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Krispy Kreme's focus turns to franchising, beverage line

Strategy also includes smaller factory shops and local store marketing.

May 21, 2012 by Alicia Kelso — Editor, QSRWeb.com

Krispy Kreme Doughnuts has reported positive revenues of 3.7 percent and same-store sales gains of 2.1 percent for its first quarter of 2013. This marked the 14th consecutive quarterly same-store sales increase for the Winston Salem, N.C.-based chain.

During the earnings call, CEO James H. Morgan discussed several initiatives the company is working on to continue its momentum.

Beverage line

During the fall, Krispy Kreme launched its line of signature coffees in domestic stores. The platform yields about 4 percent of all retail sales, and the company hopes to get that to 12 percent by the end of fiscal 2013.

"We're excited about our enhanced coffee program and are relentlessly pursuing its growth, but we must emphasize that it's a work in progress," Morgan said. "We are working on this to enhance the value of the Krispy Kreme brand and to continue driving same-store sales growth and profitability."

Morgan added the company has received "tremendous" feedback from consumers about its coffee program, and will work on increasing awareness through promotions.

"It's about getting the mindset of our guests and potential guests that they can stop at Krispy Kreme and have a great cup of coffee," he said. "That takes time but we're seeing progress. This is a very logical extension of our brand."

Krispy Kreme also will continue to expand its total beverage program, including with fruit-themed chillers throughout the summer.

Finally, the company said it continues to test savory products to balance out dayparts, but these won't be rolled out domestically anytime soon.

Marketing initiatives

Morgan said the company will continue enhancing its local marketing programs to drive customer visit frequency. In doing so, it will focus on limited time doughnut offerings, which generates consumer interest.

Also, Krispy Kreme is reaching out to existiing customers and potential new customers with its various 75th birthday celebrations, including a special website that has generated positive consumer response.

New store model, franchising

Additionally, Morgan said Krispy Kreme plans to increase traffic through its new smaller factory stores with full doughnut making capabilities. As of right now, the smaller footprint equipment exists in one store, but the company will accelerate this model throughout the year.

"It's more convenient for customers and less expensive for operators. We're expecting it to have a presence in our smaller markets and believe it's an important part of our domestic store lineup," Morgan said.

The smaller factory stores also will exist in markets where there is an opportunity to reach new customers, outside of core Southeast markets. Morgan said the company is actively pursuing potential, long-term franchisees to grow the brand through this model.

The smaller factory stores are about 2,000 to 3,000 square feet. The first of these will start opening within the next 6 to 9 months.

Krispy Kreme also plans to accelerate its franchising program, opening between 10 to 15 new franchise shops this year, which will add to its current 142 domestic franchised units.

Internationally, the brand has new agreements in place in Moscow and Northern India for a total of more than 70 new shops. The international pipeline is approximately 315 shops.

No new company stores were opened in Q1. Domestic franchisees opened three stores and international franchisees opened 20 new shops.

"We are closer to our stated goal of achieving and international shop count of at least 900 before the end of 2017," Morgan said. "This year, we expect around 75 international shop openings."

Q1 fiscal highlights

During the quarter:

• Revenues increased 3.7 percent to $108.5 million from $104.6 million;
• Company same store sales rose 2.1 percent, the 14th consecutive quarterly increase;
• Operating income increased to $10.8 million from $9.8 million;
• Adjusted net income was $10.3 million ($0.14 per share) compared to adjusted net income of $9.2 million ($0.13 per share) in the first quarter last year;
• Net income was $6.0 million ($0.08 per share) compared to $9.2 million ($0.13 per share); net income and EPS for the first quarter of fiscal 2013 reflect a book tax rate of 43 percent compared to a rate of 3 percent in the first quarter last year due to the required reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012; accordingly, net income and EPS for the first quarter of fiscal 2013 are not comparable to those for the first quarter of fiscal 2012.

"We are off to a good start in fiscal year 2013, with positive domestic same-store sales, positive customer count, improved international same-store sales, an expanded franchise pipeline and significantly improved operating margins," Morgan said.

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