Krispy Kreme: Reports Q2/2016 Financial Results

Winston-Salem / NC. (kkd) Krispy Kreme Doughnuts Inc., member of the South Korean Lotte Group, reported financial results for the second quarter of fiscal 2016, ended August 02, 2015. The Company also updated its adjusted EPS outlook for fiscal 2016 and announced that its Board of Directors increased the Company’s current share repurchase authorization.

Second Quarter Fiscal 2016 Highlights Compared to the Year-Ago Period

• Revenues increased 5.7 percent to 127.3 million USD from 120.5 million USD.
• Systemwide domestic same store sales rose 5.5 percent, including a 2.3 percent gain at Company Stores; constant currency international franchise same store sales declined 2.7 percent.
• Operating income rose 11.6 percent to 10.7 million USD from 9.6 million USD.
• Net income was 5.9 million USD (0.09 USD per share) compared to 5.8 million USD (0.08 USD per share) in the second quarter last year.
• Adjusted net income rose 9.7 percent to 9.8 million USD (0.15 USD per share) from 9.0 million USD (0.13 USD per share). Adjusted net income and adjusted EPS are non-GAAP measures (see the reconciliation of GAAP to adjusted earnings in the table accompanying this release) and reflect income tax expense only to the extent currently payable in cash.
• The Company repurchased 1.5 million shares of its common stock under the Board of Directors approved authorization at a total cost of 26.9 million USD of which 25.5 million USD was settled during the quarter.

Year-to-Date Fiscal 2016 Highlights Compared to the Year-Ago Period

• Revenues increased 7.3 percent to 259.8 million USD from 242.1 million USD.
• Systemwide domestic same store sales rose 5.4 percent, including a 3.3 percent gain at Company Stores; constant currency international franchise same store sales declined 2.2 percent.
• Operating income rose 8.6 percent to 28.0 million USD from 25.8 million USD.
• Net income was 16.6 million USD (0.24 USD per share) compared to 15.4 million USD (0.22 USD per share) last year.
• Adjusted net income rose 6.7 percent to 26.5 million USD (0.39 USD per share) from 24.8 million USD (0.36 USD per share).
• Cash provided by operating activities was 35.4 million USD compared to 27.7 million USD last year.
• The Company repurchased 1.9 million shares of its common stock under the Board of Directors approved authorization at a total cost of 34.3 million USD of which 32.9 million USD was settled during the six-month period.

President and Chief Executive Officer Tony Thompson commented: «Systemwide domestic same store sales were strong, increasing 5.5 percent and both Company Stores same store sales and traffic were positive for the quarter. We continue to be more strategic in our use of promotional incentives as we balance driving consistent same store sales growth and overall store level profitability. We were pleased with our retail sales performance; however, Company Stores segment profitability was negatively impacted by lower than anticipated results within our consumer packaged goods category. This, combined with some charges associated with our derivative instruments, resulted in us adjusting our financial outlook for fiscal 2016».

Thompson continued, «We remain focused and very confident in the long-term opportunities for the brand. As part of our ongoing efforts to enhance shareholder value, we are returning a significant portion of our excess cash flow to our shareholders via our ongoing share repurchase program, which our Board increased by 50 million USD during the quarter».

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 current share repurchase authorization by 50 million USD during the second quarter from 105 million USD to 155 million USD. At the end of the second quarter, approximately 59.1 million USD remained outstanding under the share repurchase authorization.

Second Quarter Fiscal 2016 Segment Results

Company Stores revenues increased 7.1 percent to 84.1 million USD in the second quarter of fiscal 2016, driven by a 14.3 percent increase in on-premises sales as store operating weeks increased 14.1 percent and same store sales rose 2.3 percent. Company Stores contribution increased to 11.3 million USD compared to 10.5 million USD last year driven by the increase in revenue as the contribution margin was flat with the prior year. While the performance of the Company’s retail sales continued to improve year-over-year, softness within its consumer packaged goods category weighed on overall segment profitability.

Domestic Franchise revenues increased 19.4 percent to 3.9 million USD, principally driven by higher royalties and an increase in development and franchise fees. Total sales by domestic franchisees rose 8.3 percent, and same store sales at Domestic Franchise shops increased 7.3 percent. Domestic franchisees opened seven stores during the second quarter this year compared to three during the same period last year. The Domestic Franchise segment generated operating income of 2.4 million USD compared to 1.9 million USD in the second quarter last year.

International Franchise revenues decreased 2.9 percent to 7.3 million USD from 7.5 million USD in the second quarter last year. Sales by international franchise stores rose 3.4 percent (16.1 percent excluding the effects of foreign exchange rate changes). International Franchise segment revenues include approximately 700’000 USD and 900’000 USD of royalties collected in the second quarter of fiscal 2016 and 2015, respectively, related to franchisee sales in prior periods which had not previously been recorded due to uncertainty surrounding their collection. Constant currency same store sales at international franchise stores declined 2.7 percent. International Franchise segment operating income improved to 5.5 million USD compared to 5.1 million USD in the second quarter last year as a result of lower operating costs.

KK Supply Chain revenues (including sales to Company stores) rose 6.7 percent to 63.5 million USD. External KK Supply Chain revenues rose 2.6 percent to 32.0 million USD. KK Supply Chain generated operating income of 10.1 million USD in the second quarter of fiscal 2016 compared to 9.8 million USD in the second quarter last year.

Full Year Outlook

Based on the softer than expected performance of its consumer packaged goods category and the year-to-date charges associated with the Company’s derivative financial positions, management updated its outlook of adjusted net income per share for fiscal 2016. The Company currently estimates its adjusted net income per share for fiscal 2016 will be in the range of 0.76 USD to 0.80 USD per share. This compares to adjusted net income per share of 0.70 USD in fiscal 2015. The Company’s full year outlook reflects, among other things, the following assumptions:

• 10 to 12 net new Company shops
• Approximately 20 net new domestic franchise shops
• 95 to 110 net new international franchise shops
• Capital expenditures of between 30 million USD and 40 million USD
• Continued growth in domestic same store sales
• A reduction in agricultural commodity and fuel costs compared to fiscal 2015, partially offset by the negative effect of certain derivatives
• Negative effects of a stronger U.S. Dollar (Image: Krispy Kreme)