Industry News | April 17, 2008

Krispy Kreme Reports 4Q Losses

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Krispy Kreme Doughnuts, Inc. (NYSE: KKD - News) today reported financial results for the fourth quarter and fiscal year ended February 3, 2008 ("fiscal 2008"), and filed with the Securities and Exchange Commission its Annual Report on Form 10-K. The Annual Report is available at www.sec.gov.

The Company's fiscal year ends on the Sunday closest to January 31, which periodically results in a 53-week year. The fourth quarter and fiscal year ended February 3, 2008 contained 14 weeks and 53 weeks, respectively, compared to the fourth quarter and fiscal year ended January 28, 2007, which contained 13 weeks and 52 weeks, respectively.

Fourth quarter systemwide sales (excluding the 14th week in the fourth quarter of fiscal 2008) increased 2.3 percent from the fourth quarter of last year. The growth in systemwide sales in the quarter was entirely attributable to growth in sales by international franchisees; the domestic component of systemwide sales fell in the fourth quarter compared to the fourth quarter last year, principally due to store closures. For the year, systemwide sales (measured on a 52-week basis) decreased 0.9 percent compared to fiscal 2007.

During the fourth quarter of fiscal 2008, 32 new Krispy Kreme stores, comprised of 13 factory stores and 19 satellites, were opened systemwide, and 6 stores, comprised of 5 factory stores and 1 satellite, were closed systemwide. This brings the total number of stores systemwide at the end of fiscal 2008 to 449, consisting of 295 factory stores and 154 satellites. Approximately 75 percent of these stores are operated by franchisees, and almost half are located outside the United States.

Revenues for the fourth quarter decreased to $110.9 million from $112.2 million in the fourth quarter last year. Excluding revenues for the 14th week, revenues for the fourth quarter of fiscal 2008 decreased 8.2 percent to $102.9 million. The decline in revenues reflects an 11.1 percent decrease in Company Stores revenues to $70.4 million and a 5.2 percent decrease in KK Supply Chain revenues to $25.8 million, partially offset by a 17.0 percent increase in Franchise revenues to $6.7 million.

The net loss for the fourth quarter was $31.8 million, or $0.50 per share, compared to a net loss of $24.4 million, or $0.39 per share, in the fourth quarter last year. The fourth quarters of fiscal 2008 and 2007 reflect impairment charges and lease termination costs of approximately $27.6 million ($0.43 per share) and $6.0 million ($0.10 per share), respectively, most of which are non-cash and relate to the Company Stores segment. In addition, results for the fourth quarter of fiscal 2008 include a charge of $3.0 million for estimated payments under the Company's guarantees of a portion of certain debt and leases of a franchisee in which it owns an interest. Results for the fourth quarter last year reflect charges of approximately $17.3 million (almost all of which were non-cash) related to the settlement of litigation.

For fiscal 2008, revenues decreased to $429.3 million from $461.2 million in fiscal 2007. Excluding revenues for the 53rd week, revenues for fiscal 2008 decreased 8.6 percent to $421.3 million. The decline in revenues reflects an 8.4 percent decrease in Company Stores revenues to $298.9 million and a 12.3 percent decrease in KK Supply Chain revenues $99.9 million, partially offset by a 6.8 percent increase in Franchise revenues to $22.5 million.

The net loss for fiscal 2008 was $67.1 million, or $1.05 per share, compared with a net loss of $42.2 million, or $0.68 per share, in fiscal 2007. Impairment charges and lease termination costs were $62.1 million ($0.97 per share) and $12.5 million ($0.20 per share) in fiscal 2008 and 2007, respectively. Of the total charges and costs in fiscal 2008 and 2007, most of which were non-cash, $56.0 and $9.4 million, respectively, relate to the long-lived assets and $4.6 million and $1.1 million, respectively, relate to goodwill, in each case associated principally with the Company Stores segment. In addition, fiscal 2008 results reflect an impairment charge of approximately $10.4 million related to the Company's manufacturing and distribution facility in Effingham, Illinois, which the Company divested during the year, a charge of $3.0 million for estimated payments under the Company's guarantees of a portion of certain debt and leases of a franchisee in which it owns an interest, and a charge of $9.6 million (of which $5.5 million was non-cash) resulting from the refinancing of indebtedness. Fiscal 2008 results include a non-cash credit of $14.9 million and fiscal 2007 results included a non-cash charge of $16.0 million related to changes in the value of common stock and warrants issued in March 2007 in connection with the settlement of litigation.

In addition to announcing financial results, the Company also announced that it had remediated all of the material weaknesses in its internal control over financial reporting identified as of January 28, 2007, and maintained effective internal control over financial reporting as of February 3, 2008.

As of February 3, 2008, the Company's consolidated balance sheet reflects cash and indebtedness of approximately $25 million and $77 million, respectively. During fiscal 2008, the Company prepaid approximately $32.8 million of the principal balance of the $110 million term loan entered into in February 2007. Subsequent to year end, the Company and its lenders executed amendments to the Company's secured credit facilities which, among other things, relax certain financial covenants contained therein. Those covenants previously were scheduled to become more stringent during fiscal 2009. The amendments also provide that the interest rate on the loans outstanding under the facilities will increase from LIBOR plus 3.50 percent to LIBOR plus 5.50 percent, with a minimum LIBOR rate of 3.25 percent, and fees on letters of credit outstanding under the facilities will increase from 3.75 percent to 5.75 percent. As of February 3, 2008, the outstanding loan balance was $76.1 million and outstanding letters of credit were $20.3 million. There were no amounts drawn under the revolving facility, which was reduced from $50 million to $30 million.

"Although it's clear from our fourth quarter and year-end results that we have more work to do in order to produce the financial results we believe are possible, there were some successes in fiscal 2008," said Jim Morgan, Chairman, President and Chief Executive Officer. "Our international expansion continues to be a source of exciting growth, we are seeing encouraging initial results from Company factory stores that have been converted to satellite hot shops as part of our hub and spoke strategy, and Krispy Kreme's entire menu now is zero grams trans fat per serving. In addition, we remediated all material weaknesses in our internal control over financial reporting."

Morgan added, "Beyond the challenges we still face, we believe there are a multitude of opportunities, and we are committed to providing corporate performance that is in keeping with the iconic brand we represent."

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. In addition, several franchisees have been experiencing financial pressures which, in certain instances, became more exacerbated during fiscal 2008. The Company has guaranteed certain obligations of franchisees in which it has an equity interest, and has recorded charges aggregating $3.4 million in fiscal 2007 and 2008 for estimated payments under such guarantees; these guarantees could result in additional charges in future periods. Franchisees opened 88 stores and closed 26 stores in fiscal 2008. Franchisees have contractual commitments to open over 170 additional stores after fiscal 2008; however, the Company believes franchisees also 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.

Krispy Kreme management will host a conference call to review fourth quarter and fiscal 2008 annual results on April 17, 2008 at 4:30 p.m. (ET). A live webcast of the conference call will be available at www.KrispyKreme.com/investorrelations.html and www.Streetevents.com. An archived audio replay will be available shortly following the conference call. To access the telephone replay dial 888-286-8010 and enter the passcode number 96358209. International callers may access the replay by dialing 617-801-6888 and entering passcode 96358209. The audio replay will be available through April 24, 2008. The conference call webcast will be archived and accessible for one month following the date of the conference call.

News and information presented in this release has not been corroborated by QSR, Food News Media, or Journalistic, Inc.