Krispy Kreme Q2/2009: «not satisfied» with the results

Winston-Salem / NC. (kkd) Krispy Kreme Doughnuts Inc., member of the Korean-Japanese Lotte Group, reported financial results for the second quarter of fiscal 2009, ended August 03, 2008.

The Company incurred a net loss in the second quarter of 1,9 million USD, or 0,03 USD per diluted share, compared to a net loss of 27,0 million USD, or 0,42 USD per diluted share, in the second quarter last year. While a number of factors affected results for the quarter compared to the second quarter of last year, which are disclosed in detail in the Company´s Quarterly Report on Form 10-Q, the largest single factor was that results for the second quarter of last year included impairment charges and lease termination costs of 22,1 million USD, or 0,35 USD per share.

Total revenues for the second quarter decreased 9,5 percent to 94,2 million USD compared to 104,1 million USD in the second quarter last year. The decline in revenues reflects decreases in Company Stores and KK Supply Chain revenues, partially offset by an increase in Franchise revenues. Company Stores revenues decreased 13,5 percent to 65,1 million USD. Within this segment, on-premises revenues fell 10,5 percent in total (4,1 percent on a same-store basis) and off-premises revenues fell 15,7 percent compared to the second quarter last year. KK Supply Chain revenues declined 5,1 percent to 22,5 million USD, and Franchise revenues rose 30,1 percent to 6,6 million USD.

As of August 03, 2008, the Company´s consolidated balance sheet reflected cash and debt of approximately 33,2 million USD and 75,4 million USD, respectively.

During the second quarter of fiscal 2009, 31 new Krispy Kreme stores, comprised of five factory stores and 26 satellites, were opened systemwide, and seven stores, comprised of five factory stores and two satellites, were closed systemwide. This brings the total number of stores systemwide at quarter end to 494, consisting of 286 factory stores and 208 satellites. The net increase of 24 stores in the quarter reflects a net increase of 29 international stores and a net decrease of five domestic stores. All 31 new stores were opened by franchisees. Approximately 80 percent of total stores are operated by franchisees, and over half are located outside the United States.

Second quarter systemwide sales increased 3,9 percent from the second quarter of last year. The growth in systemwide sales was entirely attributable to growth in sales by international franchisees; the domestic component of systemwide sales fell in the second quarter compared to the second quarter last year, principally due to store closures over the past twelve months.

«We are not satisfied with our financial results for the second quarter», said Jim Morgan, Chairman, President and Chief Executive Officer. «Some of the shortfall was due to external factors, but we must move forward on implementing our key strategic initiatives in order to achieve the positive long-term results we believe are possible». Those initiatives are:

• Building new small retail concept shops in select Company markets to bring our signature doughnuts closer to consumers and to establish the economics of the domestic hub-and-spoke model
• Bringing intense focus to the basics of shop operations to improve both the consumer experience and our financial results
• Developing, testing and deploying new menu offerings to give consumers more reasons to visit Krispy Kreme
• Improving how we do business in the off-premises channel, which has particular revenue and cost pressures
• Building on our successes in international franchise development, to which we are devoting additional resources
• Enhancing franchisee operational support both domestically and internationally
• Providing increased Supply Chain support to an increasingly global business and improving franchisee service levels and economics

Morgan: «A weakening economy, combined with rising fuel and agricultural commodity prices adversely affected us in the quarter, but it´s our task to operate successfully no matter the headwinds. Although our near term results may continue to be uneven, we have talented and dedicated employees who are working hard to implement the further improvements necessary for us to be successful for the long term».

Many factors could adversely affect the Company´s business. In particular, the Company is vulnerable to further increases in the cost of raw materials and fuel, which could adversely affect the Company´s operating results and cash flows. In addition, several franchisees have been experiencing financial pressures which, in certain instances, have become exacerbated in recent quarters. Royalty revenues and most of KK Supply Chain revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on the Company´s revenues, results of operations and cash flows.

Systemwide sales, a non-GAAP financial measure, include sales by both Company and franchise stores. The Company believes systemwide sales data are useful in assessing the overall performance of the Krispy Kreme brand and, ultimately, the performance of the Company. The Company´s consolidated financial statements include sales by Company stores, sales to franchisees by the KK Supply Chain business segment and royalties and fees received from franchisees, but exclude sales by franchise stores to their customers (source).