10-Q 1 krispykreme_10q.htm QUARTERLY REPORT

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________

Form 10-Q

(Mark one)
	þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended October 28, 2012

OR

	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number 001-16485
KRISPY KREME DOUGHNUTS, INC.
(Exact name of registrant as specified in its charter)

North Carolina	56-2169715
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
370 Knollwood Street	27103
Winston-Salem, North Carolina	(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code:
(336) 725-2981

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ
Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of Common Stock, no par value, outstanding as of November 23, 2012: 65,223,895.

TABLE OF CONTENTS

		Page
FORWARD-LOOKING STATEMENTS		3

PART I - FINANCIAL INFORMATION		4

Item 1.	FINANCIAL STATEMENTS	4
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
	RESULTS OF OPERATIONS	23
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	53
Item 4.	CONTROLS AND PROCEDURES	53

PART II - OTHER INFORMATION		54

Item 1.	LEGAL PROCEEDINGS	54
Item 1A.	RISK FACTORS	54
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	54
Item 3.	DEFAULTS UPON SENIOR SECURITIES	54
Item 4.	MINE SAFETY DISCLOSURES	54
Item 5.	OTHER INFORMATION	54
Item 6.	EXHIBITS	54

	SIGNATURES	55

	EXHIBIT INDEX	56

As used herein, unless the context otherwise requires, “Krispy Kreme,” the “Company,” “we,” “us” and “our” refer to Krispy Kreme Doughnuts, Inc. and its subsidiaries. References to fiscal 2013 and fiscal 2012 mean the fiscal years ending February 3, 2013 and January 29, 2012, respectively.

FORWARD-LOOKING STATEMENTS

This quarterly report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that relate to our plans, objectives, estimates and goals. Statements expressing expectations regarding our future and projections relating to products, sales, revenues, expenditures, costs and earnings are typical of such statements, and are made under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s beliefs, assumptions and expectations of our future economic performance, considering the information currently available to management. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to differ materially from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. The words “believe,” “may,” “could,” “will,” “should,” “would,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “strive” or similar words, or the negative of these words, identify forward-looking statements. Factors that could contribute to these differences include, but are not limited to:

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 small shop operating model;
political, economic, currency and other risks associated with our international operations;
the price and availability of raw materials needed to produce doughnut mixes and other ingredients, and the price of motor fuel;
our relationships with wholesale customers;
our ability to protect our trademarks and trade secrets;
changes in customer preferences and perceptions;
risks associated with competition;
risks related to the food service industry, including food safety and protection of personal information;
compliance with government regulations relating to food products and franchising;
increased costs or other effects of new government regulations relating to healthcare benefits; and
other factors discussed in Krispy Kreme’s periodic reports and other information filed with the United States Securities and Exchange Commission (the “SEC”), including under Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2012 (the “2012 Form 10-K”).

All such factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the impact of each such factor on the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

We caution you that any forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to differ materially from the facts, results, performance or achievements we have anticipated in such forward-looking statements except as required by the federal securities laws.

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

		Page
Index to Financial Statements

Consolidated statement of income for the three and nine months ended October 28, 2012 and October 30, 2011		5
Consolidated statement of comprehensive income for the three and nine months ended October 28, 2012 and October 30, 2011		6
Consolidated balance sheet as of October 28, 2012 and January 29, 2012		7
Consolidated statement of cash flows for the nine months ended October 28, 2012 and October 30, 2011		8
Consolidated statement of changes in shareholders’ equity for the nine months ended October 28, 2012 and October 30, 2011		9
Notes to financial statements		10

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

	Three Months Ended						Nine Months Ended
	October 28,			October 30,			October 28,			October 30,
	2012			2011			2012			2011
	(In thousands, except per share amounts)
Revenues	$	107,087		$	98,708		$	317,698		$	301,260
Operating expenses:
Direct operating expenses (exclusive of depreciation
expense shown below)		90,220			85,874			264,568			258,554
General and administrative expenses		5,083			4,941			16,311			15,515
Depreciation expense		2,357			2,208			7,238			6,233
Impairment charges and lease termination costs		216			135			302			680
Operating income		9,211			5,550			29,279			20,278
Interest income		14			30			102			131
Interest expense		(384	)		(385	)		(1,202	)		(1,276	)
Equity in losses of equity method franchisees		(47	)		(72	)		(150	)		(69	)
Gain on sale of interest in equity method franchisee		-			-			-			6,198
Other non-operating income and (expense), net		80			89			237			261
Income before income taxes		8,874			5,212			28,266			25,523
Provision for income taxes		3,830			495			12,267			2,796
Net income	$	5,044		$	4,717		$	15,999		$	22,727

Earnings per common share:
Basic	$	0.08		$	0.07		$	0.24		$	0.33
Diluted	$	0.07		$	0.07		$	0.23		$	0.32

The accompanying notes are an integral part of the financial statements.

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)

	Three Months Ended					Nine Months Ended
	October 28,		October 30,			October 28,			October 30,
	2012		2011			2012			2011
	(In thousands)
Net income	$	5,044	$	4,717		$	15,999		$	22,727
Other comprehensive income (loss):
Foreign currency translation adjustment		-		-			-			57
Less income taxes		-		-			-			(23	)
		-		-			-			34
Unrealized loss on cash flow hedge		-		(77	)		(14	)		(459	)
Less income taxes		-		30			5			181
		-		(47	)		(9	)		(278	)
Total other comprehensive loss		-		(47	)		(9	)		(244	)
Comprehensive income	$	5,044	$	4,670		$	15,990		$	22,483

The accompanying notes are an integral part of the financial statements.

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED BALANCE SHEET
(Unaudited)

	October 28,			January 29,
	2012			2012
	(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	49,903		$	44,319
Receivables		23,436			21,616
Receivables from equity method franchisees		774			655
Inventories		16,677			16,497
Deferred income taxes		17,685			10,540
Other current assets		6,991			3,613
Total current assets		115,466			97,240
Property and equipment		76,132			75,466
Investments in equity method franchisees		-			-
Goodwill and other intangible assets		24,219			23,776
Deferred income taxes		103,910			129,053
Other assets		12,153			9,413
Total assets	$	331,880		$	334,948

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	2,162		$	2,224
Accounts payable		12,047			10,494
Accrued liabilities		28,280			28,800
Total current liabilities		42,489			41,518
Long-term debt, less current maturities		23,750			25,369
Other long-term obligations		24,878			18,935

Commitments and contingencies

SHAREHOLDERS’ EQUITY:
Preferred stock, no par value; 10,000 shares authorized; none issued and outstanding		-			-
Common stock, no par value; 300,000 shares authorized; Shares issued and outstanding: October 28, 2012 - 65,224 and January 29, 2012 - 68,092		353,186			377,539
Accumulated other comprehensive loss		(345	)		(336	)
Accumulated deficit		(112,078	)		(128,077	)
Total shareholders’ equity		240,763			249,126
Total liabilities and shareholders’ equity	$	331,880		$	334,948

The accompanying notes are an integral part of the financial statements.

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

	Nine Months Ended
	October 28,			October 30,
	2012			2011
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	15,999		$	22,727
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		7,238			6,233
Deferred income taxes		10,824			159
Accrued rent expense		369			389
Loss on disposal of property and equipment		468			348
Gain on sale of interest in equity method franchisee		-			(6,198	)
Share-based compensation		3,570			3,437
Provision for doubtful accounts		65			(397	)
Amortization of deferred financing costs		300			320
Equity in losses of equity method franchisees		150			69
Other		(1,075	)		956
Change in assets and liabilities:
Receivables		(1,467	)		(1,794	)
Inventories		(169	)		(2,313	)
Other current and non-current assets		(1,499	)		(595	)
Accounts payable and accrued liabilities		690			1,767
Other long-term obligations		2,515			(2,196	)
Net cash provided by operating activities		37,978			22,912
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(9,480	)		(8,222	)
Proceeds from disposals of property and equipment		66			26
Acquisition of stores from franchisee		(915	)		-
Proceeds from sale of interest in equity method franchisee		-			7,723
Escrow deposit recovery		-			1,600
Other investing activities		347			(52	)
Net cash provided by (used for) investing activities		(9,982	)		1,075
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt		(1,652	)		(8,437	)
Deferred financing costs		(11	)		(23	)
Proceeds from exercise of stock options		-			1,036
Proceeds from exercise of warrants		9			-
Repurchase of common shares		(20,758	)		(954	)
Net cash used for financing activities		(22,412	)		(8,378	)
Net increase in cash and cash equivalents		5,584			15,609
Cash and cash equivalents at beginning of period		44,319			21,970
Cash and cash equivalents at end of period	$	49,903		$	37,579

The accompanying notes are an integral part of the financial statements.

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)

						Accumulated
	Common					Other
	Shares		Common			Comprehensive			Accumulated
	Outstanding		Stock			Income (Loss)			Deficit			Total
	(In thousands)
Balance at January 29, 2012	68,092		$	377,539		$	(336	)	$	(128,077	)	$	249,126
Comprehensive income (loss) for the nine months
ended October 28, 2012							(9	)		15,999			15,990
Write-off of deferred tax asset related to the
expiration of unexercised stock warrants	-			(7,174	)								(7,174	)
Exercise of warrants	1			9									9
Share-based compensation	344			3,570									3,570
Repurchase of common shares	(3,213	)		(20,758	)								(20,758	)
Balance at October 28, 2012	65,224		$	353,186		$	(345	)	$	(112,078	)	$	240,763


Balance at January 30, 2011	67,527		$	370,808		$	(34	)	$	(294,346	)	$	76,428
Comprehensive income (loss) for the nine months
ended October 30, 2011							(244	)		22,727			22,483
Exercise of stock options	397			1,036									1,036
Cancelation of restricted shares	(8	)		-									-
Share-based compensation	280			3,437									3,437
Repurchase of common shares	(121	)		(954	)								(954	)
Balance at October 30, 2011	68,075		$	374,327		$	(278	)	$	(271,619	)	$	102,430

The accompanying notes are an integral part of the financial statements.

KRISPY KREME DOUGHNUTS, INC.

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Accounting Policies

Krispy Kreme Doughnuts, Inc. (“KKDI”) and its subsidiaries (collectively, the “Company”) are engaged in the sale of doughnuts and complementary products through Company-owned stores. The Company also derives revenue from franchise and development fees and royalties from franchisees. Additionally, the Company sells doughnut mix, other ingredients and supplies and doughnut-making equipment to franchisees.

Significant Accounting Policies

BASIS OF PRESENTATION. The consolidated financial statements contained herein should be read in conjunction with the Company’s 2012 Form 10-K. The accompanying interim consolidated financial statements are presented in accordance with the requirements of Article 10 of Regulation S-X and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) with respect to annual financial statements. The interim consolidated financial statements have been prepared in accordance with the Company’s accounting practices described in the 2012 Form 10-K, but have not been audited. In management’s opinion, the financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of the Company’s results of operations for the periods presented. The consolidated balance sheet data as of January 29, 2012 were derived from the Company’s audited financial statements but do not include all disclosures required by GAAP.

BASIS OF CONSOLIDATION. The financial statements include the accounts of KKDI and its subsidiaries, the most significant of which is KKDI’s principal operating subsidiary, Krispy Kreme Doughnut Corporation.

Investments in entities over which the Company has the ability to exercise significant influence but which the Company does not control, and whose financial statements are not otherwise required to be consolidated, are accounted for using the equity method. These entities typically are 25% to 35% owned and are hereinafter sometimes referred to as “Equity Method Franchisees.”

EARNINGS PER SHARE. The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share reflects the additional common shares that would have been outstanding if dilutive potential common shares had been issued, computed using the treasury stock method. Such potential common shares consist of shares issuable upon the exercise of stock options and warrants and the vesting of currently unvested shares of restricted stock and restricted stock units.

The following table sets forth amounts used in the computation of basic and diluted earnings per share:

	Three Months Ended				Nine Months Ended
	October 28,		October 30,		October 28,		October 30,
	2012		2011		2012		2011
	(In thousands)
Numerator: net income	$	5,044	$	4,717	$	15,999	$	22,727
Denominator:
Basic earnings per share - weighted average shares outstanding		66,668		69,384		67,897		69,013
Effect of dilutive securities:
Stock options and warrants		1,719		1,654		1,663		1,796
Restricted stock and restricted stock units		416		509		481		665
Diluted earnings per share - weighted average shares
outstanding plus dilutive potential common shares		68,803		71,547		70,041		71,474

The sum of the quarterly earnings per share amounts does not necessarily equal earnings per share for the year to date.

Stock options and warrants with respect to 3.1 million and 7.4 million shares for the three months ended October 28, 2012 and October 30, 2011, respectively, as well as 340,000 unvested shares of restricted stock and unvested restricted stock units for the three months ended October 30, 2011, have been excluded from the computation of the number of shares used to compute diluted earnings per share because their inclusion would be antidilutive.

Stock options and warrants with respect to 3.2 million and 7.4 million shares, as well as 58,000 and 158,000 unvested shares of restricted stock and unvested restricted stock units, have been excluded from the computation of the number of shares used to compute diluted earnings per share for the nine months ended October 28, 2012 and October 30, 2011, respectively, because their inclusion would be antidilutive.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued an Accounting Standards Update (“ASU”) related to fair value measurements. The ASU clarifies some existing concepts, eliminates wording differences between GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, changes some principles to achieve convergence between GAAP and IFRS. The ASU also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The Company adopted the new standards in the first quarter of fiscal 2013; such adoption had no effect on the Company’s financial condition or results of operations.

In June 2011, the FASB issued new accounting standards which require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. The new accounting rules eliminate the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. The Company adopted the new standards in the first quarter of fiscal 2013 by presenting a separate consolidated statement of comprehensive income in addition to the consolidated statement of income.

In July 2012, the FASB issued amended accounting guidance regarding indefinite-lived intangible asset impairment testing and whether it is necessary to perform the quantitative impairment test currently required. This guidance is effective for the Company in fiscal 2014, with early adoption permitted. The Company does not expect that this new guidance with have a material impact on its consolidated financial statements.

Note 2 — Segment Information

The Company’s reportable segments are Company Stores, Domestic Franchise, International Franchise and KK Supply Chain. The Company Stores segment is comprised of the stores operated by the Company. These stores sell doughnuts and complementary products through both on-premises and wholesale sales channels, although some stores serve only one of these distribution channels. The Domestic Franchise and International Franchise segments consist of the Company’s franchise operations. Under the terms of franchise agreements, domestic and international franchisees pay royalties and fees to the Company in return for the use of the Krispy Kreme name and ongoing brand and operational support. Expenses for these segments include costs to recruit new franchisees, to assist in store openings, to support franchisee operations and marketing efforts, as well as allocated corporate costs. The majority of the ingredients and materials used by Company stores are purchased from the KK Supply Chain segment, which supplies doughnut mix, other ingredients and supplies and doughnut making equipment to both Company and franchisee-owned stores.

All intercompany sales by the KK Supply Chain segment to the Company Stores segment are at prices intended to reflect an arms-length transfer price and are eliminated in consolidation. Operating income for the Company Stores segment does not include any profit earned by the KK Supply Chain segment on sales of doughnut mix and other items to the Company Stores segment; such profit is included in KK Supply Chain operating income.

The following table presents the results of operations of the Company’s operating segments for the three and nine months ended October 28, 2012 and October 30, 2011. Segment operating income is consolidated operating income before unallocated general and administrative expenses and impairment charges and lease termination costs.

	Three Months Ended						Nine Months Ended
	October 28,			October 30,			October 28,			October 30,
	2012			2011			2012			2011
	(In thousands)
Revenues:
Company Stores	$	72,493		$	67,606		$	215,172		$	203,073
Domestic Franchise		2,498			2,327			7,561			7,045
International Franchise		6,024			5,374			17,832			16,362
KK Supply Chain:
Total revenues		52,825			50,277			158,075			154,501
Less – intersegment sales elimination		(26,753	)		(26,876	)		(80,942	)		(79,721	)
External KK Supply Chain revenues		26,072			23,401			77,133			74,780
Total revenues	$	107,087		$	98,708		$	317,698		$	301,260

Operating income (loss):
Company Stores	$	1,985		$	(574	)	$	5,271		$	551
Domestic Franchise		1,174			1,114			4,072			2,477
International Franchise		4,301			3,313			12,957			10,893
KK Supply Chain		7,312			6,987			24,181			23,074
Total segment operating income		14,772			10,840			46,481			36,995
Unallocated general and administrative expenses		(5,345	)		(5,155	)		(16,900	)		(16,037	)
Impairment charges and lease termination costs		(216	)		(135	)		(302	)		(680	)
Consolidated operating income	$	9,211		$	5,550		$	29,279		$	20,278

Depreciation expense:
Company Stores	$	1,880		$	1,756		$	5,921		$	4,982
Domestic Franchise		40			55			150			165
International Franchise		3			-			9			4
KK Supply Chain		172			183			569			560
Corporate administration		262			214			589			522
Total depreciation expense	$	2,357		$	2,208		$	7,238		$	6,233

Segment information for total assets and capital expenditures is not presented as such information is not used in measuring segment performance or allocating resources among segments.

Note 3 — Income Taxes

The Company recognizes deferred income tax assets and liabilities based upon management’s expectation of the future tax consequences of temporary differences between the income tax and financial reporting bases of assets and liabilities. Deferred tax liabilities generally represent tax expense recognized for which payment has been deferred, or expenses which have been deducted in the Company’s tax returns but which have not yet been recognized as an expense in the financial statements. Deferred tax assets generally represent tax deductions or credits that will be reflected in future tax returns for which the Company has already recorded a tax benefit in its consolidated financial statements.

The Company establishes valuation allowances for deferred income tax assets in accordance with GAAP, which provides that such valuation allowances shall be established unless realization of the income tax benefits is more likely than not.

The Company had valuation allowances against deferred tax assets of $10.7 million at October 28, 2012 and January 29, 2012, representing the portion of such deferred tax assets which, as of such dates, management estimated would not be realized in future periods. Under GAAP, future realization of deferred tax assets is evaluated under a “more likely than not” standard. Realization of net deferred tax assets generally is dependent on generation of taxable income in future periods. From fiscal 2005 until the fourth quarter of fiscal 2012, the Company maintained valuation allowances on deferred tax assets equal to the entire excess of those assets over the Company’s deferred income tax liabilities because of the uncertainty surrounding the realization of those assets. Such uncertainty arose principally from the substantial losses incurred by the Company from fiscal 2005 through fiscal 2009.

The Company reported a pretax profit of $418,000 in fiscal 2010 and $8.9 million in fiscal 2011. In fiscal 2012, the Company’s pretax profit increased to $30.4 million, inclusive of a $6.2 million non-recurring gain on the Company’s sale of its 30% interest in Krispy Kreme Mexico, S. de R.L. de C.V. (“KK Mexico”), the Company’s franchisee in Mexico. After considering all relevant factors and objectively verifiable evidence having an impact on the likelihood of future realization of the Company’s deferred tax assets, in the fourth quarter of fiscal 2012 management concluded that it was more likely than not that a substantial portion of the Company’s deferred tax assets will be realized in future years. Accordingly, the Company reversed $139.6 million of the valuation allowance on deferred tax assets, with an offsetting credit to the provision for income taxes, in the fourth quarter of fiscal 2012.

The remaining valuation allowance of $10.7 million at October 28, 2012 and January 29, 2012 represents the portion of the Company’s deferred tax assets management estimates will not be realized in the future. Such assets are associated principally with state net operating loss and state credit carryforwards having relatively short carryforward periods which are forecasted to expire unused, as well as federal foreign tax credits and federal jobs credit carryforwards forecasted to expire unused.

The realization of deferred income tax assets is dependent on future events. While management believes its forecast of future taxable income is reasonable, actual results inevitably will vary from management’s forecasts. Such variances could result in adjustments to the valuation allowance on deferred tax assets in future periods, and such adjustments could be material to the financial statements.

In fiscal 2008, the Company issued warrants to acquire shares of the Company’s common stock at a price of $12.21 per share in connection with the settlement of certain litigation. Such warrants expired worthless in March 2012 and, accordingly, the Company will not receive any income tax deduction related to them. Deferred tax assets at January 29, 2012 included approximately $7.2 million related to these warrants. In accordance with GAAP, the write-off of this deferred tax asset was charged to common stock in the first quarter of fiscal 2013 and reduced the Company’s pool of windfall tax benefits.

In fiscal 2006, the Company issued warrants to purchase 1.2 million shares of the Company’s common stock at a price of $7.75 per share as compensation for services provided to the Company. Such warrants have a term of seven years expiring on January 31, 2013. The Company will be entitled to an income tax deduction equal to the amount of income, if any, recognized by the holder of the warrants upon their exercise. The amount of income recognized by the holder upon the exercise of the warrants is equal to the excess, if any, of the fair value of one share of the Company’s common stock on the date of exercise over $7.75 per share, multiplied by the number of shares exercised. To the extent that the income tax deduction, if any, available to the Company upon any exercise of the warrants is less than $6.7 million (which was the fair value of the warrants at its issuance date), then some or all of the $2.6 million deferred tax asset related to the warrants will not be realized. Any such unrealized amount will be charged to common stock in the fourth quarter of fiscal 2013 and will reduce the Company’s pool of windfall tax benefits. As of November 30, 2012, the price of the Company’s common stock was $9.10 per share. If the price of the Company’s common stock on the date of any exercise of the warrants is $9.10 per share, and the warrants are fully exercised, then approximately $2.0 million of the deferred tax asset will not be realized.

Note 4 — Receivables

The components of receivables are as follows:

	October 28,			January 29,
	2012			2012
	(In thousands)
Receivables:
Wholesale customers	$	10,485		$	10,169
Unaffiliated franchisees		11,611			11,405
Other receivables		1,081			1,015
Current portion of notes receivable		553			185
		23,730			22,774
Less — allowance for doubtful accounts:
Wholesale customers		(254	)		(349	)
Unaffiliated franchisees		(40	)		(809	)
		(294	)		(1,158	)
	$	23,436		$	21,616

Receivables from Equity Method Franchisees (Note 6):
Trade	$	774		$	655

The changes in the allowance for doubtful accounts are summarized as follows:

	Nine Months Ended
	October 28,			October 30,
	2012			2011
	(In thousands)
Allowance for doubtful accounts related to receivables:
Balance at beginning of period	$	1,158		$	1,334
Provision for doubtful accounts		130			15
Net recoveries (chargeoffs)		(994	)		(212	)
Balance at end of period	$	294		$	1,137

Allowance for doubtful accounts related to receivables from Equity Method Franchisees:
Balance at beginning of period	$	-		$	-
Provision for doubtful accounts		(59	)		-
Net recoveries (chargeoffs)		59			-
Balance at end of period	$	-		$	-

The Company also has notes receivable from franchisees included in “Other assets” in the accompanying consolidated balance sheet which are summarized in the following table.

	October 28,			January 29,
	2012			2012
	(In thousands)
Notes receivable:
Notes receivable from franchisees, net of deferred gain of $1.7 million in fiscal 2013 (Note 12)	$	2,014		$	777
Less — portion due within one year included in receivables		(553	)		(185	)
Less — allowance for doubtful accounts		(62	)		(68	)
	$	1,399		$	524

The changes in the allowance for doubtful accounts related to notes receivable are summarized as follows:

	Nine Months Ended
	October 28,			October 30,
	2012			2011
	(In thousands)
Balance at beginning of period	$	68		$	538
Provision for doubtful accounts		(6	)		(412	)
Net recoveries (chargeoffs)		-			(58	)
Balance at end of period	$	62		$	68

In addition to the foregoing notes receivable, the Company had promissory notes totaling approximately $3.3 million at October 28, 2012 and January 29, 2012 representing principally royalties and fees due to the Company which, as a result of doubt about their collection, the Company had not yet recorded as revenues. No payments were required to be made currently on any of these amounts. During the quarter ended May 1, 2011, the Company recognized approximately $375,000 of previously unrecognized revenues related to KK Mexico which were received on May 5, 2011 in connection with the Company’s sale of its 30% equity interest in the franchisee, as more fully described in Note 6. During the quarter ended May 1, 2011, the Company also reversed an allowance for doubtful notes receivable of $391,000 related to KK Mexico; such note also was paid in full on May 5, 2011.

Note 5 — Inventories

The components of inventories are as follows:

	October 28,		January 29,
	2012		2012
	(In thousands)
Raw materials	$	5,818	$	5,306
Work in progress		46		89
Finished goods and purchased merchandise		10,813		11,102
	$	16,677	$	16,497

Note 6 — Investments in Franchisees

As of October 28, 2012, the Company had investments in three franchisees. These investments have been made in the form of capital contributions and, in certain instances, loans evidenced by promissory notes. These investments are reflected as “Investments in equity method franchisees” in the consolidated balance sheet.

The Company’s financial exposures related to franchisees in which the Company has an investment are summarized in the tables below.

	October 28, 2012
	Company		Investment
	Ownership		and					Loan
	Percentage		Advances			Receivables		Guarantees
	(Dollars in thousands)
Kremeworks, LLC	25.0	%	$	900		$	330	$	534
Kremeworks Canada, LP	24.5	%		-			28		-
Krispy Kreme of South Florida, LLC	35.3	%		-			416		1,709
				900			774	$	2,243
Less: reserves and allowances				(900	)		-
			$	-		$	774

	January 29, 2012
	Company		Investment
	Ownership		and					Loan
	Percentage		Advances			Receivables		Guarantees
	(Dollars in thousands)
Kremeworks, LLC	25.0	%	$	900		$	308	$	739
Kremeworks Canada, LP	24.5	%		-			20		-
Krispy Kreme of South Florida, LLC	35.3	%		-			327		1,946
				900			655	$	2,685
Less: reserves and allowances				(900	)		-
			$	-		$	655

The Company has guaranteed loans from third-party lenders on behalf of certain Equity Method Franchisees, primarily to assist the franchisees in obtaining financing. The loans are collateralized by certain assets of the franchisee, generally the Krispy Kreme store and related equipment. The loan guarantee amounts represent the portion of the principal amount outstanding under the related loan that is subject to the Company’s guarantee.

The Company has a 25% interest in Kremeworks, LLC (“Kremeworks”), and has guaranteed 20% of the outstanding principal balance of certain of Kremeworks’ bank indebtedness, which, as amended, matures in October 2013. The aggregate amount of such indebtedness was approximately $2.7 million at October 28, 2012. There was no liability reflected in the financial statements for the guarantee of Kremeworks’ debt because the Company did not believe it was probable that the Company would be required to perform under that guarantee.

Current liabilities at October 28, 2012 and January 29, 2012 include accruals for potential payments under loan guarantees of approximately $1.7 million and $1.9 million, respectively, related to Krispy Kreme of South Florida, LLC (“KKSF”). The underlying indebtedness related to approximately $1.6 million of the Company’s KKSF guarantee exposure matured by its terms in October 2009. Such maturity had been extended on a month-to-month basis pursuant to an informal agreement between KKSF and the original lender. In October 2012, KKSF received notice that the original lender had sold the loan to a new lender. The new lender has advised KKSF that the entire balance due under the loan is currently due and owing, but has not made demand for payment on KKSF. KKSF intends to seek modifications of the loan agreement from the new lender to extend the maturity of the loan and, as an alternative, is seeking replacement financing from other lenders to refinance the balance of the loan.

On May 5, 2011, the Company sold its 30% equity interest in KK Mexico to KK Mexico’s majority shareholder. The Company received cash proceeds of approximately $7.7 million in exchange for its equity interest and, after deducting costs of the transaction, realized a gain of approximately $6.2 million on the disposition. After provision for payment of Mexican income taxes related to the sale of approximately $1.5 million, the Company reported an after tax gain on the disposition of approximately $4.7 million in the quarter ending July 31, 2011. The net after tax proceeds of the sale of approximately $6.2 million were used to prepay a portion of the outstanding balance of the 2011 Term Loan.

In connection with the Company’s sale of its KK Mexico interest, KK Mexico paid approximately $765,000 of amounts due to the Company which were evidenced by promissory notes, relating principally to past due royalties and fees due to the Company. As a consequence of this payment, in the quarter ended May 1, 2011, the Company reversed an allowance for doubtful notes receivable of $391,000 and recorded royalty and franchise fee income of approximately $280,000 and $95,000, respectively. The reserve had previously been established, and the royalties and fees had not previously been recognized as revenue, because of uncertainty surrounding the collection of these amounts.

Note 7 — Commitments and Contingencies

Except as described below, there have been no significant changes in the status of matters disclosed in Note 14 to the Company’s consolidated financial statements in the 2012 Form 10-K.

On January 27, 2012, Colchester Security II, LLC, the Company's former landlord in Lorton, Virginia, filed a suit against the Company in the Circuit Court of Fairfax County, Virginia alleging breach of the lease and negligence resulting in property damage at a commissary facility previously operated by the Company. The plaintiff seeks $2.7 million in damages. The Company denies the allegations and intends to pursue counterclaims of approximately $3 million relating to indemnity claims and breach of the lease. No liability has been recorded with respect to this matter because management does not believe it is probable that a loss has been incurred. During the third quarter of fiscal 2013, the Court scheduled this matter for trial beginning March 25, 2013.

Note 8 — Shareholders’ Equity

Share-Based Compensation for Employees and Directors

On June 12, 2012, the Company’s shareholders approved the Krispy Kreme Doughnuts, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan, which expires on June 11, 2022, replaces the Company’s 2000 Stock Incentive Plan, which expired on June 30, 2012. The 2012 Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock awards, performance unit awards, performance share awards, stock appreciation rights and phantom stock awards.

The 2012 Plan limits the issuance of shares of Company common stock under the 2012 Plan to approximately 3,550,000 shares. Any shares that are subject to options or stock appreciation rights awarded under the 2012 Plan will be counted against the 2012 Plan limit as one share for every one share granted, and any shares that are subject to 2012 Plan awards other than options or stock appreciation rights will be counted against this limit as one and thirty three-hundredths (1.33) shares for every one share granted. The 2012 Plan provides that options may be granted with exercise prices not less than the closing sale price of the Company’s common stock on the date of grant.

The Company measures and recognizes compensation expense for share-based payment (“SBP”) awards based on their fair values. The fair value of SBP awards for which employees and directors render the requisite service necessary for the award to vest is recognized over the related vesting period.

The aggregate cost of SBP awards charged to earnings for the three and nine months ended October 28, 2012 and October 30, 2011 is set forth in the following table. The Company did not realize any excess tax benefits from the exercise of stock options or the vesting of restricted stock or restricted stock units during any of the periods.

	Three Months Ended				Nine Months Ended
	October 28,		October 30,		October 28,		October 30,
	2012		2011		2012		2011
	(In thousands)
Costs charged to earnings related to:
Stock options	$	234	$	375	$	1,295	$	1,145
Restricted stock and restricted stock units		1,188		1,256		2,275		2,292
Total costs	$	1,422	$	1,631	$	3,570	$	3,437

Costs included in:
Direct operating expenses	$	864	$	1,096	$	1,591	$	2,061
General and administrative expenses		558		535		1,979		1,376
Total costs	$	1,422	$	1,631	$	3,570	$	3,437

Repurchases of Common Stock

Pursuant to the authorization of its Board of Directors, from March 27, 2012 through June 28, 2012, the Company repurchased $20 million of its common stock.

The Company generally permits holders of restricted stock and restricted stock unit awards to satisfy their obligations to reimburse the Company for the minimum required statutory withholding taxes arising from the vesting of such awards by surrendering vested common shares in lieu of reimbursing the Company in cash.

The following table summarizes repurchases of common stock for the three and nine months ended October 28, 2012 and October 30, 2011:

	Three Months Ended
	October 28,			October 30,
	2012			2011
		Common			Common
	Shares	Stock		Shares	Stock
	(In thousands)
Shares repurchased under share repurchase authorization	-	$	-	-	$	-
Shares surrendered in reimbursement for withholding taxes	100		758	105		829
	100	$	758	105	$	829

	Nine Months Ended
	October 28,			October 30,
	2012			2011
		Common			Common
	Shares	Stock		Shares	Stock
	(In thousands)
Shares repurchased under share repurchase authorization	3,113	$	20,000	-	$	-
Shares surrendered in reimbursement for withholding taxes	100		758	121		954
	3,213	$	20,758	121	$	954

Note 9 — Impairment Charges and Lease Termination Costs

The components of impairment charges and lease termination costs are as follows:

	Three Months Ended				Nine Months Ended
	October 28,		October 30,		October 28,		October 30,
	2012		2011		2012		2011
	(In thousands)
Impairment of long-lived assets	$	-	$	-	$	-	$	-
Lease termination costs		216		135		302		680
Total impairment charges and lease termination costs	$	216	$	135	$	302	$	680

Lease termination costs represent the estimated fair value of liabilities related to unexpired leases, after reduction by the amount of accrued rent expense, if any, related to the leases, and are recorded when the lease contracts are terminated or, if earlier, the date on which the Company ceases use of the leased property. The fair value of these liabilities are estimated as the excess, if any, of the contractual payments required under the unexpired leases over the current market lease rates for the properties, discounted at a credit-adjusted risk-free rate over the remaining term of the leases. The provision for lease termination costs also includes adjustments to liabilities recorded in prior periods arising from changes in estimated sublease rentals and from settlements with landlords.

The transactions reflected in the accrual for lease termination costs are summarized as follows:

	Three Months Ended						Nine Months Ended
	October 28,			October 30,			October 28,			October 30,
	2012			2011			2012			2011
	(In thousands)
Balance at beginning of period	$	679		$	1,152		$	709		$	1,995
Provision for lease termination costs:
Adjustments to previously recorded provisions resulting from
settlements with lessors and adjustments of previous estimates		209			119			279			611
Accretion of discount		7			16			23			69
Total provision		216			135			302			680
Payments on unexpired leases, including settlements with
lessors		(48	)		(563	)		(164	)		(1,951	)
Balance at end of period	$	847		$	724		$	847		$	724

Note 10 — Fair Value Measurements

The accounting standards for fair value measurements define fair value as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

The accounting standards for fair value measurements establish a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities. These include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at October 28, 2012 and January 29, 2012.

	October 28, 2012
	Level 1		Level 2		Level 3
	(In thousands)
Assets:
401(k) mirror plan assets	$	1,656	$	-	$	-
Agricultural commodity futures contracts		60		-		-
Interest rate derivative		-		20		-
Total assets	$	1,716	$	20	$	-

	January 29, 2012
	Level 1		Level 2		Level 3
	(In thousands)
Assets:
401(k) mirror plan assets	$	1,039	$	-	$	-
Agricultural commodity futures contracts		21		-		-
Interest rate derivative		-		53		-
Total assets	$	1,060	$	53	$	-

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

There were no nonrecurring fair value measurements recorded during the three and nine months ended October 28, 2012 and October 30, 2011.

Fair Values of Financial Instruments at the Balance Sheet Dates

The carrying values and approximate fair values of certain financial instruments as of October 28, 2012 and January 29, 2012 were as follows:

	October 28, 2012				January 29, 2012
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
	(In thousands)
Assets:
Cash and cash equivalents	$	49,903	$	49,903	$	44,319	$	44,319
Receivables		23,436		23,436		21,616		21,616
Receivables from Equity Method Franchisees		774		774		655		655
Agricultural commodity futures contracts		60		60		21		21
Interest rate derivatives		20		20		53		53

Liabilities:
Accounts payable		12,047		12,047		10,494		10,494
Long-term debt (including current maturities)		25,912		25,912		27,593		27,593

The fair value of the term loan is estimated based on an indicative bid price, valuation input Level 2, under GAAP.

Note 11 — Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price risk and interest rate risk. The Company does not hold or issue derivative instruments for trading purposes.

The Company is exposed to credit-related losses in the event of non-performance by the counterparties to its derivative instruments. The Company mitigates this risk of nonperformance by dealing with highly rated counterparties.

Additional disclosure about the fair value of derivative instruments is included in Note 10.

Commodity Price Risk

The Company is exposed to the effects of commodity price fluctuations in the cost of ingredients of its products, of which flour, sugar and shortening are the most significant. In order to bring greater stability to the cost of ingredients, from time to time the Company purchases exchange-traded commodity futures contracts, and options on such contracts, for raw materials which are ingredients of its products or which are components of such ingredients, including wheat and soybean oil. The Company is also exposed to the effects of commodity price fluctuations in the cost of gasoline used by its delivery vehicles. To mitigate the risk of fluctuations in the price of its gasoline purchases, the Company may purchase exchange-traded commodity futures contracts and options on such contracts. The difference between the cost, if any, and the fair value of commodity derivatives is reflected in earnings because the Company has not designated any of these instruments as hedges. Gains and losses on these contracts are intended to offset losses and gains on the hedged transactions in an effort to reduce the earnings volatility resulting from fluctuating commodity prices. The settlement of commodity derivative contracts is reported in the consolidated statement of cash flows as a cash flow from operating activities. At October 28, 2012, the Company had commodity derivatives with an aggregate contract volume of 130,000 bushels of wheat. Other than the requirement to meet minimum margin requirements with respect to the commodity derivatives, there are no collateral requirements related to such contracts.

Interest Rate Risk

All of the borrowings under the Company’s secured credit facilities bear interest at variable rates based upon either the lenders’ prime rate, the Fed funds rate or LIBOR. The interest cost of the Company’s debt may be affected by changes in these short-term interest rates and increases in those rates may adversely affect the Company’s results of operations.

On March 3, 2011, the Company entered into an interest rate derivative contract having an aggregate notional principal amount of $17.5 million. The derivative contract entitles the Company to receive from the counterparty the excess, if any, of the three-month LIBOR rate over 3.00% for each of the calendar quarters in the period beginning April 2012 and ending December 2015. The Company is accounting for this derivative contract as a cash flow hedge.

Quantitative Summary of Derivative Positions and Their Effect on Results of Operations

The following table presents the fair values of derivative instruments included in the consolidated balance sheet as of October 28, 2012 and January 29, 2012:

		Asset Derivatives
		Fair Value
		October 28,		January 29,
Derivatives Not Designated as Hedging Instruments	Balance Sheet Location	2012		2012
			(In thousands)
Agricultural commodity futures contracts	Other current assets	$	60	$	21

		Asset Derivatives
		Fair Value
		October 28,		January 29,
Derivatives Designated as a Cash Flow Hedge	Balance Sheet Location	2012		2012
		(In thousands)
Interest rate derivative	Other assets	$	20	$	53

The effect of derivative instruments on the consolidated statement of income for the three and nine months ended October 28, 2012 and October 30, 2011, was as follows:

		Amount of Derivative Gain or (Loss)
		Recognized in Income
		Three Months Ended						Nine Months Ended
Derivatives Not Designated as	Location of Derivative Gain or (Loss)	October 28,			October 30,			October 28,			October 30,
Hedging Instruments	Recognized in Income	2012			2011			2012			2011
		(In thousands)
Agricultural commodity futures
contracts	Direct operating expenses	$	(110	)	$	176		$	1,007		$	(422	)
Gasoline commodity futures
contracts	Direct operating expenses		-			(35	)		-			(44	)
Total		$	(110	)	$	141		$	1,007		$	(466	)

		Amortization of Derivative Asset
		Recognized in Income
		Three Months Ended						Nine Months Ended
Derivatives Designated as a Cash	Location of Amortization of Derivative	October 28,			October 30,			October 28,			October 30,
Flow Hedge	Asset Recognized in Income	2012			2011			2012			2011
		(In thousands)
Interest rate derivative	Interest expense	$	(10	)	$	-		$	(19	)	$	-

		Amount of Derivative Gain or (Loss)
		Recognized in Income
		Three Months Ended						Nine Months Ended
Derivatives Designated as a Cash	Location of Derivative Gain or (Loss)	October 28,			October 30,			October 28,			October 30,
Flow Hedge	Recognized in OCI	2012			2011			2012			2011
		(In thousands)
Interest rate derivative	Change in fair value of derivative	$	-		$	(77	)	$	(14	)	$	(459	)
	Less - income tax effect		-			30			5			181
	Net change in amount recognized
	in OCI	$	-		$	(47	)	$	(9	)	$	(278	)

Note 12 — Acquisitions and Divestitures

Business Combination

On August 30, 2012, the Company acquired the assets and operations of one of its franchisees in exchange for $915,000 cash. The acquired assets consisted principally of two Krispy Kreme stores. The preliminary allocation of the purchase price was as follows: $464,000 to property and equipment, $8,000 to other assets, and the balance of $443,000 to intangibles. The Company has not yet finalized its allocation of the $443,000 portion of the purchase price allocated to intangibles to specific intangible assets. The results of operations of the acquired business have been included with those of the Company from the acquisition date.

Asset Divestiture

On September 27, 2012, the Company sold to one of its franchisees the leasehold interests and certain other assets, including rights under franchise agreements, for three Krispy Kreme stores operated by the franchisee. The Company acquired the leasehold interests and other assets related to the three stores from the franchisee in August 2006 for $2.9 million cash. Since that time, the franchisee has continued to operate the stores for its own account pursuant to an operating agreement between the Company and the franchisee. The aggregate purchase price of the three stores and the related assets was approximately $3.6 million, of which approximately $360,000 was paid in cash at closing. The balance of the purchase price was evidenced by a promissory note in the approximate amount of $3.2 million, payable in monthly installments of approximately $51,000, including interest at 8%, beginning in November 2012, and a final installment of the remaining principal balance on October 1, 2017. The carrying value of the divested assets was approximately $1.9 million. Because the initial investment made by the franchisee to acquire the assets was less than the minimum amount necessary to recognize a gain on the sale, the Company deferred recognition of the $1.7 million gain, and such deferred gain is reflected as a reduction in the carrying value of the note receivable. The Company will report the principal and interest payments received from the franchisee as a reduction of the carrying value of the note until such time as the franchisee’s investment exceeds 20% of the purchase price, at which time the Company will reconsider whether recognition of a gain on the transaction is then appropriate.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein.

Comparability of Results of Operations

The Company’s net income and earnings per share for the third quarter and the first nine months of fiscal 2013 are not comparable to the corresponding amounts for the third quarter and the first nine months of fiscal 2012 as a result of the reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012 and the resulting increase in income tax expense in periods after the reversal. See “Results of Operations - Three Months Ended October 28, 2012 Compared to Three Months Ended October 30, 2011 - Provision for Income Taxes” and “Results of Operations - Nine Months Ended October 28, 2012 Compared to Nine Months Ended October 30, 2011 - Provision for Income Taxes” below.

Results of Operations

The following table sets forth operating metrics for the three and nine months ended October 28, 2012 and October 30, 2011.

	Three Months Ended								Nine Months Ended
	October 28,				October 30,				October 28,				October 30,
	2012				2011				2012				2011
Change in Same Store Sales (on-premises sales only):
Company stores		6.8		%		4.0		%		4.7		%		4.2		%
Domestic Franchise stores		5.0		%		7.9		%		5.8		%		6.2		%
International Franchise stores		(8.3	)	%		(8.5	)	%		(9.6	)	%		(5.4	)	%
International Franchise stores, in constant dollars⁽¹⁾		(7.7	)	%		(12.2	)	%		(8.4	)	%		(11.3	)	%

Change in Same Store Customer Count - Company stores
(retail sales only)		8.4		%		(1.3	)	%		5.3		%		(0.4	)	%

Average guest check - Company stores (retail sales only)	$	7.43			$	7.49			$	7.33			$	7.34

Wholesale Metrics (Company stores only):
Average weekly number of doors served:
Grocery/mass merchants		5,644				5,811				5,611				5,851
Convenience stores		4,466				4,675				4,512				4,889

Average weekly sales per door:
Grocery/mass merchants	$	311			$	291			$	316			$	293
Convenience stores		247				236				247				226

Systemwide Sales (in thousands):⁽²⁾
Company stores	$	71,884			$	67,126			$	213,399			$	201,629
Domestic Franchise stores		68,950				64,976				210,454				196,502
International Franchise stores		103,536				91,928				310,893				279,188
International Franchise stores, in constant dollars⁽³⁾		103,536				91,457				310,893				275,138

Average Weekly Sales Per Store (in thousands):^(4) (5)
Company stores:
Factory stores:
Commissaries — wholesale	$	179.9			$	203.0			$	180.6			$	201.6
Dual-channel stores:
On-premises		34.3				32.0				33.3				32.0
Wholesale		43.5				45.1				44.8				46.1
Total		77.8				77.1				78.1				78.1
On-premises only stores		34.4				32.0				34.3				32.0
All factory stores		69.8				69.3				70.3				69.7
Satellite stores		19.6				19.4				19.8				19.7
All stores		58.8				58.9				59.3				59.9

Domestic Franchise stores:
Factory stores	$	46.7			$	42.8			$	47.2			$	43.8
Satellite stores		15.7				16.8				16.7				16.8

International Franchise stores:
Factory stores	$	39.9			$	41.3			$	40.7			$	44.0
Satellite stores		10.7				10.5				11.2				10.5

(1)		Represents the change in International Franchise same store sales computed by reconverting franchise store sales in each foreign currency to U.S. dollars at a constant rate of exchange for each period.
(2)		Excludes sales among Company and franchise stores.
(3)		Represents International Franchise store sales computed by reconverting International Franchise store sales for the three and nine months ended October 30, 2011 to U.S. dollars based upon the weighted average of the exchange rates prevailing in the three and nine months ended October 28, 2012.
(4)		Includes sales between Company and franchise stores.
(5)		Metrics for the three and nine months ended October 28, 2012 and October 30, 2011 include only stores open at the respective period end.

The change in “same store sales” is computed by dividing 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 (but only to the extent such sales occurred in the 57^th or later week of each store’s operation) by the aggregate on-premises sales of such stores for the comparable weeks in the preceding year. Once a store has been open for at least 57 consecutive weeks, its sales are included in the computation of same store 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. The change in same store customer count is similarly computed, but is based upon the number of retail transactions reported in the Company’s point-of-sale system.

For wholesale sales, “average weekly number of doors” represents the average number of customer locations to which product deliveries were made during a week, and “average weekly sales per door” represents the average weekly sales to each such location.

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 appearing elsewhere herein include sales by Company stores, sales to franchisees by the KK Supply Chain business segment, and royalties and fees received from franchise stores based on their sales, but exclude sales by franchise stores to their customers.

The following table sets forth data about the number of systemwide stores as of October 28, 2012 and October 30, 2011.

	October 28,	October 30,
	2012	2011
Number of Stores Open At Period End:
Company stores:
Factory:
Commissaries	7	6
Dual-channel stores	37	35
On-premises only stores	31	29
Satellite stores	21	19
Total Company stores	96	89

Domestic Franchise stores:
Factory stores	101	103
Satellite stores	41	38
Total Domestic Franchise stores	142	141

International Franchise stores:
Factory stores	119	112
Satellite stores	374	336
Total International Franchise stores	493	448

Total systemwide stores	731	678

The following table sets forth data about the number of store operating weeks for the three and nine months ended October 28, 2012 and October 30, 2011.

	Three Months Ended		Nine Months Ended
	October 28,	October 30,	October 28,	October 30,
	2012	2011	2012	2011
Store Operating Weeks:
Company stores:
Factory stores:
Commissaries	91	78	273	234
Dual-channel stores	477	455	1,413	1,365
On-premises only stores	395	377	1,156	1,131
Satellite stores	269	237	789	662

Domestic Franchise stores:⁽¹⁾
Factory stores	1,303	1,331	3,887	3,921
Satellite stores	518	491	1,531	1,370

International Franchise stores:⁽¹⁾
Factory stores	1,331	1,163	3,902	3,413
Satellite stores	4,655	4,159	13,190	11,978

(1)

Metrics for the three and nine months ended October 28, 2012 and October 30, 2011 include only stores open at the respective period end.

The following table sets forth the types and locations of Company stores as of October 28, 2012.

	Number of Company Stores
	Factory
State	Stores	Hot Shops	Fresh Shops	Total
Alabama	3	-	-	3
District of Columbia	-	1	-	1
Florida	4	-	-	4
Georgia	7	5	-	12
Indiana	3	1	-	4
Kansas	3	-	-	3
Kentucky	3	1	-	4
Louisiana	1	-	-	1
Maryland	2	-	-	2
Michigan	3	-	-	3
Mississippi	1	-	-	1
Missouri	4	-	-	4
New York	-	-	1	1
North Carolina	13	4	-	17
Ohio	6	-	-	6
South Carolina	3	3	-	6
Tennessee	9	3	-	12
Texas	3	-	-	3
Virginia	6	2	-	8
West Virginia	1	-	-	1
Total	75	20	1	96

Changes in the number of Company stores during the three and nine months ended October 28, 2012 and October 30, 2011 are summarized in the table below.

	Number of Company Stores
	Factory
	Stores	Hot Shops		Fresh Shops	Total
Three months ended October 28, 2012
July 29, 2012	73	19		1	93
Opened	1	-		-	1
Closed	-	-		-	-
Transferred	1	1		-	2
October 28, 2012	75	20		1	96

Nine months ended October 28, 2012
January 29, 2012	72	19		1	92
Opened	2	-		-	2
Closed	-	-		-	-
Transferred	1	1		-	2
October 28, 2012	75	20		1	96

Three months ended October 30, 2011
July 31, 2011	70	17		1	88
Opened	-	1		-	1
Closed	-	-		-	-
October 30, 2011	70	18		1	89

Nine months ended October 30, 2011
January 30, 2011	69	15		1	85
Opened	-	4		-	4
Closed	-	-		-	-
Change in store type	1	(1	)	-	-
October 30, 2011	70	18		1	89

The following table sets forth the types and locations of domestic franchise stores as of October 28, 2012.

	Number of Domestic Franchise Stores
	Factory
State	Stores	Hot Shops	Fresh Shops	Total
Alabama	5	3	-	8
Arizona	1	1	-	2
Arkansas	2	-	-	2
California	14	1	4	19
Colorado	2	-	-	2
Connecticut	1	-	3	4
Florida	12	6	1	19
Georgia	5	3	-	8
Hawaii	1	-	-	1
Idaho	1	-	-	1
Illinois	4	-	-	4
Iowa	1	-	-	1
Louisiana	3	-	-	3
Mississippi	3	1	-	4
Missouri	2	1	-	3
Nebraska	1	-	1	2
Nevada	3	-	2	5
New Jersey	-	1	-	1
New Mexico	1	1	1	3
North Carolina	7	1	-	8
Oklahoma	3	-	-	3
Oregon	2	-	-	2
Pennsylvania	4	3	1	8
South Carolina	6	2	1	9
Tennessee	1	-	-	1
Texas	7	2	-	9
Utah	2	-	-	2
Washington	6	-	-	6
Wisconsin	1	1	-	2
Total	101	27	14	142

Changes in the number of domestic franchise stores during the three and nine months ended October 28, 2012 and October 30, 2011 are summarized in the table below.

	Number of Domestic Franchise Stores
	Factory
	Stores		Hot Shops		Fresh Shops		Total
Three months ended October 28, 2012
July 29, 2012	101		26		14		141
Opened	1		2		-		3
Closed	-		-		-		-
Transferred	(1	)	(1	)	-		(2	)
October 28, 2012	101		27		14		142

Nine months ended October 28, 2012
January 29, 2012	102		25		15		142
Opened	2		4		-		6
Closed	(2	)	(1	)	(1	)	(4	)
Transferred	(1	)	(1	)	-		(2	)
October 28, 2012	101		27		14		142

Three months ended October 30, 2011
July 31, 2011	103		22		23		148
Opened	1		1		-		2
Closed	(1	)	-		(8	)	(9	)
October 30, 2011	103		23		15		141

Nine months ended October 30, 2011
January 30, 2011	102		17		25		144
Opened	3		7		1		11
Closed	(2	)	(1	)	(11	)	(14	)
October 30, 2011	103		23		15		141

The types and locations of international franchise stores as of October 28, 2012 are summarized in the table below.

	Number of International Franchise Stores
	Fiscal
	Year First	Factory
Country	Store Opened	Stores	Hot Shops	Fresh Shops	Kiosks	Total
Australia	2004	5	1	7	6	19
Bahrain	2009	1	-	1	-	2
Canada	2002	4	-	2	-	6
China	2010	1	-	1	-	2
Dominican Republic	2011	1	-	2	-	3
Indonesia	2007	3	-	3	6	12
Japan	2007	17	-	22	-	39
Kuwait	2007	2	-	5	6	13
Lebanon	2009	2	-	6	1	9
Malaysia	2010	2	1	1	4	8
Mexico	2004	7	1	31	46	85
Philippines	2007	6	3	24	6	39
Puerto Rico	2009	4	-	-	-	4
Qatar	2008	2	-	-	-	2
Saudi Arabia	2008	9	-	63	20	92
South Korea	2005	33	-	30	-	63
Thailand	2011	3	2	-	1	6
Turkey	2010	1	-	10	4	15
United Arab Emirates	2008	2	-	13	5	20
United Kingdom	2004	14	3	28	9	54
Total		119	11	249	114	493

Changes in the number of international franchise stores during the three and nine months ended October 28, 2012 and October 30, 2011 are summarized in the table below.

	Number of International Franchise Stores
	Factory
	Stores		Hot Shops	Fresh Shops		Kiosks		Total
Three months ended October 28, 2012
July 29, 2012	118		11	234		114		477
Opened	3		-	18		5		26
Closed	(2	)	-	(3	)	(5	)	(10	)
October 28, 2012	119		11	249		114		493

Nine months ended October 28, 2012
January 29, 2012	118		11	226		105		460
Opened	7		-	46		17		70
Closed	(5	)	-	(17	)	(15	)	(37	)
Change in store type	(1	)	-	(6	)	7		-
October 28, 2012	119		11	249		114		493

Three months ended October 30, 2011
July 31, 2011	111		11	229		82		433
Opened	3		2	11		4		20
Closed	(2	)	-	(2	)	(1	)	(5	)
October 30, 2011	112		13	238		85		448

Nine months ended October 30, 2011
January 30, 2011	106		11	222		78		417
Opened	10		2	27		14		53
Closed	(4	)	-	(11	)	(7	)	(22	)
October 30, 2011	112		13	238		85		448

Three months ended October 28, 2012 compared to three months ended October 30, 2011

Overview

Total revenues rose by 8.5% to $107.1 million for the three months ended October 28, 2012 compared to $98.7 million for the three months ended October 30, 2011.

Consolidated operating income increased to $9.2 million from $5.6 million and consolidated net income was $5.0 million compared to $4.7 million. Net income and earnings per share for the third quarter of fiscal 2013 are not comparable to the corresponding amounts for the third quarter of fiscal 2012 as a result of the reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012 and the resulting increase in income tax expense after the reversal; see “Provision for Income Taxes” below.

Revenues by business segment (expressed in dollars and as a percentage of total revenues) are set forth in the table below (percentage amounts may not add to totals due to rounding).

	Three Months Ended
	October 28,				October 30,
	2012				2011
	(Dollars in thousands)
Revenues by business segment:
Company Stores	$	72,493			$	67,606
Domestic Franchise		2,498				2,327
International Franchise		6,024				5,374
KK Supply Chain:
Total revenues		52,825				50,277
Less - intersegment sales elimination		(26,753	)			(26,876	)
External KK Supply Chain revenues		26,072				23,401
Total revenues	$	107,087			$	98,708

Segment revenues as a percentage of total revenues:
Company Stores		67.7		%		68.5		%
Domestic Franchise		2.3				2.4
International Franchise		5.6				5.4
KK Supply Chain (external sales)		24.3				23.7
		100.0		%		100.0		%

Operating income (loss):
Company Stores	$	1,985			$	(574	)
Domestic Franchise		1,174				1,114
International Franchise		4,301				3,313
KK Supply Chain		7,312				6,987
Total segment operating income		14,772				10,840
Unallocated general and administrative expenses		(5,345	)			(5,155	)
Impairment charges and lease termination costs		(216	)			(135	)
Consolidated operating income	$	9,211			$	5,550

A discussion of the revenues and operating results of each of the Company’s four business segments follows, together with a discussion of income statement line items not associated with specific segments.

Company Stores

The components of Company Stores revenues and expenses (expressed in dollars and as a percentage of total revenues) are set forth in the table below (percentage amounts may not add to totals due to rounding).

						Percentage of Total Revenues
	Three Months Ended					Three Months Ended
	October 28,		October 30,			October 28,		October 30,
	2012		2011			2012		2011
	(In thousands)
Revenues:
On-premises sales:
Retail sales	$	31,039	$	27,190		42.8	%	40.2		%
Fundraising sales		4,260		4,157		5.9		6.1
Total on-premises sales		35,299		31,347		48.7		46.4
Wholesale sales:
Grocery/mass merchants		22,555		21,716		31.1		32.1
Convenience stores		13,803		13,793		19.0		20.4
Other wholesale		836		750		1.2		1.1
Total wholesale sales		37,194		36,259		51.3		53.6
Total revenues		72,493		67,606		100.0		100.0

Operating expenses:
Cost of sales:
Food, beverage and packaging		26,995		26,360		37.2		39.0
Shop labor		12,940		12,436		17.8		18.4
Delivery labor		5,880		5,731		8.1		8.5
Employee benefits		4,672		4,717		6.4		7.0
Total cost of sales		50,487		49,244		69.6		72.8
Vehicle costs⁽¹⁾		4,416		4,258		6.1		6.3
Occupancy⁽²⁾		2,443		2,237		3.4		3.3
Utilities expense		1,568		1,610		2.2		2.4
Depreciation expense		1,880		1,756		2.6		2.6
Other operating expenses		5,201		4,675		7.2		6.9
Total store level costs		65,995		63,780		91.0		94.3
Store operating income		6,498		3,826		9.0		5.7
Other segment operating costs⁽³⁾		3,438		3,275		4.7		4.8
Allocated corporate overhead		1,075		1,125		1.5		1.7
Segment operating income (loss)	$	1,985	$	(574	)	2.7	%	(0.8	)	%

(1)		Includes fuel, maintenance and repairs, rent, taxes and other costs of operating the delivery fleet, exclusive of depreciation.
(2)		Includes rent, property taxes, common area maintenance charges, insurance, building maintenance and other occupancy costs, exclusive of utilities and depreciation.
(3)		Includes marketing costs not charged to stores, segment management costs, wholesale selling expenses and support functions.

A reconciliation of Company Stores segment sales from the third quarter of fiscal 2012 to the third quarter of fiscal 2013 follows:

	On-Premises		Wholesale		Total
	(In thousands)
Sales for the three months ended October 30, 2011	$	31,347	$	36,259	$	67,606
Increase in sales at established stores (open stores only)		2,091		779		2,870
Increase in sales at stores opened in fiscal 2012		613		-		613
Sales at stores opened in fiscal 2013		824		-		824
Sales at stores acquired in fiscal 2013		424		156		580
Sales for the three months ended October 28, 2012	$	35,299	$	37,194	$	72,493

The following table presents sales metrics for Company stores:

	Three Months Ended
	October 28,				October 30,
	2012				2011
On-premises:
Change in same store sales		6.8		%		4.0		%
Change in same store customer count (retail sales only)		8.4		%		(1.3	)	%
Average guest check (retail sales only)	$	7.43			$	7.49
Wholesale:
Grocery/mass merchants:
Change in average weekly number of doors		(2.9	)	%		1.4		%
Change in average weekly sales per door		6.9		%		15.9		%
Convenience stores:
Change in average weekly number of doors		(4.5	)	%		(9.3	)	%
Change in average weekly sales per door		4.7		%		14.0		%

On-premises sales

The components of the change in same store sales at Company stores are as follows:

	Three Months Ended
	October 28,			October 30,
	2012			2011
Change in same store sales:
Retail pricing	0.0		%	7.4		%
Guest check average (exclusive of the effects of pricing)	(0.3	)		(2.4	)
Customer count	7.1			(1.1	)
Other	0.0			0.1
Total	6.8		%	4.0		%

On-premises sales increased 12.6% to $35.3 million in the third quarter of fiscal 2013 from $31.3 million in the third quarter of fiscal 2012, driven by higher customer traffic. The Company is developing and implementing new and enhanced marketing programs designed to increase guest visit frequency. In addition to improved marketing programs, management believes that customer traffic has been positively affected by ongoing store remodelings, an emphasis on hospitality, and continued use of creative limited time doughnut offerings.

The Company believes that the expected cannibalization and honeymoon effects of new stores in expansion markets adversely affected same store customer count in the third quarter of fiscal 2013. “Cannibalization effect” means the tendency for new stores to become successful, in part or in whole, by “shifting” sales from existing stores in the same market. “Honeymoon effect” means the common pattern for many start-up restaurants in which a flurry of activity due to start-up publicity and natural curiosity is followed by a decline during which a steady repeat customer base develops.

Wholesale distribution

Sales to wholesale accounts increased 2.6% to $37.2 million in the third quarter of fiscal 2013 from $36.3 million in the third quarter of fiscal 2012. Higher unit volumes accounted for the majority of the increase.

Sales to grocers and mass merchants increased 3.9% to $22.6 million, with a 6.9% increase in average weekly sales per door partially offset by a 2.9% decline in the average number of doors served. The Company believes that average weekly sales per door in the grocery/mass merchant channel have grown as a result of, among other things, improved customer service, introduction of additional price points, and the addition of new relatively higher volume doors. The decline in the average number of doors served in the grocery/mass merchant channel reflects store closures by a regional grocery store customer as well as the elimination of loose doughnut sales at another regional grocer, although the Company continues to sell packaged products to this customer. Sales of loose unpackaged products comprised approximately 2% of sales to grocery/mass merchant customers for the three months ended October 28, 2012, with the balance comprised of packaged products.

Convenience store sales were relatively unchanged, reflecting a 4.7% increase in the average weekly sales per door and a 4.5% decline in the average number of doors served. The decline in the average number of doors served in the convenience store channel reflects a reduction in the number of stops at relatively low volume doors, as well as the loss of a regional convenience store account. Sales of loose unpackaged products comprised approximately 80% of sales to convenience store customers for the three months ended October 28, 2012, with the balance comprised of sales of packaged products.

Costs and expenses

Total cost of sales as a percentage of revenues decreased by 3.2 percentage points from the third quarter of fiscal 2012 to 69.6% of revenues in the third quarter of fiscal 2013.

The cost of food, beverage and packaging as a percentage of revenues decreased by 1.8 percentage points in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012. Lower aggregate costs for doughnut mixes, sugar, shortening, other ingredients and packaging accounted for approximately 1.0 percentage point of the improvement, with the remainder principally reflecting operating improvements and a greater percentage of sales derived from on-premises customers compared to the third quarter of fiscal 2012. Lower aggregate costs for ingredients and packaging reflect generally lower input costs at KK Supply Chain.

KK Supply Chain has fixed the prices on all of its major raw materials for the remainder of fiscal 2013. Except for sugar, the Company currently anticipates the aggregate cost of doughnut mix, shortening and other ingredients to be slightly lower in the fourth quarter of fiscal 2013 compared to the third quarter, and compared to the fourth quarter of fiscal 2012. For fiscal 2014, the Company has entered into contracts to purchase approximately half of its shortening requirements, approximately 10% of its flour requirements, and substantially all of its estimated sugar requirements. Based upon current market forecasts, the Company expects its aggregate cost of ingredients and packaging to rise modestly in fiscal 2014 compared to fiscal 2013, and expects to recover these higher costs through price increases or cost reduction measures. The Company’s contracts for sugar also cover substantially all of its estimated fiscal 2015 requirements.

Shop labor and employee benefits as a percentage of revenues both declined by 0.6 percentage points from the third quarter of fiscal 2012 to the third quarter of fiscal 2013, principally due to higher revenues and improved labor cost management.

Vehicle costs as a percentage of revenues decreased from 6.3% of revenues in the third quarter of fiscal 2012 to 6.1% of revenues in the third quarter of fiscal 2013, principally as a result of lower fuel costs due to a reduction in mileage due to account rationalization.

Other operating expenses as a percentage of revenues increased by 0.3 percentage points from the third quarter of fiscal 2012 to the third quarter of fiscal 2013 reflecting, among other things, higher store-level marketing expenses.

Many segment operating costs are fixed or semi-fixed in nature and, accordingly, segment profit margins are sensitive to changes in sales volumes.

The Patient Protection and Affordable Care Act (the “Act”) requires businesses employing fifty or more full-time equivalent employees to offer health care benefits to those full-time employees beginning in January 2014, or be subject to an annual penalty. Those benefits must be provided under a health care plan which provides a certain minimum scope of health care services. The Act limits the portion of the cost of the benefits which the Company can require employees to pay.

The Company currently employs approximately 1,300 persons (approximately 35% of the Company’s total number of employees) to whom the Company does not currently provide health care benefits but who could be entitled to receive health care benefits under the Act. The Company does not know the amount by which its costs will increase assuming the above provisions of the Act are implemented in January 2014 because, among other reasons, many of the specifics relating to implementation, including many of the specifics of the coverage required to be offered, are to be contained in regulations which have not yet been drafted. In addition, the Company does not know how many of the potentially newly-eligible employees will elect to obtain coverage under the Act.

However, based on information currently available to the Company and the Company’s analyses to-date and its current cost estimates, management currently does not expect that the aggregate incremental cost of providing health care coverage prescribed by the Act will exceed its current costs by more than approximately $5 million annually. The Company currently believes its incremental costs will be less than such amount, and may be substantially less. Such estimate does not reflect any mitigating actions the Company might take in order to reduce the cost of the benefits required to be offered or reduce the number of employees subject to the new requirements. The Company is continuing to study and evaluate the requirements of the Act, and the Company’s estimate of the additional cost of providing benefits mandated by the Act is expected to change as the Company gains additional information and makes decisions affecting its implementation of the Act’s requirements.

Domestic Franchise

	Three Months Ended
	October 28,		October 30,
	2012		2011
	(In thousands)
Revenues:
Royalties	$	2,307	$	2,144
Development and franchise fees		100		75
Other		91		108
Total revenues		2,498		2,327

Operating expenses:
Segment operating expenses		1,184		1,058
Depreciation expense		40		55
Allocated corporate overhead		100		100
Total operating expenses		1,324		1,213
Segment operating income	$	1,174	$	1,114

Domestic Franchise revenues increased 7.3% to $2.5 million in the third quarter of fiscal 2013 from $2.3 million in the third quarter of fiscal 2012. The increase reflects higher domestic royalty revenues resulting from an increase in sales by domestic franchise stores from $65 million in the third quarter of fiscal 2012 to $69 million in the third quarter of fiscal 2013. Domestic Franchise same store sales rose 5.0% in the third quarter of fiscal 2013.

Domestic Franchise operating expenses include costs to recruit new domestic franchisees, to assist in domestic store openings, and to monitor and aid in the performance of domestic franchise stores, as well as allocated corporate costs. Domestic Franchise operating expenses in the third quarter of fiscal 2012 reflect the reversal of a previously recorded accrual of $110,000 related to a franchisee lease guarantee as a result of the Company receiving a release from the guarantee. The Company intends to add additional human resources to the Domestic Franchise segment and incur other additional franchise marketing costs in coming quarters in connection with management’s plan to reengage in franchise marketing efforts to drive domestic franchise growth.

Domestic franchisees opened three stores during the third quarter of fiscal 2013. On August 30, 2012, the Company acquired two stores from one of its domestic franchisees as more fully described in Note 12 to the consolidated financial statements appearing elsewhere herein. As of October 28, 2012, existing development and franchise agreements for territories in the United States provide for the development of approximately 50 additional stores through fiscal 2018. Royalty 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.

International Franchise

	Three Months Ended
	October 28,		October 30,
	2012		2011
	(In thousands)
Revenues:
Royalties	$	5,574	$	4,990
Development and franchise fees		450		384
Total revenues		6,024		5,374

Operating expenses:
Segment operating expenses		1,420		1,736
Depreciation expense		3		-
Allocated corporate overhead		300		325
Total operating expenses		1,723		2,061
Segment operating income	$	4,301	$	3,313

International Franchise royalties increased 11.7%, driven by an increase in sales by international franchise stores from $92 million in the third quarter of fiscal 2012 to $104 million in the third quarter of fiscal 2013. Changes in the rates of exchange between the U.S. dollar and the foreign currencies in which the Company’s international franchisees do business had no significant impact on sales by international franchisees measured in U.S. dollars in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012.

International Franchise same store sales, measured on a constant currency basis to remove the effects of changing exchange rates between foreign currencies and the U.S. dollar (“constant dollar same store sales”), fell 7.7%. The decline in International Franchise same store sales reflects, among other things, waning honeymoon effects from the large number of new stores opened internationally in recent years and the cannibalization effects on initial stores in new markets of additional store openings in those markets. Over the past three years, constant dollar same store sales have improved from the 21.1% decline reported for fiscal 2010. Management believes the improvement reflects reduced cannibalization as store density grows in established markets, as well as waning honeymoon effects from a decrease in the number of new stores as a percentage of the total international store count.

Constant dollar same store sales in established markets fell 2.4% in the third quarter of fiscal 2013 and fell 12.4% in new markets. “Established markets” means countries in which the first Krispy Kreme store opened before fiscal 2007. Sales at stores in established markets comprised approximately 50% of aggregate constant dollar same store sales for the third quarter of fiscal 2013. While the Company considers countries in which Krispy Kreme first opened before fiscal 2007 to be established markets, franchisees in those markets continue to develop their businesses; these franchisees opened 233 of the 581 international stores opened since the beginning of fiscal 2007.

International Franchise operating expenses include costs to recruit new international franchisees, to assist in international store openings, and to monitor and aid in the performance of international franchise stores, as well as allocated corporate costs. International Franchise operating expenses decreased to $1.4 million compared to $1.7 million in the third quarter of fiscal 2012, principally reflecting a shift in the timing of recognition of share-based compensation related to a retirement-eligible officer. Management expects International Franchise operating expenses to rise in fiscal 2014 due to human resource additions to support international franchise growth, as well as anticipated fiscal 2014 shop openings in new markets which typically require a greater level of franchisor support than openings in existing markets.

International franchisees opened 26 stores and closed ten stores in the third quarter of fiscal 2013. As of October 28, 2012, existing development and franchise agreements for territories outside the United States provide for the development of approximately 380 additional stores through fiscal 2019. Royalty 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.

KK Supply Chain

The components of KK Supply Chain revenues and expenses (expressed in dollars and as a percentage of total revenues before intersegment sales elimination) are set forth in the table below (percentage amounts may not add to totals due to rounding).

						Percentage of Total Revenues
						Before Intersegment
						Sales Elimination
	Three Months Ended					Three Months Ended
	October 28,		October 30,			October 28,		October 30,
	2012		2011			2012		2011
	(In thousands)
Revenues:
Doughnut mixes	$	18,226	$	16,650		34.5	%	33.1		%
Other ingredients, packaging and supplies		31,560		31,357		59.7		62.4
Equipment		2,340		1,660		4.4		3.3
Fuel surcharge		699		610		1.3		1.2
Total revenues before intersegment sales elimination		52,825		50,277		100.0		100.0

Operating expenses:
Cost of sales:
Cost of goods produced and purchased		36,646		34,281		69.4		68.2
(Gain) loss on agricultural derivatives		110		(176	)	0.2		(0.4	)
Inbound freight		1,471		1,082		2.8		2.2
Total cost of sales		38,227		35,187		72.4		70.0
Distribution costs		3,582		4,100		6.8		8.2
Other segment operating costs		3,232		3,545		6.1		7.1
Depreciation expense		172		183		0.3		0.4
Allocated corporate overhead		300		275		0.6		0.5
Total operating costs		45,513		43,290		86.2		86.1
Segment operating income	$	7,312	$	6,987		13.8	%	13.9		%

KK Supply Chain revenues before intersegment sales elimination increased 5.1% in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012.

Sales of doughnut mixes rose 9.5% year over year in the third quarter of fiscal 2013, reflecting higher unit volumes offset by lower selling prices resulting from a reduction in raw materials costs.

Sales of other ingredients, packaging and supplies, made principally to Company and Domestic Franchise stores, rose 0.6% year-over-year in the third quarter of fiscal 2013 due to higher unit volumes partially offset by lower selling prices. While systemwide sales at Company and Domestic Franchise stores rose in the third quarter of fiscal 2013 compared to the third quarter of the preceding fiscal year, a greater percentage of such sales was to on-premises customers compared to wholesale customers. On-premises sales at Company and Domestic Franchise stores generate proportionately lower KK Supply Chain sales than do sales to wholesale customers. In addition, the Company outsourced distribution to its International Franchise stores in fiscal 2012, which resulted in a reduction in sales of non-mix products to those franchisees.

The Company utilizes a fuel surcharge program to recoup additional freight costs resulting from increases in fuel costs. Charges under the program are based upon the price of diesel fuel.

KK Supply Chain input costs increased to 69.4% of revenues in third quarter of fiscal 2013 compared to 68.2% of revenues in the third quarter of the preceding fiscal year, principally as a result of a reduction in the gross margin on sugar. While the Company raised selling prices to recover higher sugar costs, the Company did not mark up such higher costs, which resulted in an increase in the overall cost of goods produced and purchased as a percentage of revenues.

Inbound freight increased 0.6 percentage points from the third quarter of fiscal 2012 to 2.8% of revenues in the third quarter of fiscal 2013 as a result of outsourcing product distribution for stores east of the Mississippi to a third party provider beginning in fiscal 2012. These increased inbound freight costs were substantially offset by a reduction in distribution costs and other segment operating costs, which include segment management, purchasing, customer service and support, laboratory and quality control costs, and research and development expenses, associated with the outsourcing of product distribution. Other segment operating expenses in the third quarter of fiscal 2012 also included charges of approximately $330,000 recorded to the KK Supply Chain segment for the settlement of certain sales tax litigation.

Franchisees opened 29 stores and closed 10 stores in the third quarter of fiscal 2013. A substantial portion of KK Supply Chain’s 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.

An increasing percentage of franchise store sales is attributable to sales by franchisees outside North America. The Company sells doughnut mixes and concentrates to its international franchisees. These franchisees purchase substantially all other ingredients, packaging and supplies from vendors approved by the Company. Accordingly, KK Supply Chain revenues are less correlated with sales by international franchisees than with sales by domestic franchisees.

General and Administrative Expenses

General and administrative expenses increased slightly to $5.1 million in the third quarter of fiscal 2013 from $4.9 million in the third quarter of fiscal 2012, but as a percentage of total revenues decreased to 4.7% from 5.0%, respectively. The Company is seeking to minimize general and administrative expenses in order to gain operating leverage as its revenues rise.

Impairment Charges and Lease Termination Costs

Impairment charges and lease termination costs were $216,000 in the third quarter of fiscal 2013 compared to $135,000 in the third quarter of fiscal 2012. The components of these charges are set forth in the following table:

	Three Months Ended
	October 28,		October 30,
	2012		2011
		(In thousands)

Impairment of long-lived assets	$	-	$	-
Lease termination costs		216		135
	$	216	$	135

The Company tests long-lived assets for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. These events and changes in circumstances include store closing and refranchising decisions, the effects of changing costs on current results of operations, observed trends in operating results, and evidence of changed circumstances observed as a part of periodic reforecasts of future operating results and as part of the Company’s annual budgeting process. Impairment charges generally relate to Company stores expected to be closed or refranchised, as well as to stores management believes will not generate sufficient future cash flows to enable the Company to recover the carrying value of the stores’ assets, but which management has not yet decided to close. When the Company concludes that the carrying value of long-lived assets is not recoverable (based on future projected undiscounted cash flows), the Company records impairment charges to reduce the carrying value of those assets to their estimated fair values. The fair values of these assets are estimated based on the present value of estimated future cash flows, on independent appraisals and, in the case of assets the Company currently is negotiating to sell, based on the Company’s negotiations with unrelated third-party buyers.

Lease termination costs represent the estimated fair value of liabilities related to unexpired leases, after reduction by the amount of accrued rent expense, if any, related to the leases, and are recorded when the lease contracts are terminated or, if earlier, the date on which the Company ceases use of the leased property. The fair value of these liabilities were estimated as the excess, if any, of the contractual payments required under the unexpired leases over the current market lease rates for the properties, discounted at a credit-adjusted risk-free rate over the remaining term of the leases. The provision for lease termination costs also includes adjustments to liabilities recorded in prior periods arising from changes in estimated sublease rentals and from settlements with landlords.

In the third quarter of fiscal 2013 and 2012, the Company recorded lease termination charges of $216,000 and $135,000, respectively, principally reflecting a change in estimated sublease rentals and settlements with landlords on stores previously closed.

The Company intends to refranchise certain geographic markets, expected to consist principally of, but not necessarily limited to, markets outside the Company’s traditional base in the Southeastern United States. The franchise rights and other assets in many of these markets were acquired by the Company in business combinations in prior years.

Since the beginning of fiscal 2009, the Company has refranchised a total of 11 stores and received consideration totaling $2.5 million in connection with those transactions. During this period, the Company recorded impairment charges totaling approximately $490,000 related to completed and anticipated refranchisings. The Company cannot predict the likelihood of refranchising any additional stores or markets or the amount of proceeds, if any, which might be received therefrom, including the amounts which might be realized from the sale of store assets and the execution of any related franchise agreements. Asset dispositions associated with future refranchisings could result in the recognition of impairment losses on the related assets.

Interest Expense

The components of interest expense are as follows:

	Three Months Ended
	October 28,		October 30,
	2012		2011
	(In thousands)
Interest accruing on outstanding term loan indebtedness	$	171	$	180
Letter of credit and unused revolver fees		74		79
Amortization of cost of interest rate derivatives		10		-
Amortization of deferred financing costs		98		102
Other		31		24
	$	384	$	385

Equity in Income (Losses) of Equity Method Franchisees

The Company recorded equity in the losses of equity method franchisees of $47,000 in the third quarter of fiscal 2013 compared to losses of $72,000 in the third quarter of fiscal 2012. This caption represents the Company’s share of operating results of equity method franchisees which develop and operate Krispy Kreme stores.

Provision for Income Taxes

The provision for income taxes was $3.8 million in the third quarter of fiscal 2013 compared to $495,000 in the third quarter of fiscal 2012.

The Company establishes valuation allowances for deferred tax assets in accordance with GAAP, which provides that such valuation allowances shall be established unless realization of the deferred tax assets is more likely than not. From fiscal 2005 until the fourth quarter of fiscal 2012, the Company maintained a valuation allowance on deferred tax assets equal to the entire excess of those assets over the Company’s deferred tax liabilities because of the uncertainty surrounding the realization of those assets. Such uncertainty arose principally from the substantial losses incurred by the Company from fiscal 2005 through fiscal 2009.

Realization of net deferred tax assets generally is dependent on generation of taxable income in future periods. The Company reported a pretax profit of $418,000 in fiscal 2010 and $8.9 million in fiscal 2011. In fiscal 2012, the Company’s pretax profit increased to $30.4 million, inclusive of a $6.2 million non-recurring gain on the Company’s sale of its 30% interest in KK Mexico. After considering all relevant factors and objectively verifiable evidence having an impact on the likelihood of future realization of the Company’s deferred tax assets, in the fourth quarter of fiscal 2012 management concluded that it was more likely than not that a substantial portion of the Company’s deferred tax assets will be realized in future years. Accordingly, in the fourth quarter of fiscal 2012, the Company reversed $139.6 million of the valuation allowance on deferred tax assets, with an offsetting credit to the provision for income taxes, representing the amount of deferred tax assets management believes is more likely than not to be realized.

While the reversal of a portion of the valuation allowances increased the Company’s earnings by $139.6 million in fiscal 2012, the reversal has the effect of increasing the provision for income taxes, and therefore decreasing net income, beginning in fiscal 2013. This negative effect on earnings occurs because the reversal of the valuation allowances resulted in the recognition in fiscal 2012 of income tax benefits expected to be realized in later years. Absent the reversal of the valuation allowances, such tax benefits would have been recognized when realized in future periods upon the generation of taxable income. Accordingly, beginning in fiscal 2013, the Company’s effective income tax rate, which in fiscal 2012 and earlier years bore little or no relationship to pretax income, more closely reflects the blended federal and state income tax rates in jurisdictions in which the Company operates. The reversal of the valuation allowance had no effect on the Company’s cash payments for income taxes.

Because of the increase in the Company’s effective income tax rate as described above, the Company’s income tax expense in the third quarter of fiscal 2013 is not comparable to income tax expense in the third quarter of fiscal 2012. In addition, until such time as the Company’s net operating loss carryforwards are exhausted or expire, GAAP income tax expense is expected to substantially exceed the amount of cash income taxes payable by the Company, which are expected to remain insignificant for the foreseeable future.

The portion of the income tax provision representing taxes estimated to be payable currently was approximately $530,000 and $460,000 in the third quarter of fiscal 2013 and fiscal 2012, respectively, consisting principally of foreign withholding taxes related to royalties and franchise fees paid to the Company by international franchisees.

The Company’s estimated effective income tax rate on GAAP ordinary income for fiscal 2013 is 45%. The actual effective income tax rate for fiscal 2013 will be known in the fourth quarter when the Company’s annual pretax income and income tax expense are known.

The following non-GAAP financial information and related reconciliation to GAAP measures are provided to assist the reader in understanding the effect of the fiscal 2012 reversal of the valuation allowance on the Company’s results of operations for fiscal 2013. This non-GAAP information is intended to facilitate comparisons of fiscal 2013 results with the Company’s results for fiscal 2012, and to illustrate the material difference between the Company’s income tax expense and income taxes currently payable. Adjusted net income and adjusted earnings per common share reflect income tax expense only to the extent such expense is currently payable in cash. These non-GAAP performance measures are consistent with other measurements made by management in the operation of the business which do not consider income taxes except to the extent to which those taxes currently are payable, for example, capital allocation decisions and incentive compensation measurements that are made on a pretax basis.

	Three Months Ended
	October 28,		October 30,
	2012		2011
	(In thousands, except per share amounts)

Net income, as reported	$	5,044	$	4,717
Provision for deferred income taxes		3,300		31
Adjusted net income	$	8,344	$	4,748

Adjusted earnings per common share:
Basic	$	0.13	$	0.07
Diluted	$	0.12	$	0.07

Weighted average shares outstanding:
Basic		66,668		69,384
Diluted		68,803		71,547

Nine months ended October 28, 2012 compared to nine months ended October 30, 2011

Overview

Total revenues rose by 5.5% to $317.7 million for the nine months ended October 28, 2012 compared to $301.3 million for the nine months ended October 30, 2011.

Consolidated operating income increased to $29.3 million from $20.3 million, and consolidated net income was $16.0 million compared to $22.7 million. Net income and earnings per share for the nine months ended October 28, 2012 are not comparable to the corresponding amounts for the nine months ended October 30, 2011 as a result of the reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012 and the resulting increase in income tax expense after the reversal; see “Provision for Income Taxes” below.

Revenues by business segment (expressed in dollars and as a percentage of total revenues) are set forth in the table below (percentage amounts may not add to totals due to rounding).

	Nine Months Ended
	October 28,				October 30,
	2012				2011
	(Dollars in thousands)
Revenues by business segment:
Company Stores	$	215,172			$	203,073
Domestic Franchise		7,561				7,045
International Franchise		17,832				16,362
KK Supply Chain:
Total revenues		158,075				154,501
Less - intersegment sales elimination		(80,942	)			(79,721	)
External KK Supply Chain revenues		77,133				74,780
Total revenues	$	317,698			$	301,260

Segment revenues as a percentage of total revenues:
Company Stores		67.7		%		67.4		%
Domestic Franchise		2.4				2.3
International Franchise		5.6				5.4
KK Supply Chain (external sales)		24.3				24.8
		100.0		%		100.0		%

Operating income (loss):
Company Stores	$	5,271			$	551
Domestic Franchise		4,072				2,477
International Franchise		12,957				10,893
KK Supply Chain		24,181				23,074
Total segment operating income		46,481				36,995
Unallocated general and administrative expenses		(16,900	)			(16,037	)
Impairment charges and lease termination costs		(302	)			(680	)
Consolidated operating income	$	29,279			$	20,278

Company Stores

					Percentage of Total Revenues
	Nine Months Ended				Nine Months Ended
	October 28,		October 30,		October 28,		October 30,
	2012		2011		2012		2011
	(In thousands)
Revenues:
On-premises sales:
Retail sales	$	90,697	$	81,720	42.2	%	40.2	%
Fundraising sales		11,791		11,431	5.5		5.6
Total on-premises sales		102,488		93,151	47.6		45.9
Wholesale sales:
Grocery/mass merchants		68,309		66,197	31.7		32.6
Convenience stores		41,877		41,472	19.5		20.4
Other wholesale		2,498		2,253	1.2		1.1
Total wholesale sales		112,684		109,922	52.4		54.1
Total revenues		215,172		203,073	100.0		100.0

Operating expenses:
Cost of sales:
Food, beverage and packaging		81,416		78,335	37.8		38.6
Shop labor		38,465		37,521	17.9		18.5
Delivery labor		17,663		17,382	8.2		8.6
Employee benefits		14,763		13,890	6.9		6.8
Total cost of sales		152,307		147,128	70.8		72.5
Vehicle costs⁽¹⁾		13,046		13,065	6.1		6.4
Occupancy⁽²⁾		7,246		6,822	3.4		3.4
Utilities expense		4,522		4,449	2.1		2.2
Depreciation expense		5,921		4,982	2.8		2.5
Other operating expenses		14,565		13,487	6.8		6.6
Total store level costs		197,607		189,933	91.8		93.5
Store operating income		17,565		13,140	8.2		6.5
Other segment operating costs⁽³⁾		9,069		9,214	4.2		4.5
Allocated corporate overhead		3,225		3,375	1.5		1.7
Segment operating income	$	5,271	$	551	2.4	%	0.3	%

(1)		Includes fuel, maintenance and repairs, rent, taxes and other costs of operating the delivery fleet, exclusive of depreciation.
(2)		Includes rent, property taxes, common area maintenance charges, insurance, building maintenance and other occupancy costs, exclusive of utilities and depreciation.
(3)		Includes marketing costs not charged to stores, segment management costs, wholesale selling expenses and support functions.

A reconciliation of Company Stores segment sales from the nine months ended October 30, 2011 to the nine months ended October 28, 2012 follows:

	On-Premises		Wholesale		Total
	(In thousands)
Sales for the nine months ended October 30, 2011	$	93,151	$	109,922	$	203,073
Increase in sales at established stores (open stores only)		4,471		2,606		7,077
Increase in sales at stores opened in fiscal 2012		3,226		-		3,226
Sales at stores opened in fiscal 2013		1,216		-		1,216
Sales at stores acquired in fiscal 2013		424		156		580
Sales for the nine months ended October 28, 2012	$	102,488	$	112,684	$	215,172

Selling price increases in the on-premises and wholesale distribution channels accounted for approximately 1.6 percentage points of the increase in sales, exclusive of the effects of higher pricing on unit volumes; such effects are difficult to measure reliably. As with all consumer products, however, higher prices may negatively affect sales. The Company believes this phenomenon is more pronounced in the wholesale channel where competing products are merchandised alongside those of the Company.

The following table presents sales metrics for Company stores:

	Nine Months Ended
	October 28,				October 30,
	2012				2011
On-premises:
Change in same store sales		4.7		%		4.2		%
Change in same store customer count (retail sales only)		5.3		%		(0.4	)	%
Average guest check (retail sales only)	$	7.33			$	7.34
Wholesale:
Grocery/mass merchants:
Change in average weekly number of doors		(4.1	)	%		3.7		%
Change in average weekly sales per door		7.8		%		13.1		%
Convenience stores:
Change in average weekly number of doors		(7.7	)	%		(4.4	)	%
Change in average weekly sales per door		9.3		%		9.2		%

On-premises sales

The components of the change in same store sales at Company stores are as follows:

	Nine Months Ended
	October 28,			October 30,
	2012			2011
Change in same store sales:
Retail pricing	0.9		%	7.1		%
Guest check average (exclusive of the effects of pricing)	(0.8	)		(2.5	)
Customer count	4.6			(0.4	)
Other	0.0			0.0
Total	4.7		%	4.2		%

On-premises sales increased 10.0% to $102.5 million in the first nine months of fiscal 2013 from $93.2 million in the first nine months of fiscal 2012, driven principally by higher customer traffic. The Company is developing and implementing new and enhanced marketing programs designed to increase guest visit frequency. In addition to improved marketing programs, management believes that customer traffic has been positively affected by ongoing store remodelings, an emphasis on hospitality, and continued use of creative limited time doughnut offerings. Additionally, approximately 0.9 percentage points of the sales increase reflects retail price increases implemented in the first quarter of fiscal 2012. On March 7, 2011, the Company implemented price increases at substantially all its stores designed to help offset the rising costs of doughnut mixes, other ingredients and fuel resulting from higher commodity prices. These price increases affected items comprising approximately 60% of on-premises sales, and the average price increase on these items was approximately 14%.

Higher customer traffic and retail price increases implemented in fiscal 2012 contributed to the improvement in same store sales, partially offset by coffee and doughnut promotional pricing which reduced the average guest check compared to last year. Also, the Company believes that the expected cannibalization and honeymoon effects of new stores in expansion markets adversely affected same store customer count in the first nine months of fiscal 2013.

Wholesale sales

Sales to wholesale accounts increased 2.5% to $112.7 million in the first nine months of fiscal 2013 from $109.9 million in the first nine months of fiscal 2012. Approximately 1.8 percentage points of the increase is due to price increases. The Company began implementing price increases for some products offered in the wholesale channel late in the first quarter of fiscal 2012, and substantially completed implementing the increases during the second quarter. Those price increases affected products comprising approximately 60% of wholesale sales, and the average price increase on those products was approximately 11%. Higher selling prices and higher unit volumes accounted for the majority of the increase.

Sales to grocers and mass merchants increased 3.2% to $68.3 million, with a 7.8% increase in average weekly sales per door partially offset by a 4.1% decline in the average number of doors served. In addition to pricing, the Company believes that average weekly sales per door in the grocer/mass merchant channel have grown as a result of, among other things, improved customer service, introduction of additional price points, and the addition of new relatively higher volume doors. The decline in the average number of doors served in the grocery/mass merchant channel reflects store closures by a regional grocery store customer as well as the elimination of loose doughnut sales at another regional grocer, although the Company continues to sell packaged products to this customer. Sales of loose unpackaged products comprised approximately 2% of sales to grocery/mass merchant customers for the nine months ended October 28, 2012, with the balance comprised of sales of packaged products.

Convenience store sales rose 1.0% to $41.9 million, reflecting a 9.3% increase in the average weekly sales per door, partially offset by a 7.7% decline in the average number of doors served. The decline in the average number of doors served in the convenience store channel reflects a reduction in the number of stops at relatively low volume doors, as well as the loss of a regional convenience store account. Sales of loose unpackaged products comprised approximately 80% of sales to convenience store customers for the nine months ended October 28, 2012, with the balance comprised of sales of packaged products.

Costs and expenses

Total cost of sales as a percentage of revenues decreased by 1.7 percentage points from the first nine months of fiscal 2012 to 70.8% of revenues in the first nine months of fiscal 2013.

The cost of food, beverage and packaging as a percentage of revenues decreased by 0.8 percentage points in the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012. Higher aggregate costs for food, beverage and packaging increased costs by 0.4 percentage points, most of which was the result of higher sugar costs. This increase was more than offset by improved materials consumption and a greater percentage of sales derived from on-premises customers compared to the first nine months of fiscal 2012.

KK Supply Chain has fixed the prices on all of its major raw materials for the remainder of fiscal 2013. Except for sugar, the Company currently anticipates the cost of doughnut mix, shortening and other ingredients to be slightly lower in the fourth quarter of fiscal 2013 compared to the third quarter, and compared to the fourth quarter of fiscal 2012. For fiscal 2014, the Company has entered into contracts to purchase approximately half of its shortening requirements, approximately 10% of its flour requirements, and substantially all of its estimated sugar requirements. Based upon current market forecasts, the Company expects its aggregate cost of ingredients and packaging to rise modestly in fiscal 2014 compared to fiscal 2013, and expects to recover these higher costs through price increases or cost reduction measures. The Company’s contracts for sugar also cover substantially all of its estimated fiscal 2015 requirements.

Shop labor as a percentage of revenues declined by 0.6 percentage points from the first nine months of fiscal 2012 to 17.9% of revenues in the first nine months of fiscal 2013, principally due to higher revenues and improved labor cost management.

Vehicle costs as a percentage of revenues decreased from 6.4% of revenues in the first nine months of fiscal 2012 to 6.1% of revenues in the first nine months of fiscal 2013, principally due to higher sales resulting from price increases and lower fuel costs due to a reduction in mileage due to account rationalization.

Many segment operating costs are fixed or semi-fixed in nature and, accordingly, segment profit margins are sensitive to changes in sales volumes.

The Company is self-insured for workers’ compensation, vehicle and general liability claims, but maintains stop-loss coverage for individual claims exceeding certain amounts. The Company provides for claims under these self-insured programs using actuarial methods as described in the 2012 Form 10-K, and periodically updates actuarial valuations of its self-insurance reserves. Such periodic actuarial valuations result in changes over time in the estimated amounts which ultimately will be paid for claims under these programs to reflect the Company’s actual claims experience for each policy year as well as trends in claims experience over multiple years. Such claims, particularly workers’ compensation claims, often are paid over a number of years following the year in which the insured events occur, and the estimated ultimate cost of each year’s claims accordingly is adjusted over time as additional information becomes available. As a result of the Company’s periodic update of its actuarial valuation, the Company recorded favorable adjustments to its self-insurance claims liabilities related to prior policy years of approximately $370,000 in the second quarter of fiscal 2013 and $500,000 in the second quarter of fiscal 2012. The $370,000 favorable adjustment recorded in the second quarter of fiscal 2013 includes an unfavorable adjustment relating to workers’ compensation liability claims of approximately $20,000 included in employee benefits in the table above, a favorable adjustment relating to vehicle liability claims of approximately $210,000 included in vehicle costs, and a favorable adjustment relating to general liability claims of approximately $180,000 included in other operating costs. Substantially all of the $500,000 in favorable adjustments recorded in the second quarter of fiscal 2012 related to workers’ compensation liability claims.

Depreciation expense increased in the first nine months of fiscal 2013 to 2.8% of revenues from 2.5% in the first nine months of fiscal 2012 due to increased capital expenditures in fiscal 2012 and 2013 including construction of new stores, store refurbishment efforts on existing stores and investments in information technology systems.

Domestic Franchise

	Nine Months Ended
	October 28,		October 30,
	2012		2011
	(In thousands)
Revenues:
Royalties	$	7,065	$	6,466
Development and franchise fees		188		255
Other		308		324
Total revenues		7,561		7,045

Operating expenses:
Segment operating expenses		3,039		4,103
Depreciation expense		150		165
Allocated corporate overhead		300		300
Total operating expenses		3,489		4,568
Segment operating income	$	4,072	$	2,477

Domestic Franchise revenues increased 7.3% to $7.6 million in the first nine months of fiscal 2013 from $7.0 million in the first nine months of fiscal 2012. The increase reflects higher domestic royalty revenues resulting from an increase in sales by domestic franchise stores from approximately $197 million in the first nine months of fiscal 2012 to $210 million in the first nine months of fiscal 2013. Domestic Franchise same store sales rose 5.8% in the first nine months of fiscal 2013.

Domestic Franchise operating expenses include costs to recruit new domestic franchisees, to assist in domestic store openings, and to monitor and aid in the performance of domestic franchise stores, as well as allocated corporate costs. Domestic Franchise operating expenses in the first nine months of fiscal 2012 reflect a provision of $820,000 for payments under a lease guarantee associated with a franchisee whose franchise agreements the Company terminated during the period. Segment operating expenses in fiscal 2013 also reflect a reduction in legal costs compared to fiscal 2012. Fiscal 2012 operating expenses also reflect the reversal of a previously recorded accrual of $110,000 related to a franchisee lease guarantee as a result of the Company receiving a release from the guarantee. The Company intends to add additional human resources to the Domestic Franchise segment and incur other additional franchise marketing costs in coming quarters in connection with management’s plan to reengage in franchise marketing efforts to drive domestic franchise growth.

Domestic franchisees opened six stores and closed four stores in the first nine months of fiscal 2013. On August 30, 2012, the Company acquired two Krispy Kreme stores from one of its domestic franchisees as more fully described in Note 12 to the consolidated financial statements appearing elsewhere herein. As of October 28, 2012, existing development and franchise agreements for territories in the United States provide for the development of approximately 50 additional stores through fiscal 2018. Royalty 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.

International Franchise

	Nine Months Ended
	October 28,		October 30,
	2012		2011
	(In thousands)
Revenues:
Royalties	$	16,807	$	15,407
Development and franchise fees		1,025		955
Total revenues		17,832		16,362

Operating expenses:
Segment operating expenses		3,966		4,490
Depreciation expense		9		4
Allocated corporate overhead		900		975
Total operating expenses		4,875		5,469
Segment operating income	$	12,957	$	10,893

International Franchise royalties rose 9.1%, driven by an increase in sales by international franchise stores from $279 million in the first nine months of fiscal 2012 to $311 million in the first nine months of fiscal 2013. Changes in the rates of exchange between the U.S. dollar and the foreign currencies in which the Company’s international franchisees do business decreased sales by international franchisees measured in U.S. dollars by approximately $4.6 million in the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012, which negatively affected international royalty revenues by approximately $270,000.

Royalties and franchise fees for the first nine months of fiscal 2012 included approximately $280,000 and $95,000, respectively, of amounts relating to the Company’s franchisee in Mexico which accrued in prior periods but which had not previously been reported as revenue because of uncertainty surrounding their collection. Such amounts were reported as revenue in recognition of the payment of such amounts to the Company on May 5, 2011, in connection with the Company’s sale of its 30% equity interest in the franchisee as more fully described in Note 6 to the consolidated financial statements appearing elsewhere herein.

International Franchise same store sales, measured on a constant currency basis to remove the effects of changing exchange rates between foreign currencies and the U.S. dollar, fell 8.4%. The decline in International Franchise same store sales reflects, among other things, waning honeymoon effects from the large number of new stores opened internationally in recent years and the cannibalization effects on initial stores in new markets of additional store openings in those markets. Over the past three years, constant dollar same store sales have improved from the 21.1% decline reported for fiscal 2010. Management believes the improvement reflects reduced cannibalization as store density grows in established markets, as well as waning honeymoon effects from a decrease in the number of new stores as a percentage of the total international store count.

Constant dollar same store sales in established markets fell 1.0% in the first nine months of fiscal 2013 and fell 14.4% in new markets. Sales at stores in established markets comprised approximately 49% of aggregate constant dollar same store sales for the first nine months of fiscal 2013. While the Company considers countries in which Krispy Kreme first opened before fiscal 2007 to be established markets, franchisees in those markets continue to develop their business; these franchisees opened 233 of the 581 international stores opened since the beginning of fiscal 2007.

International Franchise operating expenses include costs to recruit new international franchisees, to assist in international store openings, and to monitor and aid in the performance of international franchise stores, as well as allocated corporate costs. International Franchise operating expenses decreased in the first nine months of fiscal 2013 to $4.0 million compared to $4.5 million in the first nine months of fiscal 2012. International Franchise operating expenses reflect decreases in legal fees associated with certain litigation and lower share-based compensation expense in the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012. In addition, in the first nine months of fiscal 2012, the Company recorded a credit of $391,000 to the bad debt provision principally related to the Mexican franchisee discussed above. Management expects International Franchise operating expenses to rise in fiscal 2014 due to human resource additions to support international franchise growth, as well as anticipated fiscal 2014 shop openings in new markets which typically require a greater level of franchisor support than openings in existing markets.

International franchisees opened 70 stores and closed 37 stores in the first nine months of fiscal 2013. As of October 28, 2012, existing development and franchise agreements for territories outside the United States provide for the development of approximately 380 additional stores through fiscal 2019. Royalty 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.

KK Supply Chain

						Percentage of Total Revenues
						Before Intersegment
						Sales Elimination
	Nine Months Ended					Nine Months Ended
	October 28,			October 30,		October 28,			October 30,
	2012			2011		2012			2011
	(In thousands)
Revenues:
Doughnut mixes	$	54,050		$	51,580	34.2		%	33.4	%
Other ingredients, packaging and supplies		95,805			95,008	60.6			61.5
Equipment		6,175			6,087	3.9			3.9
Fuel surcharge		2,045			1,826	1.3			1.2
Total revenues before intersegment sales elimination		158,075			154,501	100.0			100.0

Operating expenses:
Cost of sales:
Cost of goods produced and purchased		109,466			105,441	69.2			68.2
(Gain) loss on agricultural derivatives		(1,007	)		422	(0.6	)		0.3
Inbound freight		4,449			3,178	2.8			2.1
Total cost of sales		112,908			109,041	71.4			70.6
Distribution costs		10,631			11,489	6.7			7.4
Other segment operating costs		8,886			9,512	5.6			6.2
Depreciation expense		569			560	0.4			0.4
Allocated corporate overhead		900			825	0.6			0.5
Total operating costs		133,894			131,427	84.7			85.1
Segment operating income	$	24,181		$	23,074	15.3		%	14.9	%

KK Supply Chain revenues before intersegment sales elimination increased 2.3% in the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012.

Sales of doughnut mixes rose 4.8% year-over-year in the first nine months of fiscal 2013, reflecting higher unit volumes partially offset by lower selling prices resulting from a reduction in raw materials costs.

Sales of other ingredients, packaging and supplies, made principally to Company and Domestic Franchise stores, rose 0.8% year-over-year in the first nine months of fiscal 2013 due to higher selling prices of sugar partially offset by lower unit volumes. While systemwide sales at Company and Domestic Franchise stores rose in the first nine months of fiscal 2013 compared to the first nine months of the preceding fiscal year, a greater percentage of such sales was to on-premises customers compared to wholesale customers. On-premises sales at Company and Domestic Franchise stores generate proportionately lower KK Supply Chain sales than do sales to wholesale customers. In addition, the Company outsourced distribution to its International Franchise stores in fiscal 2012, which resulted in a reduction in sales of non-mix products to those franchisees.

The Company utilizes a fuel surcharge program to recoup additional freight costs resulting from increases in fuel costs. Charges under the program are based upon the price of diesel fuel.

KK Supply Chain input costs increased to 69.2% of revenues in the first nine months of fiscal 2013 compared to 68.2% of revenues in the first nine months of the preceding fiscal year, principally as a result of an approximate 15% increase in the cost of sugar. While the Company raised selling prices to recover higher sugar costs, the Company did not mark up such higher costs, which resulted in an increase in the overall cost of goods produced and purchased as a percentage of revenues.

Inbound freight increased 0.7 percentage points from the first nine months of fiscal 2012 to 2.8% of revenues in the first nine months of fiscal 2013 as a result of outsourcing product distribution for stores east of the Mississippi to a third party provider beginning in fiscal 2012. These increased inbound freight costs were substantially offset by a reduction in distribution costs and other segment operating costs, which include segment management, purchasing, customer service and support, laboratory and quality control costs, and research and development expenses, associated with the outsourcing of product distribution. Other segment operating expenses in the first nine months of fiscal 2012 also included charges of approximately $330,000 recorded to the KK Supply Chain segment for the settlement of certain sales tax litigation.

Franchisees opened 76 stores and closed 41 stores in the first nine months of fiscal 2013. A substantial portion of KK Supply Chain’s 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.

General and Administrative Expenses

General and administrative expenses increased to $16.3 million, or 5.1% of total revenues, in the first nine months of fiscal 2013 from $15.5 million or 5.2% of total revenues, in the first nine months of fiscal 2012. The increase is due principally to an increase in share-based compensation as a result of a grant to an executive officer who attained retirement eligibility during the first quarter of fiscal 2013 and the resulting acceleration in the recognition of share-based compensation expense compared to prior periods.

Impairment Charges and Lease Termination Costs

Impairment charges and lease termination costs were $302,000 in the first nine months of fiscal 2013 compared to $680,000 in the first nine months of fiscal 2012.

	Nine Months Ended
	October 28,		October 30,
	2012		2011
	(In thousands)
Impairment of long-lived assets	$	-	$	-
Lease termination costs		302		680
	$	302	$	680

Lease termination costs represent the estimated fair value of liabilities related to unexpired leases, after reduction by the amount of accrued rent expense, if any, related to the leases, and are recorded when the lease contracts are terminated or, if earlier, the date on which the Company ceases use of the leased property. The fair value of these liabilities were estimated as the excess, if any, of the contractual payments required under the unexpired leases over the current market lease rates for the properties, discounted at a credit-adjusted risk-free rate over the remaining term of the leases. The provision for lease termination costs also includes adjustments to liabilities recorded in prior periods arising from changes in estimated sublease rentals and from settlements with landlords.

In the first nine months of fiscal 2013 and 2012, the Company recorded lease termination charges of $302,000 and $680,000, respectively, principally reflecting a change in estimated sublease rentals and settlements with landlords on stores previously closed.

Interest Expense

The components of interest expense are as follows:

	Nine Months Ended
	October 28,		October 30,
	2012		2011
	(In thousands)
Interest accruing on outstanding term loan indebtedness	$	534	$	624
Letter of credit and unused revolver fees		223		282
Amortization of cost of interest rate derivatives		19		-
Amortization of deferred financing costs		300		320
Other		126		50
	$	1,202	$	1,276

The decrease in interest accruing on outstanding indebtedness and in letter of credit and unused revolver fees reflects the reduction in the principal outstanding under the Company’s term loan and a reduction in the lender’s interest margin due to a decrease in the Company’s leverage ratio.

Equity in Income (Losses) of Equity Method Franchisees

The Company recorded equity in the losses of equity method franchisees of $150,000 in the first nine months of fiscal 2013 compared to losses of $69,000 in the first nine months of fiscal 2012. This caption represents the Company’s share of operating results of equity method franchisees which develop and operate Krispy Kreme stores. On May 5, 2011, the Company sold its 30% equity interest in KK Mexico, the Company’s franchisee in Mexico, to KK Mexico’s majority shareholder as more fully described in Note 6 to the consolidated financial statements appearing elsewhere herein. The Company’s equity in the earnings of KK Mexico was approximately $110,000 for the nine months ended October 30, 2011.

Gain on Sale of Interest in Equity Method Franchisee

In the first nine months of fiscal 2012, the Company realized a gain of approximately $6.2 million arising from the sale of the Company’s investment in KK Mexico as more fully described in Note 6 to the consolidated financial statements appearing elsewhere herein.

Provision for Income Taxes

The provision for income taxes was $12.3 million in the first nine months of fiscal 2013 compared to $2.8 million in the first nine months of fiscal 2012.

Because of the increase in the Company’s effective income tax rate as described above, the Company’s income tax expense in the first nine months of fiscal 2013 is not comparable to income tax expense in the first nine months of fiscal 2012. In addition, until such time as the Company’s net operating loss carryforwards are exhausted or expire, GAAP income tax expense is expected to substantially exceed the amount of cash income taxes payable by the Company, which are expected to remain insignificant for the foreseeable future.

The portion of the income tax provision representing taxes estimated to be payable currently was approximately $1.4 million and $2.6 million in the first nine months of fiscal 2013 and fiscal 2012, respectively, consisting principally of foreign withholding taxes related to royalties and franchise fees paid to the Company by international franchisees and, in fiscal 2012, $1.5 million of Mexican income taxes payable on the KK Mexico gain, partially offset by reversals of liabilities for uncertain tax positions and related interest and penalties due principally to the expiration of statutes of limitation.

The following non-GAAP financial information and related reconciliation to GAAP measures are provided to assist the reader in understanding (1) the effect of the fiscal 2012 reversal of the valuation allowance on the Company’s results of operations for fiscal 2013, and (2) the effect of the non-recurring gain on the sale of the interest in KK Mexico on the Company’s results of operations for fiscal 2012. This non-GAAP information is intended to facilitate comparisons of fiscal 2013 results with the Company’s results for fiscal 2012, and to illustrate the material difference between the Company’s income tax expense and income taxes currently payable. Adjusted net income and adjusted earnings per common share reflect income tax expense only to the extent such expense is currently payable in cash and, in fiscal 2012, exclude the gain on the sale of the equity interest in KK Mexico. These non-GAAP performance measures are consistent with other measurements made by management in the operation of the business which do not consider income taxes except to the extent to which those taxes currently are payable, for example, capital allocation decisions and incentive compensation measurements that are made on a pretax basis.

	Nine Months Ended
	October 28,		October 30,
	2012		2011
	(In thousands, except per share
	amounts)
Net income, as reported	$	15,999	$	22,727
Provision for deferred income taxes		10,824		159
Gain on sale of interest in KK Mexico
(net of income taxes of $1,492)		-		(4,706	)
Adjusted net income	$	26,823	$	18,180

Adjusted earnings per common share:
Basic	$	0.40	$	0.26
Diluted	$	0.38	$	0.25

Weighted average shares outstanding:
Basic		67,897		69,013
Diluted		70,041		71,474

LIQUIDITY AND CAPITAL RESOURCES

The following table presents a summary of the Company’s cash flows from operating, investing and financing activities for the first nine months of fiscal 2013 and fiscal 2012.

	Nine Months Ended
	October 28,			October 30,
	2012			2011
	(In thousands)
Net cash provided by operating activities	$	37,978		$	22,912
Net cash provided by (used for) investing activities		(9,982	)		1,075
Net cash used for financing activities		(22,412	)		(8,378	)
Net increase in cash and cash equivalents	$	5,584		$	15,609

Cash Flows from Operating Activities

Net cash provided by operating activities was $38.0 million and $22.9 million in the first nine months of fiscal 2013 and fiscal 2012, respectively. Higher operating income accounted for a majority of the improvement. Cash provided by operating activities in the first nine months of fiscal 2012 was adversely affected by a temporary increase in inventories associated with the outsourcing of distribution of doughnut mixes and other KK Supply Chain products for international and certain domestic stores to a third party vendor. In addition, payments on leases related to closed stores were approximately $1.8 million higher in the in the first nine months of fiscal 2012 than in the first nine months of fiscal 2013, principally due to settlements with landlords on terminated leases in the fiscal 2012 period. The remainder of the change in cash flows from operating activities principally reflects normal fluctuations in working capital.

Cash Flows from Investing Activities

Net cash used for investing activities was $10.0 million in the first nine months of fiscal 2013 compared to net cash provided by investing activities of $1.1 million in the first nine months of fiscal 2012.

Cash used for capital expenditures increased to $9.5 million in the first nine months of fiscal 2013 from $8.2 million in the first nine months of fiscal 2012. In addition, the Company acquired two stores from a franchisee for $915,000 during fiscal 2013. The Company currently expects capital expenditures to be approximately $5 million for the fourth quarter fiscal 2013. The Company intends to fund these capital expenditures from cash provided by operating activities, from existing cash balances and, to a lesser extent, through leases.

In the first nine months of fiscal 2012, the Company received proceeds of approximately $7.7 million from the sale of the Company’s 30% equity interest in KK Mexico as more fully described in Note 6 to the consolidated financial statements appearing elsewhere herein.

In connection with the refinancing of the Company’s Secured Credit Facilities in January 2011 as more fully described in Note 12 to the consolidated financial statements in the 2012 Form 10-K, the Company deposited into escrow $1.8 million related to properties with respect to which the Company agreed to furnish to the lenders certain documentation on or before January 31, 2012, with amounts to be released from escrow upon the Company’s furnishing such documentation. In fiscal 2012, the entire $1.8 million was released from escrow, including $1.6 million in the first nine months of fiscal 2012.

Cash Flows from Financing Activities

Net cash used by financing activities was $22.4 million in the first nine months of fiscal 2013, compared to $8.4 million in the first nine months of fiscal 2012.

During the first nine months of fiscal 2013, the Company repaid approximately $1.7 million of scheduled principal amortization of outstanding term loan and capitalized lease indebtedness.

During the first nine months of fiscal 2012, the Company repaid approximately $8.4 million of outstanding term loan and capitalized lease indebtedness, consisting of approximately $1.7 million of scheduled principal amortization, $6.2 million of prepayments from the sale of the Company’s interest in KK Mexico as more fully described in Note 6 to the consolidated financial statements appearing elsewhere herein, and $520,000 of prepayments from the proceeds of the exercise of stock options.

On March 27, 2012, the Company’s Board of Directors authorized the repurchase of up to $20 million of the Company’s common stock. The Company completed the share repurchase during the second quarter of fiscal 2013, purchasing 3,113,000 shares in the first nine months of fiscal 2013 at an average cost of $6.42 per share, for a total cost of $20 million.

Recent Accounting Pronouncements

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no material changes from the disclosures in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in the 2012 Form 10-K.

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

As of October 28, 2012, the end of the period covered by this Quarterly Report on Form 10-Q, management performed, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, an evaluation of the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. Based on this evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of October 28, 2012, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the quarter ended October 28, 2012, there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

Except as described below, there have been no material changes in the status of matters disclosed in Part 1, Item 3, “Legal Proceedings,” in the 2012 Form 10-K.

On January 27, 2012, Colchester Security II, LLC, the Company's former landlord in Lorton, Virginia, filed a suit against the Company in the Circuit Court of Fairfax County, Virginia alleging breach of the lease and negligence resulting in property damage at a commissary facility previously operated by the Company. The plaintiff seeks $2.7 million in damages. The Company denies the allegations and intends to pursue counterclaims of approximately $3 million relating to indemnity claims and breach of the lease. During the third quarter of fiscal 2013, the Court scheduled this matter for trial beginning March 25, 2013.

Item 1A. RISK FACTORS.

There have been no material changes from the risk factors disclosed in Part I, Item 1A, “Risk Factors,” in the 2012 Form 10-K.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES.

None.

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

Item 5. OTHER INFORMATION.

None.

Item 6. EXHIBITS.

The exhibits filed with this Quarterly Report on Form 10-Q are set forth in the Exhibit Index on page 56 and are incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Krispy Kreme Doughnuts, Inc.

Date: December 7, 2012	By:	/s/ Douglas R. Muir
	Name:	Douglas R. Muir
	Title:	Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

Exhibit Index

3.1	—	Amended Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K filed on April 15, 2010)

3.2	—	Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed December 15, 2008)

10.1	—	Form of Nonqualified Stock Option Agreement under the 2012 Stock Incentive Plan*

10.2	—	Form of Incentive Stock Option Agreement under the 2012 Stock Incentive Plan*

10.3	—	Form of Restricted Stock Award Agreement under the 2012 Stock Incentive Plan*

10.4	—	Form of Restricted Stock Unit Agreement under the 2012 Stock Incentive Plan*

10.5	—	Form of Director Restricted Stock Unit Agreement under the 2012 Stock Incentive Plan*

10.6	—	Form of Director Nonqualified Stock Option Agreement under the 2012 Stock Incentive Plan*

31.1	—	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2	—	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

32.1	—	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	—	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		The following materials from our Quarterly Report on Form 10-Q for the quarter ended October 28, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statement of Income for the three and nine months ended October 28, 2012, and October 30, 2011; (ii) the Consolidated Statement of Comprehensive Income for the three and nine months ended October 28, 2012, and October 30, 2011; (iii) the Consolidated Balance Sheet as of October 28, 2012 and January 29, 2012; (iv) the Consolidated Statement of Cash Flows for the nine months ended October 28, 2012 and October 30, 2011; (v) the Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended October 28, 2012 and October 30, 2011; and (vi) the Notes to the Condensed Consolidated Financial Statements**

* Executive compensation plan or agreement.

** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Our SEC file number for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 001-16485