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KKD > SEC Filings for KKD > Form 10-Q on 2-Dec-2011All Recent SEC Filings

Show all filings for KRISPY KREME DOUGHNUTS INC

Form 10-Q for KRISPY KREME DOUGHNUTS INC


2-Dec-2011

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of the Company's financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein.

Income tax matters

The Company recognizes deferred tax assets and liabilities based upon management's expectation of the future tax consequences of temporary differences between the income tax and financial reporting bases of assets and liabilities. Deferred tax liabilities generally represent tax expense recognized for which payment has been deferred, or expenses which have been deducted in the Company's tax return but which have not yet been recognized as an expense in the consolidated financial statements. Deferred tax assets generally represent tax deductions or credits that will be reflected in future tax returns for which the Company has already recorded a tax benefit in its consolidated financial statements. The Company establishes valuation allowances for deferred tax assets in accordance with GAAP, which provides that such valuation allowances shall be established unless realization of the income tax benefits is more likely than not.

Realization of deferred income tax assets is dependent upon the Company's generation of taxable income in future years. As of January 30, 2011, the Company had a valuation allowance against deferred tax assets of $159 million, representing the total amount of such assets in excess of the Company's deferred tax liabilities. The Company has maintained an allowance equal to 100% of such excess since fiscal 2005, principally because the substantial losses incurred by the Company during this period indicated that it was more likely than not that the Company's deferred tax assets would not be realized.

The Company generated a cumulative profit over its three most recent fiscal years, although substantially all of that profit was earned in fiscal 2011, the most recently completed year. The Company is encouraged by the favorable trend in the Company's financial results, including the $8.9 million pretax profit earned in fiscal 2011, and the continued improvement in earnings in fiscal 2012.

The assessment of the amount of the Company's deferred tax assets that is more likely than not to be realized, and therefore the amount of the valuation allowance that is appropriate, is a matter that requires significant management judgment. This judgment is largely dependent upon management's estimate of the amount of taxable income the Company will generate in future periods.

The Company's financial results for the first three quarters of fiscal 2012 have continued to build upon the positive results of fiscal 2011. Notwithstanding this improvement, as previously disclosed, in light of the significant losses incurred in fiscal 2005 through fiscal 2009, the significant changes affecting the Company since fiscal 2005, and other factors affecting the business currently, management believes that it is appropriate that, among other things, the Company achieve at least two full fiscal years of significant pretax earnings before concluding that future profitability is sustainable. The fourth quarter of fiscal 2012 therefore remains an important data element for the Company in assessing the recoverability of its deferred tax assets. Accordingly, when the Company conducted an assessment of the recoverability of its deferred tax assets as of October 30, 2011, management remained unable to conclude that recoverability of those assets was more likely than not, notwithstanding the Company's improved financial results in fiscal 2012.

If the Company's favorable operating results are sustained in the fourth quarter, and sufficient other evidence considered necessary to support recoverability of the deferred tax assets is present, then management could conclude that a reversal of some or all of the valuation allowance is appropriate. While the Company cannot presently predict whether a reversal will occur, or whether any reversal would equal the entire $159 million valuation allowance recorded as of January 30, 2011 or some lesser amount, management believes that any reversal is likely to be material to the Company's results of operations. Any reversal will have no effect on the Company's cash flows.


While any reversal of a portion of the valuation allowance would have a positive effect on the Company's results of operations in the period in which any reversal is recorded, any reversal will most likely have the effect of reducing the Company's earnings in subsequent periods as a result of an increase in the provision for income taxes in such future periods. This negative effect on earnings in subsequent periods occurs because the reversal of the valuation allowance will reflect the recognition of previously generated, but not recognized, income tax benefits in the period in which the reversal is recorded. Absent the reversal of the valuation allowance, any such tax benefits would be recognized in the future periods in which their realization were to occur upon the generation of taxable income. Accordingly, subsequent to any reversal of the valuation allowance, the Company's effective income tax rate, which currently bears little relationship to pretax income, is likely to more closely reflect the blended federal and state income tax rates in jurisdictions in which the Company operates. Notwithstanding any increase in the Company's effective income tax rate as a result of a potential future reversal of some or all of the valuation allowance, the Company's cash payments for income taxes will remain unchanged, and are likely to be insignificant for the foreseeable future because of the Company's substantial net operating loss carryovers.

The determination of income tax expense and the related balance sheet accounts, including valuation allowances for deferred income tax assets, requires management to make estimates and assumptions regarding future events, including future operating results and the outcome of tax-related contingencies. If future events are different from those anticipated, the amount of income tax assets and liabilities, including valuation allowances for deferred income tax assets, could be materially affected.

Results of Operations

   The following table sets forth operating metrics for the three and nine
months ended October 30, 2011 and October 31, 2010.

                                       24

--------------------------------------------------------------------------------

                                                                     Three Months Ended                   Nine Months Ended
                                                               October 30,       October 31,        October 30,        October 31,
                                                                   2011              2010              2011               2010
Change in Same Store Sales (on-premises sales only):
    Company stores                                                   4.0   %           5.0   %            4.2   %            4.6   %
    Domestic Franchise stores                                        7.9   %           5.7   %            6.2   %            4.4   %
    International Franchise stores                                  (8.5 ) %          (8.6 ) %           (5.4 ) %           (9.2 ) %
    International Franchise stores, in constant dollars(1)         (12.2 ) %         (12.3 ) %          (11.3 ) %          (14.8 ) %

Change in Same Store Customer Count - Company stores (retail
sales only)                                                         (1.3 ) %           2.5   %           (0.4 ) %            3.1   %

Off-Premises Metrics (Company stores only):
    Average weekly number of doors served:
        Grocers/mass merchants                                     5,811             5,731              5,851              5,642
        Convenience stores                                         4,675             5,152              4,889              5,114

    Average weekly sales per door:
        Grocers/mass merchants                                $      291        $      251        $       293        $       259
        Convenience stores                                           236               207                226                207

Systemwide Sales (in thousands):(2)
    Company stores                                            $   67,126        $   61,146        $   201,629        $   182,936
    Domestic Franchise stores                                     64,976            58,185            196,502            179,460
    International Franchise stores                                91,928            84,039            279,188            235,850
    International Franchise stores, in constant dollars(3)        91,928            86,971            279,188            249,933

Average Weekly Sales Per Store (in thousands):(4) (5)
    Company stores:
        Factory stores:
           Commissaries - off-premises                        $    203.0        $    176.6        $     201.6        $     173.1
           Dual-channel stores:
               On-premises                                          32.0              30.2               32.0               29.9
               Off-premises                                         45.1              39.3               46.1               39.7
                  Total                                             77.1              69.5               78.1               69.6
           On-premises only stores                                  32.0              31.4               32.0               31.7
           All factory stores                                       69.3              64.6               69.7               64.4
        Satellite stores                                            19.4              17.9               19.7               18.1
        All stores                                                  58.9              55.9               59.9               56.5

    Domestic Franchise stores:
        Factory stores                                        $     42.8        $     39.5        $      43.8        $      40.4
        Satellite stores                                            16.8              11.6               16.8               12.4

    International Franchise stores:
        Factory stores                                        $     41.3        $     41.3        $      44.0        $      40.9
        Satellite stores                                            10.5               9.0               10.5                8.9


(1) Represents the change in International Franchise same store sales computed by reconverting franchise store sales in each foreign currency to U.S. dollars at a constant rate of exchange for each period.
(2) Excludes sales among Company and franchise stores.
(3) Represents International Franchise store sales computed by reconverting International Franchise store sales for the three and nine months ended October 31, 2010 to U.S. dollars based upon the weighted average of the exchange rates prevailing in the three and nine months ended October 30, 2011.
(4) Includes sales between Company and franchise stores.
(5) Metrics for the three and nine months ended October 30, 2011 include only stores open at October 30, 2011 and metrics for the three and nine months ended October 31, 2010 include only stores open at October 31, 2010.

The change in "same store sales" is computed by dividing the aggregate on-premises sales (including fundraising sales) during the current year period for all stores which had been open for more than 56 consecutive weeks during the current year (but only to the extent such sales occurred in the 57th or later week of each store's operation) by the aggregate on-premises sales of such stores for the comparable weeks in the preceding year. Once a store has been open for at least 57 consecutive weeks, its sales are included in the computation of same store sales for all subsequent periods. In the event a store is closed temporarily (for example, for remodeling) and has no sales during one or more weeks, such store's sales for the comparable weeks during the earlier or subsequent period are excluded from the same store sales computation. The change in same store customer count is similarly computed, but is based upon the number of retail transactions reported in the Company's point-of-sale system.

For off-premises sales, "average weekly number of doors" represents the average number of customer locations to which product deliveries were made during a week, and "average weekly sales per door" represents the average weekly sales to each such location.

Systemwide sales, a non-GAAP financial measure, include sales by both Company and franchise stores. The Company believes systemwide sales data are useful in assessing the overall performance of the Krispy Kreme brand and, ultimately, the performance of the Company. The Company's consolidated financial statements appearing elsewhere herein include sales by Company stores, sales to franchisees by the KK Supply Chain business segment, and royalties and fees received from franchise stores based on their sales, but exclude sales by franchise stores to their customers.

The following table sets forth data about the number of systemwide stores as of October 30, 2011 and October 31, 2010.

                                                    October 30,     October 31,
                                                       2011            2010
Number of Stores Open At Period End:
    Company stores:
        Factory:
           Commissaries                                       6               6
           Dual-channel stores                               35              37
           On-premises only stores                           29              26
        Satellite stores                                     19              16
               Total Company stores                          89              85

    Domestic Franchise stores:
        Factory stores                                      103             101
        Satellite stores                                     38              42
           Total Domestic Franchise stores                  141             143

    International Franchise stores:
        Factory stores                                      112             106
        Satellite stores                                    336             315
           Total International Franchise stores             448             421

               Total systemwide stores                      678             649


The following table sets forth data about the number of store operating weeks for the three and nine months ended October 30, 2011 and October 31, 2010.

                                               Three Months Ended               Nine Months Ended
                                           October 30,     October 31,     October 30,     October 31,
                                              2011            2010            2011            2010
Store Operating Weeks:
    Company stores:
        Factory stores:
           Commissaries                             78              78             234             238
           Dual-channel stores                     455             481           1,365           1,443
           On-premises only stores                 377             338           1,131           1,014
        Satellite stores                           237             205             662             569

    Domestic Franchise stores:(1)
        Factory stores                           1,331           1,326           3,921           3,978
        Satellite stores                           491             517           1,370           1,452

    International Franchise stores:(1)
        Factory stores                           1,163           1,154           3,413           3,241
        Satellite stores                         4,159           4,009          11,978          11,476

(1) Metrics for the three and nine months ended October 30, 2011 include only stores open at October 30, 2011 and metrics for the three and nine months ended October 31, 2010 include only stores open at October 31, 2010.

The following table sets forth the types and locations of Company stores as of October 30, 2011.

                                      Number of Company Stores
                         Factory
       State              Stores      Hot Shops     Fresh Shops      Total
Alabama                         3             -               -            3
District of Columbia            -             1               -            1
Florida                         4             -               -            4
Georgia                         6             4               -           10
Indiana                         3             1               -            4
Kansas                          3             -               -            3
Kentucky                        3             1               -            4
Louisiana                       1             -               -            1
Maryland                        2             -               -            2
Michigan                        3             -               -            3
Mississippi                     1             -               -            1
Missouri                        4             -               -            4
New York                        -             -               1            1
North Carolina                 11             4               -           15
Ohio                            6             -               -            6
South Carolina                  2             3               -            5
Tennessee                       8             3               -           11
Texas                           3             -               -            3
Virginia                        6             1               -            7
West Virginia                   1             -               -            1
Total                          70            18               1           89


Changes in the number of Company stores during the three and nine months ended October 30, 2011 and October 31, 2010 are summarized in the table below.

                                                       Number of Company Stores
                                        Factory
                                         Stores      Hot Shops      Fresh Shops        Total
Three months ended October 30, 2011
July 31, 2011                                 70           17                1             88
Opened                                         -            1                -              1
Closed                                         -            -                -              -
Change in store type                           -            -                -              -
October 30, 2011                              70           18                1             89

Nine months ended October 30, 2011
January 30, 2011                              69           15                1             85
Opened                                         -            4                -              4
Closed                                         -            -                -              -
Change in store type                           1           (1 )              -              -
October 30, 2011                              70           18                1             89

Three months ended October 31, 2010
August 1, 2010                                69           13                2             84
Opened                                         -            1                -              1
Change in store type                           -            1               (1 )            -
October 31, 2010                              69           15                1             85

Nine months ended October 31, 2010
January 31, 2010                              69           12                2             83
Opened                                         -            3                -              3
Closed                                         -           (1 )              -             (1 )
Change in store type                           -            1               (1 )            -
October 31, 2010                              69           15                1             85


The following table sets forth the types and locations of domestic franchise stores as of October 30, 2011.

                           Number of Domestic Franchise Stores
                   Factory
    State           Stores      Hot Shops     Fresh Shops      Total
Alabama                   6             3               -            9
Arizona                   1             -               -            1
Arkansas                  2             -               -            2
California               13             -               4           17
Colorado                  2             -               -            2
Connecticut               1             -               3            4
Florida                  11             6               1           18
Georgia                   7             4               -           11
Hawaii                    1             -               -            1
Idaho                     1             -               -            1
Illinois                  4             -               -            4
Iowa                      1             -               -            1
Louisiana                 3             -               -            3
Mississippi               2             1               -            3
Missouri                  2             1               -            3
Nebraska                  1             -               1            2
Nevada                    3             1               2            6
New Jersey                -             1               -            1
New Mexico                1             -               1            2
North Carolina            7             1               -            8
Oklahoma                  3             -               1            4
Oregon                    2             -               -            2
Pennsylvania              4             2               1            7
South Carolina            6             2               1            9
Tennessee                 1             -               -            1
Texas                     7             1               -            8
Utah                      2             -               -            2
Washington                8             -               -            8
Wisconsin                 1             -               -            1
Total                   103            23              15          141


Changes in the number of domestic franchise stores during the three and nine months ended October 30, 2011 and October 31, 2010 are summarized in the table below.

                                              Number of Domestic Franchise Stores
                                     Factory
                                     Stores       Hot Shops      Fresh Shops        Total
Three months ended October 30, 2011
July 31, 2011                           103             22               23           148
Opened                                    1              1                -             2
Closed                                   (1 )            -               (8 )          (9 )
October 30, 2011                        103             23               15           141

Nine months ended October 30, 2011
January 30, 2011                        102             17               25           144
Opened                                    3              7                1            11
Closed                                   (2 )           (1 )            (11 )         (14 )
October 30, 2011                        103             23               15           141

Three months ended October 31, 2010
August 1, 2010                          102             15               23           140
Opened                                    -              -                3             3
Closed                                    -              -                -             -
Change in store type                     (1 )            1                -             -
October 31, 2010                        101             16               26           143

Nine months ended October 31, 2010
January 31, 2010                        104             14               23           141
Opened                                    -              1                4             5
Closed                                   (2 )            -               (1 )          (3 )
Change in store type                     (1 )            1                -             -
October 31, 2010                        101             16               26           143


The types and locations of international franchise stores as of October 30, 2011 are summarized in the table below.

                                            Number of International Franchise Stores
                            Fiscal
                          Year First      Factory
      Country            Store Opened     Stores      Hot Shops     Fresh Shops     Kiosks      Total
Australia                    2004               6             1              11          9           27
Bahrain                      2009               1             -               2          4            7
Canada                       2002               4             -               1          -            5
China                        2010               1             -               -          -            1
Dominican Republic           2011               1             -               -          -            1
Indonesia                    2007               3             -               3          6           12
Japan                        2007              15             -              15          -           30
Kuwait                       2007               3             -              21          2           26
Lebanon                      2009               2             -               6          2           10
Malaysia                     2010               2             1               1          1            5
Mexico                       2004               5             1              28         33           67
Philippines                  2007               5             4              15          2           26
Puerto Rico                  2009               5             -               -          -            5
Qatar                        2008               2             -               3          1            6
Saudi Arabia                 2008               8             -              64         13           85
South Korea                  2005              32             1              18          -           51
Thailand                     2011               2             1               -          -            3
Turkey                       2010               1             -              10          2           13
. . .
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