Krispy Kreme Releases Second Quarter Fiscal 2008 Results



    WINSTON-SALEM, N.C., Sept. 6 /CNW/ -- Krispy Kreme Doughnuts, Inc. (NYSE:  
KKD) (the "Company") today reported financial results for the second fiscal
quarter ended July 29, 2007 and announced certain turnaround steps the Company
is taking.
    Second quarter systemwide sales decreased approximately 0.5% from the
second quarter of last year.  Systemwide average weekly sales per store
decreased approximately 2.8% to approximately $37,500.  Company Stores average
weekly sales per store increased 1.6% to approximately $51,800. Systemwide
average weekly sales per store are lower than Company average weekly sales per
store principally because satellite stores, which have lower average weekly
sales than factory stores, are more prevalent in franchise operations than in
Company operations.
    Revenues for the second quarter of fiscal 2008 decreased 7.5% to $104.1
million compared to $112.5 million in the second quarter of last year. Company
Stores revenues decreased 4.7% to $75.3 million, Franchise revenues were flat
at $5.1 million and KK Supply Chain revenues decreased 16.8% to $23.7 million.
    The net loss for the second quarter of fiscal 2008 was $27.0 million, or
$0.42 per diluted share, compared to a net loss of $4.6 million, or $0.07 per
diluted share, in the comparable period last year.
    Impairment charges and lease termination costs totaled $22.1 million in
the second quarter this year, compared to $382,000 in the second quarter of
fiscal 2007.  The current year charge includes approximately $10.6 million
arising from the decision to divest the Company's manufacturing and
distribution facility in Illinois.  Most of the remainder of the charge
relates to underperforming stores, including stores closed and likely to be
closed.
    "After several quarters of progress on our turnaround, second quarter
results did not meet our expectations," said Daryl Brewster, the Company's
President and Chief Executive Officer.  "We are taking steps to transform the
Company and improve its performance."  These steps include:

    
      (*) Closing or improving underperforming Company shops
      (*) Planning to divest an underutilized manufacturing facility in the KK
        Supply Chain to lower costs, and evaluating strategic options related
        to other aspects of the supply chain
      (*) Realigning Company Stores and Franchise management and reducing the
        cost of store support functions
      (*) Continuing international expansion
      (*) Opening small retail stores through our domestic and international
        franchisees
      (*) Cooperating with franchisees who are restructuring their operations
      (*) Continuing to focus on reducing G&A costs
      (*) Continuing marketing efforts and driving product innovation
      (*) Developing plans to refranchise certain geographic markets
    
    Consistent with its previously announced plans to increase the percentage
of stores operated by franchisees, the Company is developing a strategy to
refranchise certain geographic markets, consisting principally of markets
outside the Company's traditional base in the Southeast.  The franchise rights
and other assets in many of these markets were acquired by the Company in
business combinations in prior years.  The Company's strategy is to focus on
the development of small retail stores, including hot shops, fresh shops and
kiosks, in a limited number of geographic markets inside of the Company's
traditional base in the Southeast where the Company believes it can achieve
market scale.
    During the second quarter of fiscal 2008, 19 new Krispy Kreme stores,
comprised of 3 factory stores and 16 satellites, were opened systemwide, and
12 Krispy Kreme stores, comprised of 5 factory stores and 7 satellites, were
closed systemwide.  This brings the total number of stores systemwide at the
end of the second quarter of fiscal 2008 to 411, consisting of 299 factory
stores and 112 satellites.  The net increase of 7 stores in the quarter
reflects a net increase of 13 international stores and a net decrease of 6
domestic stores.
    During the second quarter, the Company prepaid $5.0 million of the
balance outstanding under its term loan, bringing total prepayments for the
six months ended July 29, 2007 to $14.3 million, including $4.3 million
prepaid using the proceeds of certain asset sales and a $5.0 million
prepayment in the first quarter of the fiscal year.  As of July 29, 2007, the
maximum additional indebtedness permitted under the term loan financial
covenants was approximately $8 million.  Based on the Company's current
forecast of fiscal 2008 results, the Company anticipates that an additional
prepayment of approximately $5 million will be necessary in the third quarter
of fiscal 2008 in order to continue to comply with the financial covenants. 
As of July 29, 2007, the Company's consolidated balance sheet reflects cash
and indebtedness of approximately $25 million and $96 million, respectively.
    Several franchisees have been experiencing financial pressures which, in
certain instances, appear to have become more exacerbated during the second
quarter.  Franchisees closed 13 stores in the first six months of fiscal 2008,
and the Company believes that the closure of a significant number of
additional franchise stores is likely during the balance of the fiscal year.
Royalty revenues and most of KK Supply Chain revenues are directly correlated
to sales by franchise stores and, accordingly, store closures have an adverse
effect on the Company's revenues and results of operations.
    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.
    Krispy Kreme management will host a conference call to review second
quarter results on September 7, 2007 at 8:30 a.m. (ET).  A live webcast of the
conference call will be available at
www.KrispyKreme.com/investorrelations.html and www.Streetevents.com.  An
archived audio replay will be available shortly following the conference call.
To access the telephone replay dial 888-286-8010 and enter the passcode number
69961589.  International callers may access the replay by dialing 617-801-6888
and entering passcode 69961589.  The audio replay will be available through
September 14, 2007.  The conference call webcast will be archived and
accessible for one month following the date of the conference call.
    Information contained in this press release, other than historical
information, should be considered forward-looking.  Forward-looking statements
are subject to various risks, uncertainties and assumptions.  Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or expected.  Among the key factors that may have a
direct bearing on Krispy Kreme's operating results, performance or financial
condition are the outcome of pending governmental investigations, including by
the Securities and Exchange Commission and the United States Attorney's Office
for the Southern District of New York; potential indemnification obligations
and limitations of our director and officer liability insurance; material
weaknesses in our internal control over financial reporting; our ability to
implement remedial measures necessary to improve our processes and procedures;
negative publicity; significant changes in our management; our ability, and
our dependence on the ability of our franchisees, to execute our and their
business plans; our ability to implement our international growth strategy;
currency, economic, political and other risks associated with our
international operations; the price and availability of raw materials needed
to produce doughnut mixes and other ingredients; compliance with governmental
regulations relating to food products and franchising; our relationships with
wholesale customers; our ability to protect our trademarks; restrictions on
our operations contained in our senior secured credit facilities; changes in
customer preferences and perceptions; risks associated with competition; and
other factors discussed in Krispy Kreme's Annual Report on Form 10-K for
fiscal 2007 and other periodic reports filed with the Securities and Exchange
Commission.

    
    Krispy Kreme Contact:
    Brian K. Little
    336-726-8825
    blittle@KrispyKreme.com
    



    KRISPY KREME DOUGHNUTS, INC.

    
                          CONSOLIDATED BALANCE SHEET
                                 (Unaudited)
    

    (In thousands)

    
                                                          July 29,  Jan. 28,
                                                           2007      2007
    

    
                           ASSETS
    CURRENT ASSETS:
    Cash and cash equivalents                             $24,893    $36,242
    Receivables                                            20,886     26,769
    Accounts and notes receivable - equity method
     franchisees                                            2,200        834
    Inventories                                            24,404     21,006
    Insurance recovery receivable                           -         34,967
    Other current assets                                    6,616     12,000
    Total current assets                                   78,999    131,818
    Property and equipment                                135,297    168,654
    Investments in equity method franchisees                2,839      3,224
    Goodwill and other intangible assets                   28,534     28,934
    Deferred income taxes                                      20         20
    Other assets                                           10,247     16,842
    Total assets                                         $255,936   $349,492
    

    
            LIABILITIES AND SHAREHOLDERS' EQUITY
    CURRENT LIABILITIES:
    Current maturities of long-term debt                   $1,851     $1,730
    Accounts payable                                        8,677      7,874
    Accrued litigation settlement                           -         86,772
    Deferred income taxes                                      20         20
    Other accrued liabilities                              34,006     38,474
    Total current liabilities                              44,554    134,870
    Long-term debt, less current maturities                94,336    105,966
    Other long-term obligations                            29,597     29,694
    

    Commitments and contingencies

    
    SHAREHOLDERS' EQUITY:
    Preferred stock, no par value                           -          -
    Common stock, no par value                            352,524    310,942
    Accumulated other comprehensive income                  1,384      1,266
    Accumulated deficit                                  (266,459)  (233,246)
    Total shareholders' equity                             87,449     78,962
    Total liabilities and shareholders' equity           $255,936   $349,492
    



    KRISPY KREME DOUGHNUTS, INC.

    
                     CONSOLIDATED STATEMENT OF OPERATIONS
                                 (Unaudited)
    

    (In thousands, except per share amounts)

    
                                       Three Months Ended    Six Months Ended
                                        July 29,  July 30,  July 29,  July 30,
                                          2007      2006      2007     2006
    

    
    Revenues                           $104,098  $112,535  $215,016  $231,900
    Operating expenses:
    Direct operating expenses
     (exclusive of depreciation
     and amortization shown below)       95,333    97,048   192,328   194,133
    General and administrative expenses   6,922    12,154    13,744    28,761
    Depreciation and amortization
     expense                              4,086     5,459     8,774    10,937
    Impairment charges and lease
     termination costs                   22,109       382    34,772     1,137
    Settlement of litigation                  -         -   (14,930)        -
    Other operating (income) and
     expense, net                            16       111      (269)      100
    Operating (loss)                    (24,368)   (2,619)  (19,403)   (3,168)
    Interest income                         407       424       845       708
    Interest expense                     (2,635)   (5,036)   (5,155)  (10,169)
    Loss on extinguishment of debt         -         -       (9,622)     -
    Equity in (losses) of equity method
     franchisees                           (258)     (365)     (479)     (859)
    Other non-operating income and
     (expense), net                          23     3,097        46     3,219
    (Loss) before income taxes          (26,831)   (4,499)  (33,768)  (10,269)
    Provision for income taxes              209        78       670       350
    Net (loss)                         $(27,040)  $(4,577) $(34,438) $(10,619)
    

    
    (Loss) per common share:
     Basic                                $(.42)    $(.07)    $(.54)    $(.17)
    

    Diluted                              $(.42)    $(.07)    $(.54)    $(.17)

    Weighted average shares outstanding  63,872    61,854    63,511    61,847



    KRISPY KREME DOUGHNUTS, INC.

    
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (Unaudited)
    

    (In thousands)

    
                                                            Six Months Ended
                                                           July 29,  July 30,
                                                             2007      2006
    

    
    CASH FLOW FROM OPERATING ACTIVITIES:
    Net (loss)                                            $(34,438) $(10,619)
    Adjustments to reconcile net loss to net cash
     provided by operating activities:
    Depreciation and amortization                            8,774    10,937
    Deferred income taxes                                       39      (292)
    Impairment charges                                      33,124       398
    Settlement of litigation                               (14,930)     -
    Accrued rent expense                                       109       823
    (Gain) on disposal of property and equipment              (446)       83
    (Gain) on sale of interest in equity method franchisee    -       (3,520)
    Share-based compensation                                 4,525     6,902
    Provision for doubtful accounts                          1,215     2,008
    Amortization of deferred financing costs                 5,726     1,374
    Equity in losses of equity method franchisees              479       859
    Other                                                      185       303
    Change in assets and liabilities:
    Receivables                                              3,312    (2,690)
    Inventories                                             (3,378)    1,497
    Other current and non-current assets                       703     4,262
    Accounts payable and accrued liabilities                (3,364)   (3,522)
    Other long-term obligations                                310       809
    Net cash provided by operating activities                1,945     9,612
    CASH FLOW FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                      (3,357)   (1,987)
    Proceeds from disposals of property and equipment        4,866     3,627
    Investments in and advances to franchise investees        -         (625)
    Recovery of investments in and advances to franchise
     investee                                                 -        2,500
    Sale of interest in equity method franchisee              -        3,840
    Acquisition of stores from franchisee                     -         (400)
    Decrease in other assets                                     5        14
      Net cash provided by investing activities              1,514     6,969
    CASH FLOW FROM FINANCING ACTIVITIES:
    Issuance of short-term debt                               -        2,984
    Repayment of short-term debt                              -       (1,317)
    Proceeds from issuance of long-term debt               110,000      -
    Repayment of long-term debt                           (122,165)   (2,137)
    Deferred financing costs                                (2,868)     -
    Proceeds from exercise of stock options                    182      -
    Net change in book overdraft                              -          (60)
    Net cash (used for) financing activities               (14,851)     (530)
    Effect of exchange rate changes on cash                     43        23
    Cash balances of subsidiary at date of deconsolidation    -       (1,413)
    Net increase (decrease) in cash and cash equivalents   (11,349)   14,661
    Cash and cash equivalents at beginning of period        36,242    16,980
    Cash and cash equivalents at end of period             $24,893   $31,641
    Supplemental schedule of non-cash investing and
     financing activities:
    Assets acquired under capital leases                      $656       $41
    



    KRISPY KREME DOUGHNUTS, INC.

    Store Count

    
                                                          NUMBER OF STORES
                                                     FACTORY  SATELLITE  TOTAL
    

    
    Three months ended July 29, 2007:
    APRIL 29, 2007                                       301      103     404
    Opened                                                 3       16      19
    Closed                                                (5)      (7)    (12)
    JULY 29, 2007                                        299      112     411
    

    
    Six months ended July 29, 2007:
    JANUARY 28, 2007                                     296       99     395
    Opened                                                12       20      32
    Closed                                                (9)      (7)    (16)
    JULY 29, 2007                                        299      112     411
    



    KRISPY KREME DOUGHNUTS, INC.

    SELECTED OPERATING STATISTICS

    (Dollars in thousands)

    
                                          Three Months Ended  Six Months Ended
                                            July     July      July     July
                                             29,      30,       29,      30,
                                            2007     2006      2007     2006
    

    
    Year over year percentage change in
     systemwide sales (1)                   (0.5)%  (14.8)%    (1.7)% (15.7)%
    

    
    Average weekly sales per factory
     store (2):
    Company                                 $53.3    $52.8     $55.0   $53.9
    Systemwide                              $50.5    $48.1     $51.1   $48.6
    

    
    Factory store operating weeks (3):
    Company                                 1,411    1,495     2,828   2,997
    Systemwide                              3,812    4,016     7,625   8,130
    

    
    Average weekly sales per store (4):
    Company                                 $51.8    $51.0     $53.6   $52.2
    Systemwide                              $37.5    $38.6     $38.4   $39.2
    

    
    Store operating weeks (5):
    Company                                 1,450    1,547     2,906   3,093
    Systemwide                              5,127    5,011    10,136  10,073
    

    
    On-premises sales (6):
    Company change in same store sales       1.4 %              0.7 %
    Systemwide change in same store sales   (1.8)%             (2.1)%
    

    
    Company off-premises sales (7):
    Change in average weekly number of
     doors                                  (1.6)%             (0.1)%
    Change in average weekly sales per
     door                                   (6.1)%             (5.2)%
    

    
    (1) Systemwide sales, a non-GAAP financial measure, include the sales by
        both Company and franchise stores.  The Company believes systemwide
        sales data is useful in assessing the overall performance of the
        Krispy Kreme brand and, ultimately, the performance of the Company.
    (2) Represents, on a Company and systemwide basis, total sales of all
        stores divided by the number of operating weeks for factory stores.
    (3) Represents, on a Company and systemwide basis, the aggregate number of
        operating weeks for factory stores.
    (4) Represents, on a Company and systemwide basis, total sales of all
        stores divided by the number of operating weeks for both factory and
        satellite stores.
    (5) Represents, on a Company and systemwide basis, the aggregate number of
        operating weeks for both factory and satellite stores.
    (6) The change in "same store sales" represents, on a Company and
        systemwide basis, the aggregate on-premises sales (including
        fundraising sales) during the current year period for all stores which
        had been open for more than 56 consecutive weeks during the current
        year period (but only to the extent such sales occurred in the 57th or
        later week of each store's operation) divided by the aggregate on-
        premises sales of such stores for the comparable weeks in
        the preceding year period.  Once a store has been open for at least 57
        consecutive weeks, its sales are included in the computation of same
        stores 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.
    (7) For Company off-premises sales, "average weekly number of doors"
        represents the average number of customer locations to which product
        deliveries are made during a week by Company Stores, and "average
        weekly sales per door" represents the average weekly sales to each
        such location by Company Stores.
    



    KRISPY KREME DOUGHNUTS, INC.

    SEGMENT INFORMATION

    (Dollars in thousands)

    
                                         Three Months Ended  Six Months Ended
                                          July      July      July      July
                                           29,       30,       29,       30,
                                          2007      2006      2007      2006
    Revenues:
    Company Stores                      $75,265   $78,937  $155,717 $164,935
    Franchise                             5,094     5,054    10,094    9,603
    KK Supply Chain:
    Total revenues                       48,753    54,834   101,482  112,078
    Less- intersegment elimination      (25,014)  (26,290)  (52,277) (54,716)
    External KK Supply Chain revenues    23,739    28,544    49,205   57,362
    Total revenues                     $104,098  $112,535  $215,016 $231,900
    Operating income (loss):
    Company Stores                      $(5,164)  $(1,561)  $(5,332)  $1,769
    Franchise                             2,911     4,138     6,204    7,839
    KK Supply Chain                       7,251     7,744    13,946   17,900
    Unallocated general and
     administrative expenses             (7,257)  (12,558)  (14,379) (29,539)
    Impairment charges and lease
     termination costs                  (22,109)     (382)  (34,772)  (1,137)
    Settlement of litigation                  -         -    14,930         -
    Total operating (loss)             $(24,368)  $(2,619) $(19,403) $(3,168)
    Depreciation and amortization
     expense:
    Company Stores                       $2,923    $4,154    $6,415   $8,322
    Franchise                                24        31        48       63
    KK Supply Chain                         839       870     1,711    1,745
    Corporate administration                300       404       600      807
    Total depreciation and
     amortization expense                $4,086    $5,459    $8,774  $10,937
    




For further information:

For further information: Brian K. Little of Krispy Kreme Doughnuts,
Inc.,  +1-336-726-8825, blittle@KrispyKreme.com Web Site:
http://www.krispykreme.com/

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