Krispy Kreme reports financial results

Krispy Kreme Doughnuts, Inc. today reported financial results for the fourth quarter and fiscal year ended January 29, 2012, and reaffirmed its guidance for fiscal 2013.

Revenues increased 11.2% to $102.0 million from $91.7 million
Company same store sales rose 8.3%, the thirteenth consecutive quarterly increase
Operating income increased to $5.3 million from $0.9 million
Net income was $143.5 million ($2.01 per share), compared to a net loss of $1.5 million ($0.02 per share)
Net income in the fourth quarter of fiscal 2012 includes a non-recurring credit of $139.6 million ($1.95 per share) from the reversal of valuation allowances on deferred income tax assets
Adjusted net income was $4.0 million ($0.06 per share), compared to an adjusted net loss of $1.5 million ($0.02 per share); adjusted net income and EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release)
Cash provided by operating activities increased to $10.9 million from $7.7 million

Revenues increased 11.4% to $403.2 million from $362.0 million
Company same store sales rose 5.2%, the third consecutive annual increase
Operating income increased to $25.6 million from $15.2 million
Fiscal 2012 results include a non-operating gain of $6.2 million ($4.7 million after tax, or $0.06 per share) on the Company's sale of its 30% equity interest in KK Mexico
Net income was $166.3 million ($2.33 per share), compared to $7.6 million ($0.11 per share)
Net income in fiscal 2012 includes a non-recurring credit of $139.6 million ($1.95 per share) from the reversal of valuation allowances on deferred income tax assets
Adjusted net income was $22.2 million ($0.31 per share), compared to adjusted net income of $7.5 million ($0.11 per share); adjusted net income and EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release)
Cash provided by operating activities increased to $33.9 million from $20.5 million
Total debt was reduced by $7.8 million to $27.6 million; cash at year end totaled $44.3 million

The Company ended the year with a total of 694 Krispy Kreme stores systemwide, a net increase of 16 shops during the quarter. As of January 29, 2012, there were 92 Company stores and 602 franchise locations.

James H. Morgan, Chairman and Chief Executive Officer, commented: "The fourth quarter capped off an extremely successful year at Krispy Kreme, and we were pleased to have generated double-digit revenue growth with substantial increases in both operating income and EPS. As pleased as we were with these results, however, we are committed to converting even more of our revenue growth into bottom line profitability. To that end, we will continue to strengthen our core doughnut line through innovative limited time offerings, complimented by an already successful coffee launch and a broader beverage program to follow. We will also build on the recent introduction of our new wholesale product offerings and continue to work on cost reductions in labor, ingredients and the store model itself."

Morgan continued, "In terms of development, our system is nearly 700 stores today and we are confident in our plan to expand Company store development strategically, while growing our franchise system significantly, both domestically and internationally. We believe that Krispy Kreme has an extraordinary market opportunity, and as we look to the coming fiscal year, we are very confident that we can execute against our plan and continue to drive value for shareholders."

In fiscal 2013, which will be a 53-week year, the Company anticipates opening 5 to 10 Company stores, between 10 and 15 domestic franchise stores, and approximately 75 international franchise stores. Although the Company looks for continued organic same store sales growth in its domestic stores, international franchise same store sales will likely remain pressured by the substantial growth in international markets in recent years. In addition, with volatile prices for agricultural and other commodities, the Company will continue working to reduce its consumption of certain key ingredients while taking other measures to combat the rise in input costs the Company has experienced since fiscal 2011.

Based on these factors, management currently expects fiscal 2013 operating income in the range of $29 to $33 million, with improvements expected in each of the four business segments compared to fiscal 2012. In addition, as stated in the Company's third quarter fiscal 2012 earnings release, management also is expressing its guidance in terms of diluted earnings per share. Management estimates diluted EPS for fiscal 2013 will be in the range of $0.21 to $0.24; this range reflects an estimated tax rate of 45% compared to management's earlier estimate of 6-7%. The higher tax rate is a result of the reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012 as more fully discussed below; the amount of taxes expected to be paid in cash, which is insignificant, is unchanged from prior estimates.

Management's estimate of fiscal 2013 adjusted EPS, which includes income tax expense only to the extent expected to be currently payable, is from $0.35 to $0.41. Adjusted EPS is a non-GAAP measure; see the reconciliation of GAAP to adjusted earnings guidance in the table accompanying this release.

For the fourth quarter ended January 29, 2012, revenues increased 11.2% to $102.0 million from $91.7 million. All four business segments reported year-over-year revenue growth.

Direct operating expenses increased to $87.9 million from $80.1 million, but as a percentage of total revenues, decreased to 86.2% from 87.4%. General and administrative expenses increased to $6.7 million from $6.4 million in the same period last year but, as a percentage of total revenues, decreased to 6.5% from 6.9%. Impairment charges and lease termination costs were $0.1 million compared to $2.6 million in the year-ago period.

Interest expense decreased to $0.4 million from $1.3 million, reflecting lower interest rates as a result of the January 2011 refinancing of the Company's credit facilities, as well as reduced indebtedness. The Company recorded a charge of $1.0 million in the fourth quarter of fiscal 2011 for costs related to the January 2011 refinancing.

Net income was $143.5 million ($2.01 per share) compared to a net loss of $1.5 million ($0.02 per share), in the fourth quarter last year.

Excluding the effects of the reversal of valuation allowances on deferred tax assets and other deferred income tax effects from both years' results, adjusted net income was $4.0 million ($0.06 per share) compared to an adjusted net loss of $1.5 million ($0.02 per share) in the fourth quarter last year. Adjusted net income and EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release).

Company Stores revenues increased 11.0% to $68.6 million from $61.8 million. Same store sales at Company stores rose 8.3%, the thirteenth consecutive quarterly increase. On a same store basis, traffic count increased 3.6% in the fourth quarter of fiscal 2012 compared to a decline of 1.8% in the fourth quarter last year. The Company Stores segment posted an operating loss of $0.3 million compared to an operating loss of $1.0 million last year. Favorable adjustments related to self-insurance programs were $0.8 million in the fourth quarter this year, compared to $1.2 million in last year's fourth quarter.

Domestic Franchise revenues increased 9.3% to $2.4 million from $2.2 million, reflecting a 10.2% increase in sales by domestic franchisees. Same store sales rose 7.9% at domestic franchise stores. Domestic Franchise segment operating income improved to $1.3 million from $0.8 million in the fourth quarter last year.

International Franchise revenues increased 22.2% to $6.3 million from $5.1 million, reflecting increased royalties from higher sales by international franchise stores. Total U.S. dollar sales by international franchise stores rose 16.8%. Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 9.5%, reflecting, among other things, honeymoon effects from the over 300 stores opened internationally since the beginning of fiscal 2009, as well as cannibalization as markets develop. The International Franchise segment generated operating income of $4.2 million, up from $3.3 million in the fourth quarter last year.

Total KK Supply Chain revenues (including sales to Company stores) increased 13.4% to $52.0 million from $45.8 million, driven by selling price increases in major product categories. KK Supply Chain generated operating income of $7.1 million compared to $6.9 million in the fourth quarter last year. KK Supply Chain has raised selling prices to recover rising input costs resulting from higher agricultural commodity prices, but generally has not marked up those higher costs. Accordingly, KK Supply Chain's operating margin declined in the fourth quarter of fiscal 2012 compared to the fourth quarter last year.

Impairment charges and lease termination costs were $0.1 million compared to $2.6 million in the fourth quarter last year.

Results for the fourth quarter of fiscal 2011 include a charge of $1.0 million related to the refinancing of the Company's credit facilities, most of which was non-cash.

The Company has $139.6 million of net deferred tax assets, which, prior to the fourth quarter of fiscal 2012, had been subject to a 100% valuation allowance because the Company was unable to conclude that realization of such assets was more likely than not. In light of the Company's substantially improved performance over the past two years, in the fourth quarter of fiscal 2012 the Company concluded that it is more likely than not that the Company will continue to generate taxable income in future years and that a substantial portion of the deferred tax assets will be realized. Accordingly, as required by GAAP, in the fourth quarter of fiscal 2012 the Company reversed $139.6 million of the valuation allowance, representing the portion of the deferred tax assets expected to be realized, with the related credit to earnings reflected in income tax expense for the quarter.

While the reversal of a portion of the valuation allowance had a positive effect on the Company's results of operations in the fourth quarter, the reversal is expected to have the effect of reducing the Company's earnings in subsequent years as a result of an increase in the provision for income taxes in such future periods. This negative effect on earnings in subsequent periods is expected to occur because the reversal of the valuation allowance reflects the recognition of previously generated, but not recognized, income tax benefits in fiscal 2012 when the reversal was recorded. Absent the reversal of the valuation allowance, such tax benefits would have been recognized in the future periods in which their realization is expected to occur upon the generation of taxable income.

Accordingly, subsequent to fiscal 2012, the Company's effective income tax rate, which currently bears little or no relationship to pretax income, is expected to more closely reflect the blended federal and state income tax rates in jurisdictions in which the Company operates. Notwithstanding the expected increase in the Company's effective income tax rate as a result of the reversal of a portion of the valuation allowance, the Company's cash payments for income taxes are expected to remain insignificant for the foreseeable future because of the Company's substantial net operating loss carryovers. 

Management will host a conference call to review fourth quarter and fiscal 2012 results as well as management's outlook for fiscal 2013 this afternoon at 4:30 p.m. Eastern. A live webcast of the conference call will be available at the Company's website at www.krispykreme.com. The call also can be accessed live by dialing (800) 510-0146 or, for international callers, by dialing (617) 614-3449. A replay will be available after the call and can be accessed by dialing (888) 286-8010, or (617) 801-6888 for international callers; the passcode is 67273477. The audio replay will be available through March 27, 2012. A transcript of the conference call also will be available at the Company's website.