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KKD > SEC Filings for KKD > Form 10-K on 19-Apr-2013All Recent SEC Filings

Show all filings for KRISPY KREME DOUGHNUTS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for KRISPY KREME DOUGHNUTS INC


19-Apr-2013

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following tables set forth operating metrics with respect to the Krispy Kreme stores operated by the Company (all of which are located in the United States) and the stores operated by the Company's domestic and international franchisees.

The Company's fiscal year ends on the Sunday closest to January 31, which periodically results in a 53-week year. Fiscal 2013 included 53 weeks. Operating metrics in the table below for fiscal 2013 are presented for the 52 weeks ended January 27, 2013 in order to enhance comparability of the fiscal 2013 metrics with those for fiscal 2012 and 2011, each of which contained 52 weeks.

                                                                                              52 Weeks Ended
                                                                             January 27,       January 29,       January 30,
                                                                                 2013              2012              2011
Change in Same Store Sales (on-premises sales only):
    Company stores                                                                   5.5 %             5.2 %             4.0 %
    Domestic Franchise stores                                                        6.8               6.6               4.5
    International Franchise stores                                                  (9.0 )            (6.4 )            (8.8 )
    International Franchise stores, in constant dollars(1)                          (8.1 )           (10.8 )           (13.9 )

Change in Same Store Customer Count - Company stores (retail sales only)             7.1 %             0.6 %             1.8 %

Average Guest Check - Company stores (retail sales only)                    $       7.29      $       7.36      $       7.06

Wholesale Metrics (Company stores only):
    Average weekly number of doors served:
        Grocers/mass merchants                                                     5,582             5,814             5,664
        Convenience stores                                                         4,517             4,822             5,122

    Average weekly sales per door:
        Grocers/mass merchants                                              $        319      $        293      $        260
        Convenience stores                                                           248               228               206

Systemwide Sales (in thousands):(2)
    Company stores                                                          $    288,079      $    269,676      $    244,324
    Domestic Franchise stores                                                    281,334           261,979           238,890
    International Franchise stores                                               423,418           383,508           325,192
    International Franchise stores, in constant dollars(3)                       423,418           380,028           336,469

Average Weekly Sales Per Store (in thousands):(4) (5)
    Company stores:
        Factory stores:
           Commissaries - wholesale                                         $      181.6      $      199.3      $      175.3
           Dual-channel stores:
               On-premises                                                          34.0              32.0              30.2
               Wholesale                                                            45.7              45.6              42.0
                  Total                                                             79.7              77.6              72.2
           On-premises only stores                                                  35.0              32.5              30.7
           All factory stores                                                       71.0              69.4              64.6
        Satellite stores                                                            20.1              19.9              18.6
        All stores                                                                  59.8              59.5              56.9

    Domestic Franchise stores:
        Factory stores                                                      $       48.2      $       43.9      $       40.4
        Satellite stores                                                            16.7              16.5              12.2

    International Franchise stores:
        Factory stores                                                      $       41.0      $       43.4      $       42.3
        Satellite stores                                                            11.3              10.9               9.1

(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. Systemwide sales is a non-GAAP measure.
(3) Represents International Franchise store sales computed by reconverting International Franchise store sales for the year ended January 29, 2012 and January 30, 2011 to U.S. dollars based upon the weighted average of the exchange rates prevailing in the year ended February 3, 2013.
(4) Includes sales between Company and franchise stores.
(5) Metrics reflect only stores open at the respective period end.


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 wholesale 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 Krispy Kreme stores. The Company believes systemwide sales data are useful in assessing consumer demand for the Company's products, the overall success of the Krispy Kreme brand and, ultimately, the performance of the Company. All of the Company's royalty revenues are computed as percentages of sales made by the Company's domestic and international franchisees, and substantially all of KK Supply Chain's external sales of doughnut mixes and other ingredients ultimately are determined by demand for the Company's products at franchise stores. Accordingly, sales by the Company's franchisees have a direct effect on the Company's royalty and KK Supply Chain revenues, and therefore on the Company's profitability. 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 February 3, 2013, January 29, 2012 and January 30, 2011.

                                                February 3,     January 29,     January 30,
                                                   2013            2012            2011
Number of Stores Open At Year End:
    Company stores:
        Factory:
           Commissaries                                   7               7               6
           Dual-channel stores                           36              35              35
           On-premises only stores                       33              30              28
        Satellite stores                                 21              20              16
               Total Company stores                      97              92              85

    Domestic Franchise stores:
        Factory stores                                   99             102             102
        Satellite stores                                 43              40              42
           Total Domestic Franchise stores              142             142             144

    International Franchise stores:
        Factory stores                                  120             118             106
        Satellite stores                                389             342             311
           Total international franchise stores         509             460             417

               Total systemwide stores                  748             694             646


The following table sets forth data about the number of store operating weeks for the 52-weeks ended January 27, 2013, January 29, 2012 and January 30, 2011.

                                                     52 Weeks Ended
                                       January 27,     January 29,     January 30,
                                          2013            2012            2011
Store Operating Weeks:
    Company stores:
        Factory stores:
           Commissaries                        364             315             316
           Dual-channel stores               1,842           1,820           1,820
           On-premises only stores           1,623           1,519           1,456
        Satellite stores                     1,062             913             786

    Domestic Franchise stores:(1)
        Factory stores                       4,910           5,168           5,275
        Satellite stores                     2,078           1,884           1,985

    International Franchise stores:(1)
        Factory stores                       5,224           4,717           4,305
        Satellite stores                    17,724          15,870          14,581

(1) Metrics reflect only stores open at the respective period end.


FISCAL 2013 COMPARED TO FISCAL 2012

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

Matters Affecting Comparability

   The Company's fiscal year ends on the Sunday closest to January 31, which
periodically results in a 53-week year. The year ended February 3, 2013 included
53 weeks, compared to 52 weeks for the year ended January 29, 2012. Accordingly,
financial results for fiscal 2013 are not directly comparable to those of fiscal
2012.

   Additionally, the Company's provision for income taxes, net income and
earnings per share for fiscal 2013 are not comparable to the corresponding
amounts for fiscal 2012 as a result of the reversal of valuation allowances on
deferred tax assets in the fourth quarter of fiscal 2012 and the resulting
increase in income tax expense in fiscal 2013. The Company has substantial net
operating loss carryforwards and, accordingly, the Company's cash payments for
income taxes, which were not affected by the reversal of the valuation allowance
on deferred tax assets, are expected to remain insignificant for the foreseeable
future. See "Results of Operations - Fiscal 2013 Compared to Fiscal 2012 -
Provision for Income Taxes" below, and Note 3 to the consolidated financial
statements appearing elsewhere herein.

   Finally, in the second quarter of fiscal 2012, the Company recognized a gain
of approximately $6.2 million on the sale of its 30% equity interest in KK
Mexico (approximately $4.7 million after deduction of approximately $1.5 million
of Mexican taxes payable on the transaction), as described in Note 8 to the
consolidated financial statements appearing elsewhere herein. Such gains should
not be expected to occur regularly.

   Management evaluates the Company's results of operations using, among other
measures, adjusted net income and adjusted earnings per share, which include the
provision for income taxes only to the extent such taxes are currently payable
in cash. In addition, management excludes from adjusted net income charges and
credits that are unusual and infrequently occurring. Management believes
adjusted net income and adjusted earnings per share are useful performance
measures because they more closely measure the cash flows generated by the
Company's operations and the trends in those cash flows than do GAAP net income
and earnings per share, and because they exclude the effects of transactions
that are not indicative of the Company's ongoing results of operations.

   Adjusted net income and adjusted earnings per share are non-GAAP measures.

   The following presentation of adjusted net income, and the related
reconciliation of adjusted net income to GAAP net income and presentation of
adjusted earnings per share, are intended to (1) assist the reader in
understanding the effects of the reversal of the valuation allowance and the
non-recurring gain on the sale of the interest in KK Mexico on the Company's
results of operations for fiscal 2012; (2) facilitate comparisons of fiscal 2013
results with the Company's results for fiscal 2012; and (3) illustrate the
material difference between the Company's income tax expense and income taxes
currently payable. These non-GAAP performance measures are consistent with other
measurements made by management in the operation of the business which do not
consider income taxes except to the extent to which those taxes currently are
payable, for example, capital allocation decisions and incentive compensation
measurements that are made on a pretax basis.

                                                                                                            Year Ended
                                                                                                 February 3,          January 29,
                                                                                                    2013                  2012
                                                                                                  (In thousands, except per share
                                                                                                             amounts)
Net income, as reported                                                                        $        20,779      $      166,269
Provision for deferred income taxes                                                                     13,413            (139,403 )
Gain on sale of interest in KK Mexico (net of income taxes of $1,492)                                        -              (4,706 )
Adjusted net income                                                                            $        34,192      $       22,160

Adjusted earnings per common share:
    Basic                                                                                      $          0.51      $         0.32
    Diluted                                                                                    $          0.49      $         0.31

Weighted average shares outstanding:
    Basic                                                                                             67,624                69,145
    Diluted                                                                                           69,896                71,497


Overview

Total revenues rose to $435.8 million in fiscal 2013 compared to $403.2 million in fiscal 2012. Excluding the 53rd week, total revenues rose 5.9% to $426.8 million.

Consolidated operating income increased to $37.7 million in fiscal 2013 (of which approximately $1.3 million relates to the 53rd week) from $25.6 million in fiscal 2012. Consolidated net income was $20.8 million compared to $166.3 million. Consolidated net income for fiscal 2012 included an unusual credit of $139.6 million from the reversal of valuation allowances on deferred tax assets and a $4.7 million after-tax gain on the sale of the Company's 30% equity interest in KK Mexico. See "Matters Affecting Comparability" above.

Revenues by business segment (expressed in dollars and as a percentage of total revenues) are set forth in the table below (percentage amounts may not add to totals due to rounding).

                                                                                        Year Ended
                                                                              February 3,         January 29,
                                                                                 2013                2012
                                                                                  (Dollars in thousands)
Revenues by business segment:
    Company Stores                                                          $     296,494       $     271,657
    Domestic Franchise                                                             10,325               9,463
    International Franchise                                                        24,941              22,621
    KK Supply Chain:
        Total revenues                                                            215,412             206,453
        Less - intersegment sales elimination                                    (111,329 )          (106,977 )
           External KK Supply Chain revenues                                      104,083              99,476
               Total revenues                                               $     435,843       $     403,217

Segment revenues as a percentage of total revenues:
    Company Stores                                                                   68.0 %              67.4 %
    Domestic Franchise                                                                2.4                 2.3
    International Franchise                                                           5.7                 5.6
    KK Supply Chain (external sales)                                                 23.9                24.7
                                                                                    100.0 %             100.0 %

Operating income:
    Company Stores                                                          $       8,534       $         284
    Domestic Franchise                                                              5,590               3,737
    International Franchise                                                        17,387              15,054
    KK Supply Chain                                                                32,450              30,160
        Total segment operating income                                             63,961              49,235
    Unallocated general and administrative expenses (including depreciation
        and amortization expense)                                                 (25,926 )           (22,875 )
    Impairment charges and lease termination costs                                   (306 )              (793 )
        Consolidated operating income                                       $      37,729       $      25,567

A discussion of the revenues and operating results of each of the Company's four business segments follows, together with a discussion of income statement line items not associated with specific segments.


Company Stores

   The components of Company Stores revenues and expenses (expressed in dollars
and as a percentage of total revenues) are set forth in the table below
(percentage amounts may not add to totals due to rounding).

                                                                         Percentage of Total Revenues
                                              Year Ended                          Year Ended
                                     February 3,      January 29,        February 3,       January 29,
                                         2013             2012              2013               2012
                                            (In thousands)
Revenues:
    On-premises sales:
        Retail sales                 $    127,989     $    111,701             43.2 %            41.1 %
        Fundraising sales                  14,929           14,302              5.0               5.3
           Total on-premises sales        142,918          126,003             48.2              46.4
    Wholesale sales:
        Grocers/mass merchants             93,384           87,654             31.5              32.3
        Convenience stores                 56,972           54,961             19.2              20.2
        Other wholesale                     3,220            3,039              1.1               1.1
           Total wholesale sales          153,576          145,654             51.8              53.6
               Total revenues             296,494          271,657            100.0             100.0

Operating expenses:
    Cost of sales:
        Food, beverage and packaging      111,205          105,216             37.5              38.7
        Shop labor                         53,210           50,202             17.9              18.5
        Delivery labor                     24,222           23,044              8.2               8.5
        Employee benefits                  20,889           18,992              7.0               7.0
           Total cost of sales            209,526          197,454             70.7              72.7
    Vehicle costs(1)                       17,336           17,228              5.8               6.3
    Occupancy(2)                            9,901            9,240              3.3               3.4
    Utilities expense                       5,993            5,779              2.0               2.1
    Depreciation expense                    8,142            6,593              2.7               2.4
    Other operating expenses               20,429           18,581              6.9               6.8
        Total store level costs           271,327          254,875             91.5              93.8
    Store operating income                 25,167           16,782              8.5               6.2
    Other segment operating costs(3)       12,333           11,998              4.2               4.4
    Allocated corporate overhead            4,300            4,500              1.5               1.7
Segment operating income             $      8,534     $        284              2.9 %             0.1 %

(1) Includes fuel, maintenance and repairs, rent, taxes and other costs of operating the delivery fleet, exclusive of depreciation.
(2) Includes rent, property taxes, common area maintenance charges, insurance, building maintenance and other occupancy costs, exclusive of utilities and depreciation.
(3) Includes marketing costs not charged to stores, segment management costs, wholesale selling expenses and support functions.

A reconciliation of Company Stores segment sales from fiscal 2012 to fiscal 2013 follows:

                                                            On-Premises        Wholesale           Total
                                                                             (In thousands)
Sales for the year ended January 29, 2012                  $    126,003       $    145,654     $    271,657
Fiscal 2012 sales at closed stores                                 (723 )                -             (723 )
Fiscal 2013 sales at closed stores                                  741                  -              741
Increase in sales at established stores (open stores only)        9,565              7,471           17,036
Increase in sales at stores opened in fiscal 2012                 3,077                  -            3,077
Sales at stores opened in fiscal 2013                             3,143                  -            3,143
Sales at stores acquired in fiscal 2013                           1,112                451            1,563
Sales for the year ended February 3, 2013                  $    142,918       $    153,576     $    296,494


Sales at Company Stores increased to $296.5 million in fiscal 2013 from $271.7 million in fiscal 2012. Excluding the 53rd week, sales increased 6.9% to $290.3 million. Selling price increases in the on-premises and wholesale distribution channels accounted for approximately 1.2 percentage points of the increase in sales, exclusive of the effects of higher pricing on unit volumes; such effects are difficult to measure reliably. As with all consumer products, however, higher prices may negatively affect sales. The Company believes this phenomenon is more pronounced in the wholesale channel where competing products are merchandised alongside those of the Company.

The following table presents sales metrics for Company stores:

                                                                        52 Weeks Ended
                                                                 January 27,       January 29,
                                                                    2013              2012
On-premises:
        Change in same store sales                                     5.5 %             5.2 %
        Change in same store customer count (retail sales only)        7.1 %             0.6 %
        Average guest check (retail sales only)                 $     7.29        $     7.36
Wholesale:
    Grocers/mass merchants:
        Change in average weekly number of doors                      (4.0 )%            2.6 %
        Change in average weekly sales per door                        8.9 %            12.7 %
    Convenience stores:
        Change in average weekly number of doors                      (6.3 )%           (5.9 )%
        Change in average weekly sales per door                        8.8 %            10.7 %

On-premises sales

The components of the change in same store sales at Company stores are as follows:

                                                                     52 Weeks Ended
                                                              January 27,      January 29,
                                                                  2013             2012
Change in same store sales attributable to:
    Retail pricing                                                   0.7 %            7.4 %
    Guest check average (exclusive of the effects of pricing)       (1.4 )           (2.9 )
    Customer count                                                   6.2              0.5
    Other                                                            0.0              0.2
    Total                                                            5.5 %            5.2 %

On-premises sales increased to $142.9 million in fiscal 2013 compared to $126.0 million in fiscal 2012. Excluding the 53rd week, on-premises sales increased 10.9% to $139.8 million. The Company is developing and implementing . . .

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