News
Krispy Kreme says it has 'firm foundation on which to build'
April 15, 2010
Krispy Kreme Doughnuts is finally beginning to see some payoff from its 2008 turnaround strategy, James Morgan, the company's chairman, president and CEO told investors in the company's fourth quarter earnings call. For the year, debt fell 42 percent, with payments of $31.4 million, to meet one of its strategic objectives. The company also is seeing results from improving franchisee relations and operations.
"Fiscal 2010 was a year of many challenges for our business and for the industry as a whole," Morgan said on the call. "Our financial results improved, but more importantly, the strategic initiatives we instituted during fiscal 2009 gained traction and began to yield tangible results. While we are confident that we have a firm foundation on which to build, we know that continued execution is key to creating long-term value."
Krispy Kreme reported company same-sales for the quarter ended Jan. 31 were up 1.1 percent, the fifth consecutive quarterly increase. The rate was slower than in the three preceding quarters, which the company attributed to adverse weather conditions. Domestic franchisee same-store sales were down slightly at 0.4 percent for the quarter.
For the year, company-owned same-store sales were up 3.5 percent, with domestic franchisee same-store sales up 0.9 percent.
International franchise comps in constant currency were down 19.1 percent for the quarter and 21.1 percent for the year.
In the United States, Krispy Kreme is focusing on smaller satellite stores supplied through the hub-and-spoke distribution model as well as testing smaller factory stores. Along with the smaller footprint, the new store models improve the operating model by offering greater efficiencies and quality consistency through centralized production. At the satellite stores in particular, staff can focus on improving the guest experience because employees are focused only on serving the product, not producing it.
Morgan said he expects the shift to the smaller model to increase sales and further system growth to increase store density and leverage broadcast media.
The company is expanding its test of its soft serve product in an attempt to improve sales in slower dayparts and seasons. The product will soon be deployed in an additional four company and three franchise markets. Krispy Kreme also will be developing additional menu offerings and focusing on improving sales in the beverage category.
Douglas Muir, Krispy Kreme executive vice president, chief financial officer and treasurer, said on the earnings call that the company is once again poised to grow after several years of declining store counts. For the coming year, the company expects the first increase in domestic store count since 2005 as the company refines its hub-and-spoke store model.
Franchisees also are welcoming the new store model, which has been implemented in two new franchise markets. Those markets have opened 12 stores in the past two years, including three factory stores supplying nine satellite locations. The company announced earlier this week the opening of a new franchise market for the new store model.
Dough Nut LLC signed an agreement for 21 Krispy Kreme retail locations over the next seven years in the greater Philadelphia market, which includes southeastern Pennsylvania, southern New Jersey and northern Delaware. The first new Krispy Kreme shop in the market is expected to open in late 2010.
Morgan said the company has set the goal of becoming a world-class franchisor as it works to improve franchisee relations, which suffered in prior years. The company is deploying a number of tools to assist franchisees in improving the areas of cost of goods sold, labor management and more.
Off-premises sales
Off-premise sales at grocers/mass merchants were up 12.8 percent during the quarter, while the number of doors was down 10.6 percent. For the year, sales were up 10.5 percent, with the number of doors down 10.7 percent. Off-premise sales at c-stores were down 1.9 percent with the number of doors down 13.7 percent. For the year, sales were down 4.1 percent and the number of doors down 11.7 percent.
Morgan said some of the decline in c-store number of doors was initiated by the company as it realigned its delivery routes, but more significant were two major chains moving to in-house donut programs. The company is working to improve sales at off-premises locations by testing products with a longer shelf-life, including snack items and cupcakes.
Financial results
Revenues for the quarter were down 5.6 percent to $86.8 million from $91.9 million in the same period last year, with approximately $1 million of the decrease due to refranchising. For the year, revenues were down 10.1 percent to $346.5 million from $385.5 million in the prior year, with approximately $8 million of the decrease due to refranchising.
The company was pleased that operating income for the quarter was up 65 percent to $2.4 million from $1.5 million, results that reflect impairment charges and lease termination costs in both periods of $2.0 million and $1.2 million, respectively. Krispy Kreme reported a net income of $0.5 million compared to a net loss of $0.3 million last year. For the year, the net loss narrowed to $0.2 million compared to a net loss of $4.1 million.
During the fourth quarter, the company opened one new company small shop, while domestic franchisees opened two small shops and three factory stores. International franchisees continued to expand, with a net increase of 17 locations in the quarter, including the first Krispy Kreme shop in China, located in Shanghai.
The company ended fiscal 2010 with a total of 582 Krispy Kreme stores systemwide, a net increase of 59 locations since Feb. 1, 2009. As of Jan. 31, 2010, there were 83 company stores and 499 franchise locations. The company currently has commitments for almost 200 stores, both domestically and internationally.
"During fiscal 2010, we made substantial progress in building a stronger foundation for our company and improving our business model," Morgan said in a news release. "The improvements in our operating results and financial position are a testament to the soundness of our business strategy and reflect our ongoing efforts to enhance shareholder value over the long term. With the support of our team members and franchise partners, we intend to build on these accomplishments and look forward to continued momentum in fiscal 2011."
Fiscal 2011 outlook
The company expects consolidated revenues will stabilize in fiscal 2011 after years of decline due to store closings and other factors. Excluding the effects of refranchising company stores, consolidated revenues are expected to rise in fiscal 2011.
The company is providing the following outlook with respect to its expectations for fiscal year 2011:
- Seven to ten Company stores and 35 to 45 domestic and international franchise shop openings are expected
- Total domestic store count is expected to rise for the first time since 2005
- Same store sales at company stores are expected to rise in the low- to mid-single digits, inclusive of pricing
- Higher input costs, including sugar and fuel, are expected to increase operating costs by about $5 million
- Higher spending to support domestic and international franchisee growth and operations is expected to continue
- Consolidated operating income is expected to range from $10 million to $13 million, exclusive of any impairment charges and lease termination costs
- Expect to report a net profit for the year
"We are continuing to make targeted investments to build our operational capabilities to support future growth, despite those investments penalizing our results in the short term. We are working vigorously to continue implementation of our strategic plans and, in doing so, we believe we are setting the stage for additional and more robust growth in revenues and earnings in fiscal 2012 and beyond," Morgan said.
Conference call replay
A replay of the conference call will be available dialing (888) 203-1112 and entering the passcode 7646829. International callers may access the replay by dialing (719) 457-0820 and entering passcode 7646829. The audio replay will be available through April 21, 2010. A transcript and webcast of the conference call also will be available at the company's Web site.
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