Article

Krispy Kreme aims to create more doughnut occasions

Company will also continue to ramp up specialty beverage platform.

August 23, 2012 by Alicia Kelso — Editor, QSRWeb.com

Krispy Kreme Doughnuts Inc. reported financial results for the second quarter of fiscal 2013, ended July 29.

Highlights included a 4.3 percent jump in revenues – to $102.1 million from $98.0 million, and an 87 percent increase in operating income, to $9.2 million from $4.9 million.

Additionally, the company's same-store sales were up 5.4 percent, marking the 15th consecutive quarterly increase.

Net income was $4.9 million ($0.07 per share) compared to $8.8 million ($0.12 per share) in the second quarter last year, reflecting a substantially higher book income tax rate. Last year's Q2 included an after-tax gain on the sale of the company's 30 percent equity interest in KK Mexico of $4.7 million.

"We were very pleased with our quarterly performance, as we drove both solid same store sales growth and increased guest traffic. The top-line momentum translated into significant year-over-year increases in both operating income and adjusted earnings per share," said James Morgan, president and CEO, during the company's earnings call Thursday.

The quarterly performance was highlighted by Krispy Kreme's ongoing 75th birthday promotions and National Doughnut Day, both of which generated significant traffic for the company, according to Morgan.

Nationwide consumer research

Morgan said there is significant opportunity for Krispy Kreme that remains untapped. The company recently completed nationwide consumer research with several findings to promote this optimism. They include:

• A "great deal" of untapped potential for doughnuts and sugar;
• A unique opportunity to create more doughnut use occasions. "Consumers tell us that they just need more excuses to eat Krispy Kreme doughnuts," Morgan said;
• Consumers are willing to eat doughnuts any time during the day and night;
• Krispy Kreme is considered a "special" brand that provides an "equally special reward," Morgan said;
• Krispy Kreme is considered an "American classic," and consumers love the brand whether they are active users, lapse users or non users;
• Guests enjoy Krispy Kreme's full sensory experience, including the smell, Doughnut Theatre, paper hats and shop atmosphere; and
• Hot doughnuts remain one of the most important brand energizers.

Armed with this research, Morgan said Krispy Kreme's focus, therefore, is on building its core offerings, continuing to enhance the doughnut experience and creating more doughnut use occasions.

"We believe we can drive incremental doughnut use occasions without complicating store operations and without any additional store investments," Morgan said.

Beverage platform

Krispy Kreme's beverage platform will also remain a strong domestic priority, and the brand will continue to build top-of-mind awareness for its drip coffee, iced coffees, specialty coffees, frozen chillers and new iced tea.

"New drip coffees represent the first step in a continuing revitalization of our overall beverage program and we continue to expect that program will contribute measurably to long term traffic and sales gains," Morgan said. "We see this as a tremendous opportunity and are leveraging our local marketing, marketing promotions, public relations, social media marketing and in-store programs to grow beverage sales traffic and profitability."

Doug Muir, executive vice president and chief financial officer, said the beverage unit volume on an established store basis was up about 7.6 percent year-over-year. Drop coffee was up 5.4 percent year-over-year.

"That was over the summer months so the coffee portion of our beverage program should get stronger. We only started doing the coffee products in the fall, so we think that's a pretty good beginning," Morgan added.

One uphill battle Krispy Kreme is facing in the coffee space is convenience.

"We have only a limited number of locations in the U.S. and coffee is an item of convenience – a destination item – for most consumers," Morgan added. "Our first job is to make sure that consumers coming to us anyway get attached and attracted to our coffee and we will move it from there."

The company's coffee goal is to go from 4 percent of sales to 12 percent of sales.

In the fall, Krispy Kreme's promotional focus will be on specialty, espresso-based coffee beverages.

Pipeline

The company ended Q2 2013 with a total of 711 Krispy Kreme stores systemwide, a net increase of 19 shops during the quarter. As of July 29, there were 93 company stores and 618 franchise locations.

So far this year, Krispy Kreme has announced two new international franchise development agreements for India and one for Russia. More international agreements are anticipates before the end of the year. The international pipeline is now approximately 390 shops and the goal remains 900 international locations by the end of fiscal 2017.

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