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KKD > SEC Filings for KKD > Form 10-Q on 13-Jun-2014All Recent SEC Filings

Show all filings for KRISPY KREME DOUGHNUTS INC

Form 10-Q for KRISPY KREME DOUGHNUTS INC


13-Jun-2014

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.

Results of Operations

   The following table sets forth operating metrics for the three months ended
May 4, 2014 and May 5, 2013.

                                       24

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                                                                        Three Months Ended
                                                                    May 4,               May 5,
                                                                     2014                 2013
Change in Same Store Sales (on-premises sales only):
    Company stores                                                     (1.5 ) %             12.2   %
    Domestic Franchise stores                                           4.5   %             11.8   %
    International Franchise stores                                     (4.5 ) %             (8.0 ) %
    International Franchise stores, in constant dollars(1)             (2.2 ) %             (4.5 ) %

Change in Same Store Customer Count - Company stores
    (retail sales only)                                                (4.3 ) %             11.3   %

Average guest check - Company stores (retail sales only)       $       7.45         $       7.33

Wholesale Metrics (Company stores only):
    Average weekly number of doors served:
        Grocery/mass merchant                                         5,206                5,370
        Convenience store                                             4,595                4,481

    Average weekly sales per door:
        Grocery/mass merchant                                  $        362         $        366
        Convenience store                                               253                  266

Systemwide Sales (in thousands):(2)
    Company stores                                             $     79,818         $     81,121
    Domestic Franchise stores                                        87,711               80,986
    International Franchise stores                                  114,511              110,255
    International Franchise stores, in constant dollars(3)          114,511              108,115

Average Weekly Sales Per Store (in thousands):(4) (5)
    Company stores:
        Factory stores:
           Commissaries - wholesale                            $      212.2         $      203.2
           Dual-channel stores:
               On-premises                                             40.0                 40.3
               Wholesale                                               50.0                 50.9
                  Total                                                90.0                 91.2
           On-premises only stores                                     38.3                 40.4
           All factory stores                                          75.2                 80.0
        Satellite stores                                               23.2                 23.4
        All stores                                                     65.2                 67.5

    Domestic Franchise stores:
        Factory stores                                         $       53.3         $       54.3
        Satellite stores                                               18.9                 18.6

    International Franchise stores:
        Factory stores                                         $       40.5         $       40.8
        Satellite stores                                                9.7                 10.4


(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 months ended May 5, 2013 to U.S. dollars based upon the weighted average of the exchange rates prevailing in the three months ended May 4, 2014.
(4) Includes sales between Company and franchise stores.
(5) Metrics for the three months ended May 4, 2014 and May 5, 2013 include only stores open at the respective period end.

The Company has revised its methodology for computing its same store sales metric. Under the revised methodology, shops are included in the same store sales computation after 18 months of operation, compared to 13 months under the former methodology. The Company believes that deferring stores' entry into the same store sales metric until week 79 results in a more meaningful measurement of comparable sales because, in most cases, substantially all of the elevated sales levels typically experienced in the initial weeks following the opening of a new Krispy Kreme shop will no longer be reflected in the metric.

All same store sales change metrics in this current report reflect the new methodology for all periods. The Company filed a Current Report on Form 8-K on May 8, 2014 providing quarterly tables showing the change in same store sales for Company, domestic franchise and international franchise shops for fiscal 2012 through fiscal 2014 calculated using the revised computational methodology and using the former methodology.

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 78 consecutive weeks during the current year (but only to the extent such sales occurred in the 79th 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 79 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 May 4, 2014 and May 5, 2013.

                                                       May 4,           May 5,
                                                        2014             2013
Number of Stores Open At Period End:
    Company stores:
        Factory:
           Commissaries                                        7                7
           Dual-channel stores                                31               34
           On-premises only stores                            40               33
        Satellite stores                                      19               21
               Total Company stores                           97               95

    Domestic Franchise stores:
        Factory stores                                       109              102
        Satellite stores                                      54               44
           Total Domestic Franchise stores                   163              146

    International Franchise stores:
        Factory stores                                       126              121
        Satellite stores                                     469              411
           Total International Franchise stores              595              532

               Total systemwide stores                       855              773


The following table sets forth data about the number of store operating weeks for the three months ended May 4, 2014 and May 5, 2013.

                                              Three Months Ended
                                             May 4,         May 5,
                                              2014           2013
Store Operating Weeks:
    Company stores:
        Factory stores:
           Commissaries                            91             91
           Dual-channel stores                    403            448
           On-premises only stores                505            413
        Satellite stores                          235            266

    Domestic Franchise stores:(1)
        Factory stores                          1,407          1,307
        Satellite stores                          688            560

    International Franchise stores:(1)
        Factory stores                          1,393          1,385
        Satellite stores                        5,906          5,132

(1) Metrics for the three months ended May 4, 2014 and May 5, 2013 include only stores open at the respective period end.

The following table sets forth the types and locations of Company stores as of May 4, 2014.

                                           Number of Company Stores
                           Factory
       State                Stores         Hot Shops      Fresh Shops        Total
Alabama                             3               -               -                3
District of Columbia                -               1               -                1
Florida                             5               -               -                5
Georgia                            11               4               -               15
Indiana                             3               1               -                4
Kansas                              2               -               -                2
Kentucky                            3               1               -                4
Louisiana                           1               -               -                1
Maryland                            2               -               -                2
Michigan                            3               -               -                3
Mississippi                         1               -               -                1
Missouri                            1               -               -                1
New York                            -               -               1                1
North Carolina                     14               4               -               18
Ohio                                6               -               -                6
South Carolina                      6               2               -                8
Tennessee                          10               3               -               13
Virginia                            6               2               -                8
West Virginia                       1               -               -                1
Total                              78              18               1               97


Changes in the number of Company stores during the three months ended May 4, 2014 and May 5, 2013 are summarized in the table below.

                                                         Number of Company Stores
                                         Factory
                                         Stores          Hot Shops      Fresh Shops         Total
Three months ended May 4, 2014
February 2, 2014                               76                18               1              95
Opened                                          2                 -               -               2
Closed                                          -                 -               -               -
May 4, 2014                                    78                18               1              97

Three months ended May 5, 2013
February 3, 2013                               76                20               1              97
Opened                                          1                 -               -               1
Closed                                          -                 -               -               -
Transferred to Domestic Franchise              (3 )               -               -              (3 )
May 5, 2013                                    74                20               1              95


The following table sets forth the types and locations of domestic franchise stores as of May 4, 2014.

                                Number of Domestic Franchise Stores
                     Factory
    State             Stores         Hot Shops       Fresh Shops        Total
Alabama                       5                3               -                8
Arizona                       2                4               -                6
Arkansas                      2                -               -                2
California                   15               11               3               29
Colorado                      2                -               -                2
Connecticut                   1                -               3                4
Florida                      12                7               1               20
Georgia                       5                3               -                8
Hawaii                        1                -               -                1
Idaho                         1                -               -                1
Illinois                      3                -               -                3
Iowa                          1                -               1                2
Kansas                        1                -               -                1
Louisiana                     2                -               -                2
Mississippi                   3                1               -                4
Missouri                      4                1               -                5
Nebraska                      1                -               1                2
Nevada                        3                -               2                5
New Jersey                    -                1               -                1
New Mexico                    1                1               1                3
North Carolina                7                1               -                8
Oklahoma                      2                -               -                2
Oregon                        2                -               -                2
Pennsylvania                  4                3               1                8
South Carolina                6                2               1                9
Tennessee                     1                -               -                1
Texas                        13                2               -               15
Utah                          2                -               -                2
Washington                    6                -               -                6
Wisconsin                     1                -               -                1
Total                       109               40              14              163


Changes in the number of domestic franchise stores during the three months ended May 4, 2014 and May 5, 2013 are summarized in the table below.

                                                 Number of Domestic Franchise Stores
                                   Factory
                                   Stores          Hot Shops        Fresh Shops            Total
Three months ended May 4, 2014
February 2, 2014                          107               37               15                 159
Opened                                      2                3                -                   5
Closed                                      -                -               (1 )                (1 )
May 4, 2014                               109               40               14                 163

Three months ended May 5, 2013
February 3, 2013                           99               29               14                 142
Opened                                      -                1                -                   1
Closed                                      -                -                -                   -
Transferred from Company Stores             3                -                -                   3
May 5, 2013                               102               30               14                 146


The types and locations of international franchise stores as of May 4, 2014 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                 5             1               6             6            18
Bahrain                      2009                 1             -               1             -             2
Canada                       2002                 4             -               2             -             6
Dominican Republic           2011                 1             -               2             -             3
India                        2013                 3             -               6             2            11
Indonesia                    2007                 1             -               6             8            15
Japan                        2007                17             -              36             2            55
Kuwait                       2007                 1             -               7             6            14
Lebanon                      2009                 1             -               1             -             2
Malaysia                     2010                 2             -               2             6            10
Mexico                       2004                 9             1              37            66           113
Philippines                  2007                 7             3              31             7            48
Puerto Rico                  2009                 6             -               -             -             6
Qatar                        2008                 2             -               -             -             2
Russia                       2014                 2             -               1             1             4
Saudi Arabia                 2008                10             -              67            19            96
Singapore                    2014                 2             -               1             -             3
South Korea                  2005                31             -              52             -            83
Taiwan                       2014                 2             -               -             1             3
Thailand                     2011                 3             2               2             5            12
Turkey                       2010                 1             -              12             9            22
United Arab Emirates         2008                 2             -               9             5            16
United Kingdom               2004                13             2              29             7            51
Total                                           126             9             310           150           595


Changes in the number of international franchise stores during the three months ended May 4, 2014 and May 5, 2013 are summarized in the table below.

                                                    Number of International Franchise Stores
                                     Factory
                                     Stores        Hot Shops     Fresh Shops        Kiosks           Total
Three months ended May 4, 2014
February 2, 2014                         125               9            296             144             574
Opened                                     2               -             14               7              23
Closed                                    (1 )             -              -              (1 )            (2 )
May 4, 2014                              126               9            310             150             595

Three months ended May 5, 2013
February 3, 2013                         120               9            257             123             509
Opened                                     3               -             16               8              27
Closed                                    (2 )             -             (2 )             -              (4 )
May 5, 2013                              121               9            271             131             532

Three months ended May 4, 2014 compared to three months ended May 5, 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.

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.

Management evaluates the Company's results of operations using, among other measures, adjusted net income and adjusted earnings per share, which reflect 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 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.

                                                       Three Months Ended
                                               May 4,                     May 5,
                                                2014                       2013
                                            (In thousands, except per share amounts)
Net income, as reported                  $             9,656        $             7,999
Provision for deferred income taxes                    6,162                      6,105
Adjusted net income                      $            15,818        $            14,104

Adjusted earnings per common share:
    Basic                                $              0.24        $              0.21
    Diluted                              $              0.23        $              0.20

Weighted average shares outstanding:
    Basic                                             66,522                     67,012
    Diluted                                           69,746                     70,578


Overview

Total revenues rose 0.8% to $121.6 million for the three months ended May 4, 2014 compared to $120.6 million for the three months ended May 5, 2013. Exclusive of the effects of refranchising three stores in Kansas and Missouri and three stores in Dallas in February and July of 2013, respectively, revenues rose 2.1%. Consolidated operating income increased to $16.2 million from $15.2 million, and consolidated net income was $9.7 million compared to $8.0 million for the three months ended May 4, 2014 and May 5, 2013, respectively.

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).


                                                                Three Months Ended
                                                            May 4,              May 5,
                                                             2014                2013
                                                              (Dollars in thousands)
Revenues by business segment:
    Company Stores                                      $    80,448         $    81,921
    Domestic Franchise                                        3,499               2,871
. . .
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