Krispy Kreme: Reports Fiscal 2017 First Quarter Results

Winston-Salem / NC. (kkd) Krispy Kreme Doughnuts Inc. reported financial results for the first quarter of fiscal 2017, ended May 01, 2016.

Recent Developments

As previously announced, the Company entered into an Agreement and Plan of Merger with Cotton Parent Inc., a Delaware corporation (Cotton), Cotton Merger Sub Inc., a North Carolina corporation and a wholly-owned subsidiary of Cotton (Merger Sub), and JAB Holdings B.V., a private limited liability company incorporated under the laws of the Netherlands (JAB). Cotton and Merger Sub are affiliates of JAB which will acquire the Company for 21.00 USD per share in cash pursuant to the terms of the Merger Agreement and subject to satisfaction or waiver of the conditions included therein. The Company’s Board of Directors unanimously approved the Merger Agreement, the Merger, and the other transactions contemplated by the Merger Agreement and unanimously resolved to recommend that the Company’s shareholders vote to approve the Merger Agreement.

The transaction is not subject to a financing condition and is expected to close in the third quarter of fiscal 2017, subject to customary closing conditions, including receipt of regulatory and shareholder approvals. The Merger is subject to a vote of the Company’s shareholders. In connection with the proposed Merger, the Company has filed a preliminary proxy statement with the Securities and Exchange Commission (the SEC) for a special meeting of the Company’s shareholders at which the shareholders will be asked to vote on whether to approve the Merger. Upon completion of review, if any, of the preliminary proxy statement by the staff of the SEC, a definitive proxy statement will be filed and mailed with a form of proxy to the shareholders of the Company. The Company’s Board of Directors has postponed the Company’s 2016 Annual Meeting of Shareholders, originally scheduled for June 14, 2016. At a later date, the Company will provide information related to a rescheduled meeting, if applicable.

First Quarter Fiscal 2017 Highlights Compared to the Year-Ago Period

• Revenues increased 3.0 percent to 136.5 million USD from 132.5 million USD.
• Domestic systemwide same store sales rose 0.7 percent, including a 0.7 percent decrease at Company Stores and 1.6 percent increase at domestic franchise stores; constant currency international franchise same store sales declined 7.3 percent.
• Systemwide store count rose 13.0 percent from the first quarter of last year to 1,133 shops worldwide.
• Operating income was 15.9 million USD compared to 17.3 million USD, including 0.5 million USD in impairment and lease termination costs and 1.6 million USD in employee termination benefits and Merger related costs in the current year period.
• Net income was 9.4 million USD (0.14 USD per share) compared to 10.7 million USD (0.16 USD per share) in the first quarter last year.
• Adjusted earnings per share rose to 0.25 USD per share from 0.24 USD in the first quarter last year.
• Cash provided by operating activities was 19.5 million USD compared to 17.1 million USD in the first quarter last year.
• The Company repurchased 2.4 million shares of its common stock for a total cost of 39.6 million USD under the authorization approved by the Board of Directors and pursuant to a pre-arranged stock trading plan in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934 and the Company’s policies regarding stock transactions. The settlement of such purchases was 34.2 million USD during the quarter.

First Quarter Consolidated Results

In addition to the results included in the highlights above, direct operating expenses for the first quarter of fiscal 2017 increased to 108.0 million USD from 103.8 million USD in the comparable period last year and, as a percentage of total revenues, increased to 79.1 percent from 78.3 percent. Direct operating expenses include 1.1 million USD related to employee termination benefits.

General and administrative expenses were 7.5 million USD in the first quarter compared to 7.6 million USD in the same period a year ago. General and administrative expenses in the first quarter of fiscal 2017 include 0.1 million USD in employee termination benefits and 0.5 million USD in Merger related costs.

Impairment charges and lease termination costs of 0.5 million USD in the first quarter of the current year principally relate to the refranchising of certain shop locations which was completed during the second quarter of fiscal 2017.

First Quarter Segment Results

Revenues at Company Stores increased 3.6 percent to 94.0 million USD in the quarter, driven by a 4.7 percent increase in on-premises sales, which included a 1.8 percent increase in store operating weeks and 0.7 percent decrease in same store sales. Sales within the consumer packaged goods category, which represents just under half of the Company Stores segment revenues, increased 2.3 percent compared to the prior year. Company Stores segment operating income decreased from 7.4 million USD to 6.0 million USD in the quarter as a result of the Company Stores contribution margin decreasing from 18.5 percent to 17.1 percent and 0.4 million USD in employee termination benefits. The decrease in contribution margin was primarily due to higher shop labor partially offset by lower commodity costs.

Domestic Franchise revenues increased 11.5 percent to 4.1 million USD primarily reflecting higher royalties. Total sales by domestic franchisees rose 6.7 percent, and same store sales at domestic franchise shops increased 1.6 percent. The Domestic Franchise segment generated operating income of 2.5 million USD compared to 2.1 million USD in the same period last year, and included 0.2 million USD in employee termination benefits.

International Franchise revenues increased 1.9 percent to 6.9 million USD from 6.7 million USD last year principally due to higher royalties and franchise fees. Unfavorable foreign exchange rates adversely affected royalty revenues and segment operating income by approximately 300’000 USD. Sales by International Franchise stores declined 1.9 percent, largely due to unfavorable foreign exchange rate impacts. Excluding the effects of changes in foreign exchange rates, International Franchise stores sales rose 2.8 percent. Constant currency same store sales at International Franchise stores declined 7.3 percent. International Franchise segment operating income decreased to 4.6 million USD compared to 4.9 million USD in the quarter last year primarily due to the negative impact of foreign exchange rates and 0.3 million USD in employee termination benefits.

KK Supply Chain revenues (including sales to Company stores) rose 0.8 percent to 64.0 million USD and external KK Supply Chain revenues rose 0.6 percent to 31.5 million USD. KK Supply Chain generated operating income of 12.0 million USD compared to 10.9 million USD last year, primarily due to higher volumes and lower operating costs partially offset by 0.2 million USD in employee termination benefits.

Full Year Outlook and Conference Call

Due to the proposed Merger, the Company will not be updating its outlook for fiscal 2017 and will not be holding a conference call to discuss its first quarter fiscal 2017 results.