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KKD > SEC Filings for KKD > Form 10-K on 3-Apr-2014All Recent SEC Filings

Show all filings for KRISPY KREME DOUGHNUTS INC

Form 10-K for KRISPY KREME DOUGHNUTS INC


3-Apr-2014

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 2014 and 2012, each of which contained 52 weeks.


                                                                                          52 Weeks Ended
                                                                            February 2,     January 27,     January 29,
                                                                               2014            2013            2012
Change in Same Store Sales (on-premises sales only):
    Company stores                                                                 6.7 %           5.5 %           5.2 %
    Domestic Franchise stores                                                      9.9             6.8             6.6
    International Franchise stores                                               (10.4 )          (9.0 )          (6.4 )
    International Franchise stores, in constant dollars(1)                        (5.6 )          (8.1 )         (10.8 )

Change in Same Store Customer Count - Company stores (retail sales only)           4.5 %           7.1 %           0.6 %

Average Guest Check - Company stores (retail sales only)                   $      7.47     $      7.29     $      7.36

Wholesale Metrics (Company stores only):
    Average weekly number of doors served:
        Grocers/mass merchants                                                   5,236           5,582           5,814
        Convenience stores                                                       4,503           4,517           4,822

    Average weekly sales per door:
        Grocers/mass merchants                                             $       350     $       319     $       293
        Convenience stores                                                         256             248             228

Systemwide Sales (in thousands):(2)
    Company stores                                                         $   303,973     $   288,079     $   269,676
    Domestic Franchise stores                                                  317,864         281,334         261,979
    International Franchise stores                                             438,027         423,418         383,508
    International Franchise stores, in constant dollars(3)                     438,027         403,918         362,526

Average Weekly Sales Per Store (in thousands):(4) (5)
    Company stores:
        Factory stores:
           Commissaries - wholesale                                        $     202.9     $     181.6     $     199.3
           Dual-channel stores:
               On-premises                                                        37.4            34.0            32.0
               Wholesale                                                          49.0            45.7            45.6
                  Total                                                           86.4            79.7            77.6
           On-premises only stores                                                37.3            35.0            32.5
           All factory stores                                                     74.4            71.0            69.4
        Satellite stores                                                          21.4            20.1            19.9
        All stores                                                                63.4            59.8            59.5

    Domestic Franchise stores:
        Factory stores                                                     $      51.4     $      48.2     $      43.9
        Satellite stores                                                          18.0            16.7            16.5

    International Franchise stores:
        Factory stores                                                     $      40.1     $      41.0     $      43.4
        Satellite stores                                                          10.2            11.3            10.9

(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. Systemwide sales is a non-GAAP measure.
(3) Represents International Franchise store sales computed by reconverting International Franchise store sales for the 52-weeks ended January 27, 2013 and January 29, 2012 to U.S. dollars based upon the weighted average of the exchange rates prevailing in the year ended February 2, 2014.
(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 2, 2014, February 3, 2013 and January 29, 2012.

                                                    February 2,     February 3,     January 29,
                                                       2014            2013            2012
Number of Stores Open At Year End:
    Company stores:
        Factory:
           Commissaries                                       7               7               7
           Dual-channel stores                               31              36              35
           On-premises only stores                           38              33              30
        Satellite stores                                     19              21              20
               Total Company stores                          95              97              92

    Domestic Franchise stores:
        Factory stores                                      107              99             102
        Satellite stores                                     52              43              40
           Total Domestic Franchise stores                  159             142             142

    International Franchise stores:
        Factory stores                                      125             120             118
        Satellite stores                                    449             389             342
           Total international franchise stores             574             509             460

               Total systemwide stores                      828             748             694


The following table sets forth data about the number of store operating weeks for the 52 weeks ended February 2, 2014, January 27, 2013 and January 29, 2012.

                                                     52 Weeks Ended
                                       February 2,     January 27,     January 29,
                                          2014            2013            2012
Store Operating Weeks:
    Company stores:
        Factory stores:
           Commissaries                        364             364             315
           Dual-channel stores               1,684           1,842           1,820
           On-premises only stores           1,805           1,623           1,519
        Satellite stores                     1,011           1,062             913

    Domestic Franchise stores:(1)
        Factory stores                       5,365           4,910           5,168
        Satellite stores                     2,406           2,078           1,884

    International Franchise stores:(1)
        Factory stores                       5,296           5,224           4,717
        Satellite stores                    21,180          17,724          15,870

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


FISCAL 2014 COMPARED TO FISCAL 2013

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 2, 2014 included 52 weeks, compared to 53 weeks for the year ended February 3, 2013. Accordingly, financial results for fiscal 2014 are not directly comparable to those for fiscal 2013.

In the second quarter of fiscal 2014, the Company recorded a charge of $967,000 related to the retirement of its secured credit facilities, consisting principally of the write off of deferred financing costs related to the Company's term loan, which was retired in full, and the termination of an interest rate hedge related to the term loan. Charges of this nature are not expected to recur on a regular basis.

Non-GAAP Measures

The Company has substantial net operating loss carryforwards and, accordingly, the Company's cash payments for income taxes are not significant and are expected to remain insignificant for the foreseeable future. See "Provision for Income Taxes" below, and Note 3 to the consolidated financial statements appearing elsewhere herein.

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, the related reconciliation of adjusted net income to GAAP net income, and the presentation of adjusted earnings per share are intended to facilitate comparisons of fiscal 2014 results with the Company's results for fiscal 2013 in light of the effects of the matters discussed under "Matters Affecting Comparability" above, and to 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 2,           February 3,
                                                                                   2014                  2013
                                                                                 (In thousands, except per share
                                                                                             amounts)
Net income, as reported                                                       $       34,256      $         20,779
Loss on retirement of debt                                                               967                     -
Provision for deferred income taxes                                                    8,014                13,413
Adjusted net income                                                                   43,237                34,192
Earnings for the 53rd week                                                                 -                (1,273 )
Adjusted net income - 52 week basis                                           $       43,237      $         32,919

Adjusted earnings per common share:
    Basic                                                                     $         0.64      $           0.51
    Diluted                                                                   $         0.61      $           0.49

Adjusted earnings per common share - 52 week basis:
    Basic                                                                     $         0.64      $           0.49
    Diluted                                                                   $         0.61      $           0.47

Weighted average shares outstanding:
    Basic                                                                             67,261                67,624
    Diluted                                                                           71,054                69,896


Overview

Total revenues rose to $460.3 million in fiscal 2014 compared to $435.8 million in fiscal 2013. Excluding the 53rd week in fiscal 2013, total revenues rose 7.9% from $426.8 million.

Consolidated operating income increased to $46.6 million in fiscal 2014 from $37.7 million in fiscal 2013 (of which approximately $1.3 million relates to the 53rd week). Consolidated net income was $34.3 million compared to $20.8 million. See "Matters Affecting Comparability" above.

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


                                                                      Year Ended
                                                           February 2,          February 3,
                                                               2014                 2013
                                                                (Dollars in thousands)
Revenues by business segment:
    Company Stores                                       $      306,825       $      296,494
    Domestic Franchise                                           11,839               10,325
    International Franchise                                      25,607               24,941
    KK Supply Chain:
        Total revenues                                          231,229              215,412
        Less - intersegment sales elimination                  (115,169 )           (111,329 )
           External KK Supply Chain revenues                    116,060              104,083
               Total revenues                            $      460,331       $      435,843

Segment revenues as a percentage of total revenues:
    Company Stores                                                 66.7 %               68.0 %
    Domestic Franchise                                              2.6                  2.4
    International Franchise                                         5.6                  5.7
    KK Supply Chain (external sales)                               25.2                 23.9
                                                                  100.0 %              100.0 %

Operating income:
    Company Stores                                       $       11,334       $        8,534
    Domestic Franchise                                            8,083                5,590
    International Franchise                                      17,977               17,387
    KK Supply Chain                                              36,953               32,450
        Total segment operating income                           74,347               63,961
    General and administrative expenses                         (25,149 )            (25,089 )
    Corporate depreciation and amortization expense              (1,254 )               (837 )
    Impairment charges and lease termination costs               (1,374 )               (306 )
        Consolidated operating income                            46,570               37,729
    Interest income                                                 616                  114
    Interest expense                                             (1,057 )             (1,642 )
    Loss on retirement of debt                                     (967 )                  -
    Equity in losses of equity method franchisee                   (221 )               (202 )
    Other non-operating income, net                                 119                  317
    Income before income taxes                                   45,060               36,316
    Provision for income taxes                                   10,804               15,537
    Consolidated net income                              $       34,256       $       20,779

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).

                                       42

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

                                                                                 Percentage of Total Revenues
                                                    Year Ended                            Year Ended
                                           February 2,        February 3,       February 2,        February 3,
                                              2014               2013               2014               2013
                                                  (In thousands)
Revenues:
    On-premises sales:
        Retail sales                     $     136,921       $     127,989             44.6 %             43.2 %
        Fundraising sales                       14,591              14,929              4.8                5.0
           Total on-premises sales             151,512             142,918             49.4               48.2
    Wholesale sales:
        Grocers/mass merchants                  94,352              93,384             30.8               31.5
        Convenience stores                      57,390              56,972             18.7               19.2
        Other wholesale                          3,571               3,220              1.2                1.1
           Total wholesale sales               155,313             153,576             50.6               51.8
               Total revenues                  306,825             296,494            100.0              100.0

Operating expenses:
    Cost of sales:
        Food, beverage and packaging           115,623             111,205             37.7               37.5
        Shop labor                              54,270              53,210             17.7               17.9
        Delivery labor                          24,280              24,222              7.9                8.2
        Employee benefits                       21,259              20,889              6.9                7.0
           Total cost of sales                 215,432             209,526             70.2               70.7
    Vehicle costs(1)                            17,135              17,336              5.6                5.8
    Occupancy(2)                                 9,954               9,901              3.2                3.3
    Utilities expense                            5,876               5,993              1.9                2.0
    Depreciation expense                         9,039               8,142              2.9                2.7
    Gain of refranchising                         (876 )                 -             (0.3 )                -
    Other operating expenses                    20,847              20,429              6.8                6.9
        Total store level costs                277,407             271,327             90.4               91.5
    Store operating income                      29,418              25,167              9.6                8.5
    Other segment operating costs(3)            13,784              12,333              4.5                4.2
    Allocated corporate overhead                 4,300               4,300              1.4                1.5
Segment operating income                 $      11,334       $       8,534              3.7 %              2.9 %

(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 2013 to fiscal 2014 follows:

                                                                 On-Premises          Wholesale             Total
                                                                                   (In thousands)
Sales for the year ended February 3, 2013                      $     142,918       $     153,576       $     296,494
Fiscal 2013 sales at closed stores                                    (3,580 )            (2,630 )            (6,210 )
Fiscal 2013 sales at stores refranchised in fiscal 2014               (7,554 )            (7,811 )           (15,365 )
Fiscal 2014 sales at closed stores                                     1,408                 892               2,300
Fiscal 2014 sales at stores refranchised in fiscal 2014                2,075               1,715               3,790
Increase in sales at established stores (open stores only)             4,844               8,405              13,249
Increase in sales at stores opened in fiscal 2013                      4,038                   -               4,038
Increase in sales at stores acquired in fiscal 2013                    1,549               1,166               2,715
Sales at stores opened in fiscal 2014                                  5,814                   -               5,814
Sales for the year ended February 2, 2014                      $     151,512       $     155,313       $     306,825

Sales at Company Stores increased 3.5% to $306.8 million in fiscal 2014 from $296.5 million in fiscal 2013. Excluding the 53rd week from fiscal 2013, sales increased 5.7%.

   The following table presents sales metrics for Company stores:

                                                                            52 Weeks Ended
                                                                     February 2,       January 27,
                                                                        2014              2013
On-premises:
        Change in same store sales                                         6.7 %             5.5 %
        Change in same store customer count (retail sales only)            4.5 %             7.1 %
        Average guest check (retail sales only)                     $     7.47        $     7.29
Wholesale:
    Grocers/mass merchants:
        Change in average weekly number of doors                          (6.2 )%           (4.0 )%
        Change in average weekly sales per door                            9.7 %             8.9 %
    Convenience stores:
        Change in average weekly number of doors                          (0.3 )%           (6.3 )%
        Change in average weekly sales per door                            3.2 %             8.8 %

On-premises sales

On-premises sales increased 6.0% to $151.5 million in fiscal 2014 from $142.9 million in fiscal 2013. Excluding the 53rd week from fiscal 2013, on-premises sales increased 8.4%. The increases were driven principally by a combination of higher customer traffic and price increases. The Company is developing and implementing new and enhanced marketing programs designed to increase guest visit frequency. In addition to improved marketing programs, management believes that customer traffic has been positively affected by ongoing store remodelings, an emphasis on hospitality, and continued use of creative limited time doughnut offerings.

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

. . .

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