Krispy Kreme Doughnuts, Inc. has reported financial results for the second quarter of fiscal 2012, ended July 31, 2011. The Company also reaffirmed its fiscal 2012 outlook and announced that it will present at an investor conference on September 14, 2011.
Second Quarter Fiscal 2012 Highlights Compared to the Year-Ago Period:
- Revenues increased 11.4% to $98.0 million from $87.9 million
- Company same store sales rose 2.5%, the eleventh consecutive quarterly increase
- Operating income rose 18.8% to $4.9 million from $4.2 million
- Net income was $8.8 million ($0.12 per share diluted) compared to $2.2 million ($0.03 per share diluted) in the second quarter last year
- Net income for the second quarter of fiscal 2012 includes a gain on the sale of the Company’s equity interest in its Mexican franchisee of $4.7 million after tax ($0.06 per share diluted)
- Cash provided by operating activities was $7.6 million compared to $3.7 million in the second quarter last year
The Company ended the second quarter of fiscal 2012 with a total of 669 Krispy Kreme stores systemwide, a net increase of 17 shops during the quarter. As of July 31, 2011, there were 88 Company stores and 581 franchise locations.
James H. Morgan, President and Chief Executive Officer, commented: “Our second quarter performance was the best of any second quarter since fiscal 2005 and reflects the progress we’ve made in executing our strategic plans. We generated double-digit revenue growth in each of our business segments, doubled earnings per share excluding a nonrecurring gain of $0.06, and expanded the Krispy Kreme system with a net 17 new stores. Moreover, our results were generated in the face of higher agricultural commodity prices, extreme temperatures, and much higher gas prices compared to the year ago period. Based upon our year-to-date financial performance, we are very pleased to be reiterating our annual outlook for fiscal 2012 consolidated operating income, exclusive of impairment charges and lease termination costs, of between $22 million and $24 million. We continue to believe the high end of this range is achievable and look forward to building on our recent momentum as we move toward calendar 2012.”
Second Quarter Fiscal 2012 Results
Consolidated Results
For the second quarter ended July 31, 2011, revenues increased 11.4% to $98.0 million from $87.9 million. Year-over-year revenue increases were generated in all four business segments.
Direct operating expenses increased to $85.7 million from $77.1 million in the same period last year, but as a percentage of total revenues, were down slightly to 87.5% from 87.7%. General and administrative expenses decreased to $4.9 million from $5.0 million in the year-ago period and, as a percentage of total revenues, decreased to 5.0% from 5.7%. Impairment charges and lease termination costs were $300,000 compared to a credit of $220,000 in the same period last year.
Operating income increased to $4.9 million from $4.2 million.
Interest expense decreased to $410,000 from $1.6 million, principally reflecting lower interest rates as a result of the January 2011 refinancing of the Company’s credit facilities as well as the reduced level of indebtedness.
As previously announced, on May 5, 2011, the Company sold its 30% equity interest in KK Mexico. The Company received cash proceeds of approximately $7.7 million in exchange for its equity interest and, after deducting costs of the transaction, realized a gain of approximately $6.2 million on the sale. After provision for payment of Mexican income taxes on the sale of $1.5 million, the Company reported an after tax gain on the disposition of $4.7 million ($0.06 per share) in the second quarter.
Net income was $8.8 million ($0.12 per share diluted) compared to $2.2 million ($0.03 per share diluted), in the second quarter last year.
Segment Results
Company Stores revenues increased 10.0% to $66.0 million from $60.0 million. Same store sales at Company stores rose 2.5%, the eleventh consecutive quarterly increase. Price increases instituted during the first quarter to help offset higher input costs drove the increase, but were partially offset by a decrease in customer traffic. In addition, exclusive of the effects of pricing, our average guest check declined slightly. The Company believes that expected cannibalization by new stores in expansion markets adversely affected same store sales in the second quarter. The Company Stores segment posted an operating loss of $1.0 million, compared to an operating loss of $1.7 million in the second quarter last year.
Domestic Franchise revenues increased 13.3% to $2.3 million from $2.1 million, reflecting a 10.3% rise in sales by domestic franchisees. Same store sales rose 6.3% at domestic franchise stores. The increase in revenues was offset by a charge of $820,000 for estimated payments under a lease guarantee related to a franchisee whose franchise agreements were terminated during the quarter. This resulted in Domestic Franchisee segment operating income of $220,000, compared to $1.0 million in the second quarter last year.
International Franchise revenues increased 33.5% to $5.4 million from $4.0 million. The increase in revenue was primarily driven by higher royalty revenues reflecting a 13.7% increase in constant dollar sales by international franchise stores. Adjusted to eliminate the effects of changes in foreign exchange rates, same store sales at international franchise stores fell 11.7%, reflecting, among other things, honeymoon effects from the over 300 stores opened internationally in the past three years, as well as cannibalization as markets develop. In addition, the Company estimates that the aftereffects of the March 2011 tsunami in Japan adversely affected international constant dollar same store sales by between four and five percentage points in the second quarter. The International Franchise segment generated operating income of $3.4 million compared to $2.5 million in the second quarter last year.
KK Supply Chain revenues (including sales to Company stores) increased 12.1% to $50.3 million from $44.9 million in the same period last year, driven by selling price increases. External KK Supply Chain revenues rose 10.9% to $24.3 million from $21.9 million in the year-ago period. KK Supply Chain generated operating income of $7.7 million in the second quarter of fiscal 2012 compared to $7.3 million in the second 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 second quarter of fiscal 2012 compared to the second quarter last year.
Krispy Kreme is a leading branded specialty retailer and wholesaler of premium quality sweet treats and complementary products, including its signature Original Glazed doughnut. Headquartered in Winston-Salem, NC, the Company has offered the highest quality doughnuts and great tasting coffee since it was founded in 1937. Today, Krispy Kreme shops can be found in over 660 locations in 21 countries around the world.