Industry News | June 9, 2008

Krispy Kreme Announces Fiscal Results

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Krispy Kreme Doughnuts Inc. reported financial results for the first quarter of fiscal 2009, which ended May 4, 2008.
    Net income for the first quarter was $4.0 million, or $0.06 per diluted share, compared to a net loss of $7.4 million, or $0.12 per diluted share, in the first quarter last year. While a number of factors affected results for the first quarter compared to the first quarter of last year as disclosed in the Company's Quarterly Report on Form 10-Q filed this morning, the largest single factor was that results for the first quarter of last year included a charge of $9.6 million related to the refinancing of long-term debt.
    "We are pleased to report improved bottom line results in the first quarter of fiscal 2009 compared to the first quarter of last year," says Jim Morgan, chairman, president, and CEO. "Much work remains to be done to achieve the consistent profitability and sustainable growth we envision. While we continue to face many challenges, I believe more than ever there also are many opportunities ahead of us. Although our near term results may be uneven, our employees are working hard to implement the further improvements necessary for us to be successful for the long term."
    Among the other factors that affected the Company's results for the first quarter of fiscal 2009 were a $930,000 non-cash gain on the disposal of equity interests in two franchisees and the related release of the Company's guarantees of certain debt and leases, as well as a net credit in impairment and lease termination costs of $645,000 resulting from changes in estimated sublease rentals on a closed store and the realization of proceeds on the assignment of another closed store lease.
    Company revenues for the first quarter decreased 6.6 percent to $103.6 million compared to $110.9 million in the first quarter last year. The decline in revenues reflects a 10.3 percent decrease in Company Stores revenues to $72.2 million and a 2.0 percent decrease in KK Supply Chain revenues to $24.9 million, partially offset by a 30.2 percent increase in Franchise revenues to $6.5 million. As of May 4, 2008, the Company's consolidated balance sheet reflects cash and debt of approximately $29.2 million and $75.7 million, respectively.
    During the first quarter of fiscal 2009, 28 new Krispy Kreme stores, comprised of four factory stores and 24 satellites, were opened systemwide, and seven stores, comprised of six factory stores and one satellite, were closed systemwide. This brings the total number of stores systemwide at quarter end to 470, consisting of 289 factory stores and 181 satellites. The net increase of 21 stores in the quarter reflects a net increase of 27 international stores and a net decrease of six domestic stores. Approximately 75 percent of total stores are operated by franchisees, and half are located outside the United States.
    First quarter systemwide sales increased 2.4 percent from the first quarter of last year. The growth in systemwide sales was entirely attributable to growth in sales by international franchisees; the domestic component of systemwide sales fell in the first quarter compared to the first quarter last year, principally due to store closures over the past 12 months.
    Many factors could adversely affect the Company's business. In particular, the Company is vulnerable to further increases in the cost of raw materials, which could adversely affect the Company's operating results and cash flows. The Company has guaranteed approximately $14 million of obligations of franchisees in which it has an equity interest, and the aggregate recorded liability for estimated payments under such guarantees was $3.4 million as of May 4, 2008. Franchisees opened 28 stores and closed seven stores in the first quarter of fiscal 2009. The Company believes franchisees will close additional stores in the future, and the number of such closures may be significant. Royalty revenues and most of KK Supply Chain revenues are directly correlated to sales by franchise stores and, accordingly, franchise store closures have an adverse effect on the Company's revenues, results of operations and cash flows.
    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. 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.

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