Industry News | November 22, 2004

Krispy Kreme Continues to Struggle

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Krispy Kreme today reported unaudited financial results for the third fiscal quarter ended October 31, 2004.

Total revenues for the quarter, which include sales from company stores, franchise operations and Krispy Kreme Manufacturing and Distribution (KKM&D), increased 1.4% to $170.1 million compared with $167.8 million in the third quarter of last year. Company store sales increased 9.6% to $121.2 million, revenues from franchise operations decreased 5.4% to $6.2 million and KKM&D revenues decreased 15.7% to $42.7 million.

The Company store sales increase was attributable to sales from new stores as well as the inclusion of sales from New England Dough, LLC, the Company's consolidated joint venture partner in Connecticut, Maine, Massachusetts, Rhode Island, Vermont and New Hampshire, which was consolidated in May 2004 pursuant to FIN 46-R and the inclusion of sales from the Michigan market, which was acquired in October 2003, partially offset by decreased sales from existing stores.

Third quarter systemwide sales, including sales of company and franchise stores, increased 4.7%. Systemwide average sales per week decreased 16.7% from the prior year comparable period to approximately $52,200 per store, and company store average sales per week decreased 19.9% to approximately $58,400 per store. On a comparable store basis, systemwide sales and company store sales decreased 6.4% and 6.2%, respectively.

Net loss for the third quarter was $3.0 million, or $0.05 per diluted share, compared with net income of $14.5 million, or $0.23 per diluted share, in the comparable period last year. Loss from continuing operations for the third quarter of fiscal 2005 was $1.0 million compared with income from continuing operations of $15.0 million, or $0.24 per diluted share, in the third quarter last year. For the quarter, income from continuing operations before impairment and store closing costs was $2.4 million, or $0.04 per diluted share. The pre-tax impairment charge and store closing costs were approximately $5.5 million primarily related to the closure or pending closure of four factory stores, which are all commissaries. In the quarter, the Company reported a loss from discontinued operations, net of taxes, of approximately $2.0 million, or $0.03 per diluted share, related to the pending divestiture of the existing Montana Mills operation. Early in the fourth fiscal quarter, the Company sold the remaining assets of Montana Mills for a modest amount.

For the first nine months of fiscal 2005, total revenues increased 11.8% to $531.9 million compared with $475.6 million for the comparable period in fiscal 2004. Sales from company stores increased 16.5% to $369.6 million, revenues from franchise operations increased 14.3% to $20.1 million and KKM&D sales increased 1.0% to $142.3 million. During this period, systemwide sales increased 14.3%.

Net loss for the nine months ended October 31, 2004 was $21.7 million, or $0.34 per diluted share, compared with net income of $40.7 million, or $0.66 per diluted share, in the comparable prior year period. Income from continuing operations decreased to $15.1 million from $41.6 million in the comparable period last year. Diluted earnings per share from continuing operations was $0.24 in the first nine months of the year compared with $0.67 per diluted share in the comparable period a year ago. For the first nine months of fiscal 2005, income from continuing operations before impairment and store closing costs was $24.3 million, or $0.38 per diluted share. For the nine months ended October 31, 2004, the Company reported a loss from discontinued operations, net of taxes, of approximately $36.7 million, or $0.58 per diluted share, related to Montana Mills.

For the quarter ended October 31, 2004, the Company incurred professional fees, net of currently anticipated insurance recoveries, of approximately $3 million in connection with the previously announced Securities and Exchange Commission formal investigation, pending litigation, the previously disclosed Audit Committee investigation, the Special Committee's investigation discussed below and related work by the independent auditors. The Company expects that ongoing professional fees in connection with these matters will be material.

During the third quarter, the Company recorded a $2 million allowance for doubtful accounts with respect to accounts receivable from two franchisees as an estimate of potential exposure. The Company will continue to monitor franchise receivables and make appropriate adjustments to the allowance as circumstances warrant. Also during the quarter, certain members of management of Glazed Investments, LLC, the Company's consolidated joint venture partner in Colorado, Minnesota and Wisconsin, exercised a put of an 11% interest to the Company for $3.6 million. At quarter end, the Company consolidated KremeKo, Inc., the Company's area developer for Central and Eastern Canada, pursuant to FIN 46-R. The Company owns approximately 40% of this entity but has recently provided KremeKo, Inc. additional subordinated financial support, which triggered the consolidation.

Commenting on the Company's performance, Scott Livengood, Chairman, President and Chief Executive Officer of Krispy Kreme Doughnuts, Inc. said, "Clearly we are disappointed with our third quarter results. We are focused on addressing the challenges facing the Company and regaining our business momentum."