Krispy Kreme: Reports Q4 and FY Financial Results

Winston-Salem / NC. (kkd) Krispy Kreme Doughnuts Inc., member of the South Korean Lotte Group, reported financial results for the fourth quarter and fiscal year ended January 31, 2016, and provided adjusted EPS guidance for fiscal 2017 (ending January 29, 2017).

Fourth Quarter Fiscal 2016 Highlights Compared to the Year-Ago Period:

• Revenues increased 4.0 percent to 130.4 million USD from 125.4 million USD.
• Systemwide domestic same store sales rose 1.6 percent, including a 0.2 percent gain at Company shops; constant currency international franchise same store sales declined 7.1 percent.
• Operating income rose 12.1 percent to 10.7 million USD from 9.6 million USD including impairment charges and lease termination costs of 4.4 million USD in the fourth quarter of fiscal 2016 and 0.9 million USD in the prior year quarter.
• Net income was 8.2 million USD (0.13 USD per share) compared to 6.5 million USD (0.10 USD per share) in the fourth quarter last year.
• Adjusted earnings per share rose to 0.22 USD per share from 0.17 USD per share; adjusted net income and adjusted earnings per share are non-GAAP measures.

Fiscal 2016 Highlights Compared to Last Year:

• Revenues increased 5.8 percent to 518.7 million USD from 490.3 million USD.
• Systemwide domestic same store sales rose 3.9 percent, including a 2.4 percent gain at Company shops; constant currency international franchise same store sales declined 3.9 percent.
• Systemwide store count rose 13.6 percent during the year to 1,121 Company and franchise shops worldwide.
• Operating income rose 8.0 percent to 52.1 million USD from 48.2 million USD including impairment charges and lease termination costs of 4.7 million USD in the current year compared to 1.0 million USD in the prior year.
• Net income was 32.4 million USD (0.48 USD per share) compared to 30.1 million USD (0.44 USD per share) last year.
• Adjusted earnings per share rose to 0.80 USD per share from 0.70 USD per share last year.
• Cash provided by operating activities was 78.9 million USD compared to 62.9 million USD in fiscal 2015.
• The Company repurchased 2.8 million shares of its common stock under the Board of Directors’ approved authorization for a total cost of 50.0 million USD.

President and Chief Executive Officer Tony Thompson commented: “We are pleased with continued growth of the Krispy Kreme brand throughout fiscal 2016. During the year, we increased total revenue by almost 6 percent, adjusted earnings per share by 14 percent, operating cash flow by 26 percent and expanded our worldwide store count by 14 percent to over 1,100 stores. Systemwide domestic same store sales also rose nearly 4 percent as we had our seventh consecutive year of positive same store sales at Company stores. We thank our entire team and our franchise partners for their contributions to our ongoing success.”

Thompson continued: “We believe fiscal 2017 will be another year of sustainable growth as we partner with new and existing franchisees to spread the joy of Krispy Kreme throughout the world. As part of these efforts, we are refining our retail store model to deliver better returns while executing on our four key business drivers: accelerating global growth; leveraging technology; enhancing our core menu; and maximizing brand awareness. We remain excited about our brand’s long-term potential and believe we are well positioned to drive earnings and cash flow growth in the future. We also plan to continue returning a significant portion of our excess cash flow to shareholders via on-going share repurchases.”

Share Repurchase Authorization

In recognition of the Company’s continuing ability to generate cash flow in excess of its current business needs, the Board of Directors increased the Company’s share repurchase authorization by 100 million USD in March 2016 from 155 million USD to 255 million USD. With this increase, the Company has current authorization to repurchase an additional 143.4 million USD worth of shares.

Consolidated Results for the Quarter Ended January 31, 2016

In addition to the results included in the highlights above, direct operating expenses for the fourth quarter increased to 103.6 million USD from 99.4 million USD in the comparable period last year, and as a percentage of total revenues increased slightly to 79.5 percent from 79.3 percent.

General and administrative expenses were 6.6 million USD in the fourth quarter compared to 9.2 million USD in the same period a year ago. General and administrative expenses in the fourth quarter of fiscal 2015 include a 2.5 million USD charge for the settlement of amounts due under an employment agreement with the Company’s former chief executive officer.

Impairment charges and lease termination costs totaled 4.4 million USD in the fourth quarter of fiscal 2016 compared to 0.9 million USD in the fourth quarter of the prior year. Impairment charges and lease termination costs in the fourth quarter of the current year principally relate to the Company’s decision to close certain shop locations.

During the fourth quarter of fiscal 2016, the Company recorded a one-time gain of approximately 810’000 USD as a result of conveying its membership interest in an equity method franchisee to the majority owner upon receipt of payment for all outstanding indebtedness.

The effective income tax rate was 24.8 percent in the fourth quarter of the current year compared to 31.4 percent in the same quarter last year. Income tax expense in the fourth quarter of this year includes credits of 1.7 million USD reflecting additional tax benefits expected to be realized from the Company’s net operating loss and tax credit carryovers resulting from an increase in management’s estimate of future annual earnings.

Segment Results for the Quarter Ended January 31, 2016

Company Stores revenues increased 4.3 percent to 87.3 million USD in the fourth quarter of fiscal 2016, driven by an 8.4 percent increase in on-premises sales as store operating weeks increased 9.4 percent and same store sales increased 0.2 percent. Sales within the consumer packaged goods category, which represents just under half of the Company Stores segment revenues, were down slightly compared to the prior year. Company Stores segment operating income decreased from 4.0 million USD to 2.4 million USD in the fourth quarter of this year as a result of the Company Stores contribution margin decreasing from 15.7 percent to 12.5 percent. The margin decrease was primarily due to increased discounts associated with marketing promotional activities in the fourth quarter of this year combined with favorable self-insurance adjustments recorded in the fourth quarter of the prior year as a result of improved claims experience.

Domestic Franchise revenues increased 24.3 percent to 4.2 million USD reflecting higher royalties and initial franchise fees. Total sales by domestic franchisees rose 9.4 percent, and same store sales at domestic franchise shops increased 2.5 percent. The Domestic Franchise segment generated operating income of 3.2 million USD this year compared to 2.1 million USD in the fourth quarter last year.

International Franchise revenues decreased 3.4 percent to 7.4 million USD from 7.6 million USD in the fourth quarter last year principally due to unfavorable foreign exchange rates which adversely affected royalty revenues and segment operating income by approximately 500’000 USD. Sales by international franchise stores declined 4.0 percent, largely due to adverse foreign exchange rate impacts. Excluding the effects of changes in foreign exchange rates, international franchise stores sales rose 3.7 percent. Constant currency same store sales at international franchise stores declined 7.1 percent, reflecting, among other things, the normal, on-going impact of high shop growth on existing unit sales resulting from the market penetration strategy of our international franchisees. International Franchise segment operating income decreased to 5.4 million USD compared to 5.6 million USD in the fourth quarter last year primarily due to the negative impact of foreign exchange rates.

KK Supply Chain revenues (including sales to Company stores) rose 1.4 percent to 64.2 million USD and external KK Supply Chain revenues rose 2.8 percent to 31.5 million USD. KK Supply Chain generated operating income of 12.2 million USD compared to 11.4 million USD in the fourth quarter last year.

Fiscal 2017 Outlook

Management announced its guidance for adjusted earnings per share for fiscal 2017 of 0.87 USD to 0.91 USD per share, compared to 0.80 USD per share in fiscal 2016. On a GAAP basis, the Company projects fiscal 2017 earnings per share of 0.54 USD to 0.58 USD per share compared to 0.48 USD per share in fiscal 2016. The Company’s above guidance for fiscal 2017 is based on the following expectations:

• approximately 30 new domestic shops including 10 Company shops;
• approximately 120 to 140 net new international franchise shops;
• capital expenditures of approximately 30 million USD;
• continued growth in systemwide domestic same store sales;
• relatively flat agricultural commodity and lower fuel costs compared to fiscal 2016, largely offset by increased store level labor and incentive costs;
• continued negative effects of a stronger U.S. Dollar; and
• effective tax rate of 40 percent.