EX-99.1 2 exhibit99-1.htm PRESS RELEASE (

Exhibit 99.1

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

KRISPY KREME ANNOUNCES SECOND QUARTER
FISCAL 2009 RESULTS

Winston-Salem, NC – September 11, 2008 – Krispy Kreme Doughnuts, Inc. (NYSE: KKD) (the “Company”) today reported financial results for the second quarter of fiscal 2009, ended August 3, 2008.

The Company incurred a net loss in the second quarter of $1.9 million, or $0.03 per diluted share, compared to a net loss of $27.0 million, or $0.42 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 filed this morning, 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, or $.35 per share.

Total revenues for the second quarter decreased 9.5% to $94.2 million compared to $104.1 million 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% to $65.1 million. Within this segment, on-premises revenues fell 10.5% in total (4.1% on a same-store basis) and off-premises revenues fell 15.7% compared to the second quarter last year. KK Supply Chain revenues declined 5.1% to $22.5 million, and Franchise revenues rose 30.1% to $6.6 million.

As of August 3, 2008, the Company’s consolidated balance sheet reflected cash and debt of approximately $33.2 million and $75.4 million, 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% of total stores are operated by franchisees, and over half are located outside the United States.

Second quarter systemwide sales increased 3.9% 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 12 months.

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“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; and

  • Providing increased Supply Chain support to an increasingly global business and improving franchisee service levels and economics.

“A weakening economy, combined with rising fuel and agricultural commodity prices adversely affected us in the quarter,” Morgan continued, “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.

Management will host a conference call to review second quarter results this afternoon at 4:30 p.m. (ET). A live webcast of the conference call will be available at www.KrispyKreme.com/investorrelations.html. To access an archived audio replay of the call, dial 888-286-8010 and enter the passcode 20395285. International callers may access the replay by dialing 617-801-6888 and entering passcode 20395285. The audio replay will be available through September 18, 2008.

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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.

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KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED BALANCE SHEET
(Unaudited)

(In thousands)

  Aug. 3, Feb. 3,
  2008      2008
ASSETS         
CURRENT ASSETS:         
Cash and cash equivalents  $  33,215   $  24,735  
Receivables    21,000     22,991  
Accounts and notes receivable — equity method franchisees    1,203     2,637  
Inventories    21,905     19,987  
Deferred income taxes    83     83  
Other current assets    6,345     5,647  
     Total current assets    83,751     76,080  
Property and equipment    87,901     90,996  
Investments in equity method franchisees    2,980     1,950  
Goodwill and other intangible assets    23,856     23,856  
Other assets    10,129     9,469  
     Total assets  $  208,617     $  202,351  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY         
CURRENT LIABILITIES:         
Current maturities of long-term debt  $  1,420   $  1,557  
Accounts payable    10,235     5,712  
Accrued liabilities    32,691     35,949  
     Total current liabilities    44,346     43,218  
Long-term debt, less current maturities    73,935     75,156  
Deferred income taxes    83     83  
Other long-term obligations    26,534     27,270  
 
Commitments and contingencies         
 
SHAREHOLDERS’ EQUITY:         
Preferred stock, no par value    —     —  
Common stock, no par value    360,319     355,615  
Accumulated other comprehensive income    345     81  
Accumulated deficit    (296,945 )   (299,072 )
     Total shareholders’ equity    63,719     56,624  
     Total liabilities and shareholders’ equity  $  208,617   $  202,351  

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KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

(In thousands, except per share amounts)

  Three Months Ended  Six Months Ended 
  Aug. 3,  July 29,  Aug. 3,  July 29, 
  2008       2007       2008       2007 
Revenues  $  94,237   $  104,098   $  197,878   $  215,016  
Operating expenses:                 
     Direct operating expenses (exclusive of depreciation 
          and amortization shown below)		   88,304     95,333     177,783     192,328  
     General and administrative expenses    4,717     6,922     11,564     13,744  
     Depreciation and amortization expense    2,266     4,086     4,502     8,774  
     Impairment charges and lease termination costs   (348 )    22,109     (993 )    34,772  
     Settlement of litigation    —     —     —     (14,930 ) 
     Other operating (income) and expense, net   302     16     413     (269 ) 
Operating income (loss)    (1,004 )    (24,368 )    4,609     (19,403 ) 
Interest income    96     407     222     845  
Interest expense    (2,300 )    (2,635 )    (4,363 )    (5,155 ) 
Loss on extinguishment of debt    —     —     —     (9,622 ) 
Equity in losses of equity method                   
     franchisees    (82 )    (258 )    (350 )    (479 ) 
Other non-operating income and (expense), net   68     23     992     46  
Income (loss) before income taxes    (3,222 )    (26,831 )    1,110     (33,768 ) 
Provision for income taxes (benefit)    (1,315 )      209     (1,017 )    670  
Net income (loss)  $  (1,907 )  $  (27,040 )    $  2,127   $  (34,438 ) 
 
Income (loss) per common share:                 
 
     Basic  $  (.03 )  $  (.42 )  $  .03   $  (.54 ) 
 
     Diluted  $  (.03 )  $  (.42 )  $  .03   $  (.54 ) 
 
     Basic - weighted average shares                 
     outstanding    65,266     63,872     64,984     63,511  
 
     Diluted - weighted average shares                 
     outstanding    65,266     63,872     66,525     63,511  

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KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

(In thousands)

  Six Months Ended
  Aug. 3, July 29,
  2008      2007
CASH FLOW FROM OPERATING ACTIVITIES:         
Net income (loss)  $  2,127   $  (34,438 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:         
     Depreciation and amortization    4,502     8,774  
     Deferred income taxes    (173 )   39  
     Impairment charges    (148 )   33,124  
     Settlement of litigation    —     (14,930 )
     Accrued rent expense    (345 )   109  
     (Gain) loss on disposal of property and equipment    192     (446 )
     Gain on disposal of equity method franchisee    (931 )   —  
     Change in unrealized loss on interest rate derivatives    (644 )   —  
     Share-based compensation    2,674     4,525  
     Provision for doubtful accounts    189     1,215  
     Amortization of deferred financing costs    571     5,726  
     Equity in losses of equity method franchisees    350     479  
     Other    276     185  
     Change in assets and liabilities:           
          Receivables    2,715     3,312  
          Inventories    (1,921 )   (3,378 )
          Other current and non-current assets    (870 )     703  
          Accounts payable and accrued liabilities    1,476     (3,364 )
          Other long-term obligations    (555 )   310  
               Net cash provided by operating activities    9,485     1,945  
CASH FLOW FROM INVESTING ACTIVITIES:         
Purchase of property and equipment    (1,450 )   (3,357 )
Proceeds from disposals of property and equipment    210     4,866  
Decrease in other assets    6     5  
               Net cash provided by (used for) investing activities    (1,234 )   1,514  
CASH FLOW FROM FINANCING ACTIVITIES:         
Proceeds from issuance of long-term debt    —     110,000  
Repayment of long-term debt    (1,359 )   (122,165 )
Deferred financing costs    (434 )   (2,868 )
Proceeds from exercise of stock options    2,057     182  
Other    (27 )   —  
               Net cash provided by (used for) financing activities    237     (14,851 )
Effect of exchange rate changes on cash    (8 )   43  
Net increase (decrease) in cash and cash equivalents    8,480     (11,349 )
Cash and cash equivalents at beginning of period    24,735     36,242  
Cash and cash equivalents at end of period  $  33,215   $  24,893  

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KRISPY KREME DOUGHNUTS, INC.

Store Count

  NUMBER OF STORES 
  FACTORY       SATELLITE       TOTAL 
Three months ended August 3, 2008:       
MAY 4, 2008  289   181   470  
Opened  5   26   31  
Closed  (5 )  (2 )  (7 ) 
Converted to satellites  (3 )  3   —  
AUGUST 3, 2008  286   208     494  
 
Six months ended August 3, 2008:       
FEBRUARY 3, 2008  295   154   449  
Opened  9     50   59  
Closed  (11 )  (3 )  (14 ) 
Converted to satellites  (7 )  7   —  
AUGUST 3, 2008  286   208   494  

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KRISPY KREME DOUGHNUTS, INC.

SELECTED OPERATING STATISTICS

(Dollars in thousands)

Three Months Ended      Six Months Ended
Aug. 3, July 29, Aug. 3, July 29,
2008      2007 2008      2007
Year over year percentage change in systemwide sales (1) (3.9 )%  (0.5 )%  3.1 %  (1.7 )%
 
Average weekly sales per store (2):
     Company $ 49.3 $ 51.8 $ 51.5 $ 53.6
     Systemwide $ 33.4 $ 37.5 $ 34.4 $ 38.4
 
Store operating weeks (3):
     Company 1,313 1,450 2,652 2,906
     Systemwide 5,975 5,127 11,674 10,136
 
Change in same store sales (on-premises only) (4): 
     Company (4.1 )% 1.4 % (1.3 )% 0.7 %
     Systemwide (9.2 )% (1.8 )% (6.5 )% (2.1 )%
 
Company off-premises sales (5):
     Change in average weekly number of doors (8.3 )% (1.6 )% (7.5 )% (0.1 )%
     Change in average weekly sales per door (7.7 )% (6.1 )% (8.1 )% (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 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.

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KRISPY KREME DOUGHNUTS, INC.

SEGMENT INFORMATION

(In thousands)

  Three Months Ended  Six Months Ended 
  Aug. 3,  July 29,  Aug. 3,  July 29, 
  2008       2007       2008       2007 
Revenues:                 
     Company Stores  $  65,071   $  75,265   $  137,253   $  155,717  
     Franchise    6,627     5,094     13,139     10,094  
     KK Supply Chain:                 
          Total revenues    46,258     48,753     96,977     101,482  
          Less- intersegment sales elimination    (23,719 )    (25,014 )    (49,491 )    (52,277 ) 
               External KK Supply Chain revenues    22,539     23,739     47,486     49,205  
          Total revenues  $  94,237   $  104,098   $  197,878   $  215,016  
 
Operating income (loss):                 
     Company Stores  $  (4,221 )  $  (5,164 )  $  (4,515 )  $  (5,332 ) 
     Franchise    3,898     2,911     8,340     6,204  
     KK Supply Chain    3,999     7,251     11,991     13,946  
     Unallocated general and administrative expenses   (5,028 )    (7,257 )    (12,200 )    (14,379 ) 
     Impairment charges and lease termination costs    348     (22,109 )    993     (34,772 ) 
     Settlement of litigation    —     —     —     14,930  
          Total operating income (loss)  $  (1,004 )  $  (24,368 )  $  4,609   $  (19,403 ) 
 
Depreciation and amortization expense:                 
     Company Stores  $  1,678   $  2,923   $  3,306   $  6,415  
     Franchise    22     24     43     48  
     KK Supply Chain    255     839     517       1,711  
     Corporate administration    311     300       636     600  
          Total depreciation and amortization expense  $  2,266   $  4,086   $  4,502   $  8,774  

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