consisting of 284 factory stores and 225 satellites. The net increase of 15 stores in the quarter reflects a net increase of 21 international stores and a net decrease of six domestic stores. All 37 new stores were opened by franchisees. Over 80% of total stores are operated by franchisees, and over half are located outside the U.S.

Third quarter systemwide sales decreased 1.0% from the third quarter of last year. The growth in sales by international franchisees was offset by a decline in domestic sales arising principally from store closures.

"Our third quarter performance was impacted by a challenging operating climate led by high gas prices, as well as our commitment to investing in our growth plan," says Jim Morgan, chairman, president, and CEO. "We have undertaken key strategic initiatives to strengthen our business as well as the economics of our stores, and that should help us succeed through various economic cycles and deliver positive long-term results. I remain confident that our employees and our management team will execute our strategic initiatives and the results will be a transition year in FY10 that positions Krispy Kreme for a prolonged period of growth in FY11 and beyond. We will drive our business forward, and continue to deliver the unique Krispy Kreme experience to customers worldwide."

In addition to further declines in revenues, many other factors could also adversely affect the company's business. In particular, increases in the cost of raw materials and fuel and strengthening of the U.S. dollar relative to other currencies could adversely affect the company's operating results and cash flows. In addition, several franchisees have been experiencing financial pressures which, in certain instances, have become exacerbated in recent quarters. Royalty revenues and most of KK supply chain revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees' operations has a direct effect on the company's revenues, results of operations and cash flows.

The company's consolidated financial statements include sales by company stores, sales to franchisees by the KK supply chain business segment and royalties and fees received from franchisees, but exclude sales by franchise stores to their customers. Systemwide sales, a non-GAAP financial measure, include sales by both company and franchise stores. The company believes systemwide sales data are useful in assessing the overall performance of the Krispy Kreme brand and, ultimately, the performance of the company.

Management will host a conference call to review third quarter results this afternoon at 4:30 p.m. (ET). A live webcast of the conference call will be available at www.KrispyKreme.com. To access an archived audio replay of the call, dial 888-203-1112 and enter the passcode 4362219. International callers may access the replay by dialing 719-457-0820 and entering passcode 4362219. The audio replay will be available through December 18, 2008.