Krispy Kreme Closings Are Possible Amid Loss

WINSTON-SALEM, N.C., Dec. 11 /PRNewswire-FirstCall/ -- Krispy Kreme Doughnuts, Inc. (the "Company") today reported financial results for the third quarter of fiscal 2009, ended November 2, 2008.


The Company incurred a net loss in the third quarter of $5.9 million, or $0.09 per diluted share, compared to a net loss of $798,000, or $0.01 per diluted share, in the third quarter last year. A number of factors affected results for the quarter compared to the third quarter of last year, which are discussed in detail in the Company's Quarterly Report on Form 10-Q filed this morning. The higher cost of doughnut mix and shortening resulting from higher agricultural commodity costs compared to last year and higher gasoline prices adversely affected results. Recent economic developments have resulted in a significant decline in the price of agricultural commodities, which should benefit both Company and franchise stores in the fourth quarter. In mid-October, the average price of gasoline fell below that of last year's third quarter, and the Company expects to see a reduction in its fuel costs in the fourth quarter.
Total revenues for the third quarter decreased 8.7% to $94.3 million compared to $103.4 million in the third 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 were $64.7 million, down $8.1 million (11.1%) from last year, of which approximately $2.0 million reflects store closings. Within this segment, on-premises revenues fell 5.4% in total (1.3% on a same-store basis) and off-premises revenues fell 15.3% compared to the third quarter last year. KK Supply Chain revenues declined 6.6% to $23.2 million while Franchise revenues rose 12.6% to $6.4 million.

During the third quarter of fiscal 2009, 37 new Krispy Kreme stores were opened systemwide and 22 stores were closed systemwide. This brings the total number of stores systemwide at quarter end to 509, consisting of 284 factory stores and 225 satellites. The net increase of 15 stores in the quarter reflects a net increase of 21 international stores and a net decrease of six domestic stores. All 37 new stores were opened by franchisees. Over 80% of total stores are operated by franchisees, and over half are located outside the United States.
Third quarter systemwide sales decreased 1.0% from the third quarter of last year. The growth in sales by international franchisees was offset by a decline in domestic sales arising principally from store closures.

"Our third quarter performance was impacted by a challenging operating climate led by high gas prices, as well as our commitment to investing in our growth plan," said Jim Morgan, Chairman, President and Chief Executive Officer. "We have undertaken key strategic initiatives to strengthen our business as well as the economics of our stores, and that should help us succeed through various economic cycles and deliver positive long-term results. I remain confident that our employees and our management team will execute our strategic initiatives and the results will be a transition year in FY10 that positions Krispy Kreme for a prolonged period of growth in FY11 and beyond. We will drive our business forward, and continue to deliver the unique Krispy Kreme experience to customers worldwide."

In addition to further declines in revenues, many other factors could also adversely affect the Company's business. In particular, increases in the cost of raw materials and fuel and strengthening of the U.S. dollar relative to other currencies 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.

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. 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.
Management will host a conference call to review third quarter results this afternoon at 4:30 p.m. (ET). A live webcast of the conference call will be available at www.KrispyKreme.com . To access an archived audio replay of the call, dial 888-203-1112 and enter the passcode 4362219. International callers may access the replay by dialing 719-457-0820 and entering passcode 4362219. The audio replay will be available through December 18, 2008.
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 (the "SEC") 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; the quality of Company and franchise store operations; our ability, and our dependence on the ability of our franchisees, to execute on our and their business plans; our relationships with our franchisees; our ability to implement our international growth strategy; our ability to implement our new domestic operating model and refranchising 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 government regulations relating to food products and franchising; our relationships with wholesale customers; our ability to protect our trademarks; risks associated with our high levels of indebtedness; restrictions on our operations and compliance with covenants contained in our secured credit facilities; changes in customer preferences and perceptions; significant changes in our management; risks associated with competition; and other factors discussed in Krispy Kreme's Annual Report on Form 10-K for fiscal 2008 and other periodic reports filed with the SEC.

KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED BALANCE SHEET (Unaudited) (In thousands) Nov. 2, Feb. 3, 2008 2008 ASSETS CURRENT ASSETS: Cash and cash equivalents $32,175 $24,735 Receivables 21,289 22,991 Accounts and notes receivable - equity method franchisees 1,017 2,637 Inventories 17,865 19,987 Deferred income taxes 83 83 Other current assets 5,699 5,647 Total current assets 78,128 76,080 Property and equipment 86,762 90,996 Investments in equity method franchisees 1,563 1,950 Goodwill and other intangible assets 23,856 23,856 Other assets 9,831 9,469 Total assets $200,140 $202,351 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $1,480 $1,557 Accounts payable 8,289 5,712 Accrued liabilities 31,270 35,949 Total current liabilities 41,039 43,218 Long-term debt, less current maturities 73,694 75,156 Deferred income taxes 83 83 Other long-term obligations 26,725 27,270 Commitments and contingencies SHAREHOLDERS' EQUITY: Preferred stock, no par value - - Common stock, no par value 360,912 355,615 Accumulated other comprehensive income 517 81 Accumulated deficit (302,830) (299,072) Total shareholders' equity 58,599 56,624 Total liabilities and shareholders' equity $201,140 $202,351 KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (In thousands, except per share amounts) Three Months Ended Nine Months Ended Nov. 2, Oct. 28, Nov. 2, Oct. 28, 2008 2007 2008 2007 Revenues $94,338 $103,355 $292,216 $318,371 Operating expenses: Direct operating expenses (exclusive of depreciation and amortization shown below) 87,143 90,911 264,926 283,239 General and administrative expenses 5,842 5,650 17,406 19,394 Depreciation and amortization expense 2,107 4,868 6,609 13,642 Impairment charges and lease termination costs 345 (268) (648) 34,504 Settlement of litigation - - - (14,930) Other operating (income) and expense, net 213 196 626 (73) Operating income (loss) (1,312) 1,998 3,297 (17,405) Interest income 65 379 287 1,224 Interest expense (2,978) (2,274) (7,341) (7,429) Loss on extinguishment of debt - - - (9,622) Equity in losses of equity method franchisees (335) (216) (685) (695) Other non-operating income and (expense), net (921) (309) 71 (263) Loss before income taxes (5,481) (422) (4,371) (34,190) Provision for income taxes (benefit) 404 376 (613) 1,046 Net loss $(5,885) $(798) $(3,758) $(35,236) Loss per common share: Basic $(.09) $(.01) $(.06) $(.55) Diluted $(.09) $(.01) $(.06) $(.55) Basic - weighted average shares outstanding 66,794 63,934 65,587 63,652 Diluted - weighted average shares outstanding 66,794 63,934 65,587 63,652 KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended Nov. 2, Oct. 28, 2008 2007 CASH FLOW FROM OPERATING ACTIVITIES: Net loss $(3,758) $(35,236) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 6,609 13,642 Deferred income taxes (283) 206 Impairment charges (109) 33,671 Settlement of litigation - (14,930) Accrued rent expense (460) (830) (Gain) loss on disposal of property and equipment 344 (316) Share-based compensation 4,263 6,646 Provision for doubtful accounts 534 755 Amortization of deferred financing costs 701 5,856 Equity in losses of equity method franchisees 685 695 Other 244 828 Change in assets and liabilities: Receivables 2,243 1,543 Inventories 2,114 (2,297) Other current and non-current assets 7 1,227 Accounts payable and accrued liabilities (1,777) (2,788) Other long-term obligations (588) (572) Net cash provided by operating activities 10,769 8,100 CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property and equipment (2,618) (4,928) Proceeds from disposals of property and equipment 427 6,751 Investment in a franchise investee (56) - Decrease in other assets 10 10 Net cash provided by (used for) investing activities (2,237) 1,833 CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt - 110,000 Repayment of long-term debt (1,673) (130,238) Deferred financing costs (434) (2,891) Proceeds from exercise of stock options 3,103 290 Repurchase of common shares (2,069) - Net cash used for financing activities (1,073) (22,839) Effect of exchange rate changes on cash (19) 83 Net increase (decrease) in cash and cash equivalents 7,440 (12,823) Cash and cash equivalents at beginning of period 24,735 36,242 Cash and cash equivalents at end of period $32,175 $23,419 KRISPY KREME DOUGHNUTS, INC. Store Count NUMBER OF STORES FACTORY SATELLITE TOTAL Three months ended November 2, 2008: AUGUST 3, 2008 286 208 494 Opened 7 30 37 Closed (11) (11) (22) Converted to factory stores 2 (2) - Converted to satellite stores - - - NOVEMBER 2, 2008 284 225 509 Nine months ended November 2, 2008: FEBRUARY 3, 2008 295 154 449 Opened 16 80 96 Closed (22) (14) (36) Converted to factory stores 2 (2) - Converted to satellite stores (7) 7 - NOVEMBER 2, 2008 284 225 509 KRISPY KREME DOUGHNUTS, INC. SELECTED OPERATING STATISTICS (Dollars in thousands) Three Months Ended Nine Months Ended Nov. 2, Oct. 28, Nov. 2, Oct. 28, 2008 2007 2008 2007 Year over year percentage change in systemwide sales (1) (1.0)% (2.6)% 1.8 % (2.0)% Average weekly sales per store (2): Company $49.9 $52.9 $51.0 $53.4 Systemwide $29.5 $36.4 $32.6 $37.7 Store operating weeks (3): Company 1,287 1,373 3,939 4,279 Systemwide 6,319 5,174 17,993 15,310 Change in same store sales (on-premises only) (4): Company (1.3)% (2.9)% (1.3)% (0.4)% Systemwide (11.8)% (6.0)% (8.3)% (3.4)% Company off-premises sales (5): Change in average weekly number of doors (5.9)% (5.7)% (7.0)% (2.1)% Change in average weekly sales per door (9.1)% (7.4)% (8.5)% (5.9)% (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 both factory and satellite stores divided by the number of operating weeks for both factory and satellite stores. (3) Represents, on a Company and systemwide basis, the aggregate number of operating weeks for both factory and satellite stores. (4) 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 (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. (5) 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 (In thousands) Three Months Ended Nine Months Ended Nov. 2, Oct. 28, Nov. 2, Oct. 28, 2008 2007 2008 2007 Revenues: Company Stores $64,708 $72,787 $201,961 $228,504 Franchise 6,393 5,679 19,532 15,773 KK Supply Chain: Total revenues 46,747 48,933 143,724 150,415 Less- intersegment sales elimination (23,510) (24,044) (73,001) (76,321) External KK Supply Chain revenues 23,237 24,889 70,723 74,094 Total revenues $94,338 $103,355 $292,216 $318,371 Operating income (loss): Company Stores $(4,470) $(1,855) $(8,985) $(7,187) Franchise 4,188 3,793 12,528 9,997 KK Supply Chain 5,449 5,735 17,440 19,681 Unallocated general and administrative expenses (6,134) (5,943) (18,334) (20,322) Impairment charges and lease termination costs (345) 268 648 (34,504) Settlement of litigation - - - 14,930 Total operating income (loss) $(1,312) $1,998 $3,297 $(17,405) Depreciation and amortization expense: Company Stores $1,548 $2,603 $4,854 $9,018 Franchise 21 22 64 70 KK Supply Chain 248 1,960 765 3,671 Corporate administration 290 283 926 883 Total depreciation and amortization expense $2,107 $4,868 $6,609 $13,642 Photo: http://www.newscom.com/cgi-bin/prnh/19991216/NYTH146AP Archive: http://photoarchive.ap.orgPRN Photo Desk, photodesk@prnewswire.com Krispy Kreme Doughnuts, Inc.
CONTACT: Brian K. Little of Krispy Kreme, +1-336-726-8825,