0001206774-16-006175.txt : 20160610 0001206774-16-006175.hdr.sgml : 20160610 20160610143231 ACCESSION NUMBER: 0001206774-16-006175 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 72 CONFORMED PERIOD OF REPORT: 20160501 FILED AS OF DATE: 20160610 DATE AS OF CHANGE: 20160610 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRISPY KREME DOUGHNUTS INC CENTRAL INDEX KEY: 0001100270 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FOOD STORES [5400] IRS NUMBER: 562169715 STATE OF INCORPORATION: NC FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16485 FILM NUMBER: 161708329 BUSINESS ADDRESS: STREET 1: 370 KNOLLWOOD ST. STREET 2: SUITE 500 CITY: WINSTON SALEM STATE: NC ZIP: 27103 BUSINESS PHONE: 3367222981 MAIL ADDRESS: STREET 1: 370 KNOLLWOOD ST STREET 2: SUITE 500 CITY: WINSTON SALEM STATE: NC ZIP: 27103 10-Q 1 kkd_10q.htm QUARTERLY REPORT


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

Form 10-Q

(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended May 1, 2016
OR
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   No

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   No

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   Accelerated filer   
Non-accelerated filer   Smaller reporting company   

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

Number of shares of Common Stock, no par value, outstanding as of May 27, 2016: 60,993,276.

1



TABLE OF CONTENTS

            Page
INTRODUCTORY NOTE 3
 
FORWARD-LOOKING STATEMENTS 3
 
PART I - FINANCIAL INFORMATION 5
 
Item 1. FINANCIAL STATEMENTS (UNAUDITED) 5
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS 23
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39
Item 4. CONTROLS AND PROCEDURES 39
 
PART II - OTHER INFORMATION   39
 
Item 1. LEGAL PROCEEDINGS 39
Item 1A. RISK FACTORS 39
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 41
Item 3. DEFAULTS UPON SENIOR SECURITIES 41
Item 4. MINE SAFETY DISCLOSURES 41
Item 5. OTHER INFORMATION 41
Item 6. EXHIBITS 41
 
SIGNATURES 42
 
EXHIBIT INDEX 43

2



As used herein, unless the context otherwise requires, the “Company,” “we,” “us” and “our” refer to Krispy Kreme Doughnuts, Inc. and its subsidiaries. References to fiscal 2017 and fiscal 2016 mean the fiscal years ending January 29, 2017 and January 31, 2016, respectively.

INTRODUCTORY NOTE

On May 8, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cotton Parent, Inc., a Delaware corporation (“Cotton”), Cotton Merger Sub Inc., a North Carolina corporation and a wholly owned subsidiary of Cotton (“Merger Sub”), and JAB Holdings B.V. a Dutch Besloten Vennootschap met beperkte aansprakelijkheid (private company with limited liability) (“JAB”). Pursuant to the Merger Agreement and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving company and a wholly owned subsidiary of Cotton (the “Merger”). The closing of the Merger is subject to certain conditions, including (i) the approval of the Merger by our shareholders, (ii) the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) there being no material adverse effect on the Company prior to the closing of the Merger and (vi) other customary conditions. On May 31, 2016, we filed a preliminary proxy statement in connection with a special meeting of our shareholders to seek approval of the Merger. Additional information about the Merger Agreement is set forth in the Company’s current Report on Form 8-K filed with the United States Securities and Exchange Commission (the “SEC”) on May 9, 2016. Unless stated otherwise, the forward-looking information contained in this report does not take into account or give any effect to the impact of the proposed Merger.

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,” “forecast,” “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 occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;
 
the inability to complete the transactions contemplated by the Merger Agreement due to the failure to obtain the required shareholder approval;
 
the inability to satisfy the other conditions specified in the Merger Agreement, including, without limitation, the receipt of necessary governmental or regulatory approvals required to complete the transactions contemplated by the Merger Agreement;
 
the risk that the proposed transactions contemplated by the Merger Agreement disrupt current plans and operations, increase operating costs or create potential difficulties in customer and employee retention as a result of the announcement and consummation of such transactions;
 
the outcome of any legal proceedings following the announcement of the Merger Agreement and transactions contemplated therein;
 
the possibility that we may be adversely affected by other economic, business, and/or competitive factors;
 
the quality of Company and franchise store operations and changes in sales volume;
 
risks associated with the use and implementation of information technology;
 
our ability, and our dependence on the ability of our franchisees, to execute on our and their business plans;

3



our relationships with our franchisees;
 
actions by franchisees that could harm our business;
 
our ability to implement our domestic and international growth strategies;
 
our ability to implement and operate our domestic shop 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;
 
reliance on third parties in many aspects of our business;
 
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; and
 
other factors discussed in our periodic reports and other information filed with the SEC, including under Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 (the “2016 Form 10-K”) or in Part II, Item 1A of this report.

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.

4



PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (UNAUDITED).

Index to Financial Statements

Consolidated Statement of Income for the three months ended May 1, 2016 and May 3, 2015       6
Consolidated Balance Sheet as of May 1, 2016 and January 31, 2016 7
Consolidated Statement of Cash Flows for the three months ended May 1, 2016 and May 3, 2015 8
Consolidated Statement of Shareholders’ Equity for the three months ended May 1, 2016 and May 3, 2015 9
Notes to financial statements 10

5



KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

Three Months Ended
May 1, May 3,
2016       2015
      (In thousands, except per share amounts)
Revenues $                    136,484 $                   132,474
Operating expenses:
       Direct operating expenses (exclusive of depreciation and
              amortization expense shown below) 107,991 103,772
       General and administrative expenses 7,483 7,554
       Depreciation and amortization expense 4,056 3,993
       Impairment charges and lease termination costs 453 4
       Pre-opening costs related to Company Stores 607 323
       Gains on commodity derivatives, net - (447 )
Operating income 15,894 17,275
Interest income 71 147
Interest expense (439 ) (377 )
Other non-operating income and (expense), net (2 ) 184
Income before income taxes 15,524 17,229
Provision for income taxes 6,108 6,563
Net income $ 9,416 $ 10,666
 
Earnings per common share:
       Basic $ 0.15 $ 0.16
       Diluted $ 0.14 $ 0.16

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

6



KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED BALANCE SHEET
(Unaudited)

      May 1,       January 31,
2016 2016
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $          28,701 $         50,785
Receivables, net 29,863 28,088
Receivables from equity method franchisees 468 338
Inventories 16,936 16,312
Assets held for sale 2,817 -
Other current assets 3,208 3,619
       Total current assets 81,993 99,142
Property and equipment 126,581 127,709
Investments in equity method franchisees - -
Goodwill and other intangible assets 30,974 30,985
Deferred income taxes 69,462 74,874
Other assets 10,004 10,165
       Total assets $ 319,014 $ 342,875
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of lease obligations $ 333 $ 326
Accounts payable 22,695 19,760
Accrued liabilities 29,332 29,633
       Total current liabilities 52,360 49,719
Lease obligations, less current portion 11,266 11,217
Other long-term obligations and deferred credits 26,734 25,799
 
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:
       May 1, 2016 - 60,914 shares and January 31, 2016 - 63,069 shares 229,822 266,724
Accumulated deficit (1,168 ) (10,584 )
       Total shareholders’ equity 228,654 256,140
              Total liabilities and shareholders’ equity $ 319,014 $ 342,875

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

7



KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

      Three Months Ended
May 1, May 3,
2016       2015
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,416 $ 10,666
Adjustments to reconcile net income to net cash provided by operating activities:
       Depreciation and amortization expense 4,056 3,993
       Deferred income taxes 5,412 5,950
       Impairment charges 500 -
       Loss on disposal of property and equipment 29 34
       Share-based compensation 1,568 1,997
       Unrealized gains on commodity derivative positions - (1,060 )
       Other 178 74
Change in assets and liabilities:
       Receivables (1,465 ) (4,720 )
       Inventories (624 ) 1,869
       Other current and non-current assets 520 1,039
       Accounts payable and accrued liabilities (718 ) (2,771 )
       Other long-term obligations and deferred credits 623 74
              Net cash provided by operating activities 19,495 17,145
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,047 ) (4,546 )
Proceeds from disposals of property and equipment (5 ) 216
Acquisition of stores and franchise rights from franchisees (185 ) (312 )
Other investing activities 89 821
              Net cash used for investing activities (8,148 ) (3,821 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of lease obligations (86 ) (82 )
Proceeds from exercise of stock options 1,334 519
Repurchase of common shares        (34,679 )        (6,090 )
              Net cash used for financing activities (33,431 ) (5,653 )
Net increase (decrease) in cash and cash equivalents (22,084 ) 7,671
Cash and cash equivalents at beginning of period 50,785 50,971
Cash and cash equivalents at end of period $ 28,701 $ 58,642
Supplemental schedule of non-cash investing and financing activities:
              Assets acquired under leasing arrangements $ 140 $ 947

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

8



KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)

Common
Shares Common Accumulated
Outstanding       Stock       Deficit       Total
      (In thousands)
Balance at January 31, 2016 63,069 $ 266,724 $ (10,584 ) $ 256,140
Comprehensive income for the three months
       ended May 1, 2016 - - 9,416 9,416
Exercise of stock options 200 1,625 - 1,625
Share-based compensation 90 1,568 - 1,568
Repurchase of common shares (2,445 ) (40,095 ) - (40,095 )
Balance at May 1, 2016             60,914 $         229,822 $           (1,168 ) $ 228,654
 
Balance at February 1, 2015 64,926 $ 310,768 $ (42,982 ) $         267,786
Comprehensive income for the three months
       ended May 3, 2015 - - 10,666 10,666
Exercise of stock options 81 519 - 519
Share-based compensation 35 1,997 - 1,997
Repurchase of common shares (402 ) (7,625 ) - (7,625 )
Balance at May 3, 2015 64,640 $ 305,659 $ (32,316 ) $ 273,343

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

9



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. We also license the Krispy Kreme business model and certain of our intellectual property to franchisees in the United States and over 25 other countries around the world, and derive revenue from franchise and development fees and royalties from those franchisees. Additionally, we sell doughnut mixes, other ingredients and supplies and doughnut-making equipment to franchisees.

Merger Agreement

On May 8, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cotton Parent, Inc., a Delaware corporation (“Cotton”), Cotton Merger Sub Inc., a North Carolina corporation and a wholly owned subsidiary of Cotton (“Merger Sub”), and JAB Holdings B.V., a Dutch Besloten Vennootschap met beperkte aansprakelijkheid (private company with limited liability) (“JAB”). Cotton and Merger Sub are affiliates of JAB. Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and as a wholly owned subsidiary of Cotton (the “Merger”). Our Board of Directors (the “Board”) unanimously adopted, approved and declared advisable the Merger Agreement, the Merger, and the other transactions contemplated by the Merger Agreement and unanimously resolved to recommend that our shareholders vote to approve the Merger Agreement. The Merger is subject to a vote of our shareholders.

As a result of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares held by Cotton, Merger Sub, certain affiliates of Cotton, or direct or indirect wholly owned subsidiaries of the Company) will be canceled and automatically converted into the right to receive $21.00 in cash, without interest and subject to any required tax withholding.

We have made various representations and warranties in the Merger Agreement that are customary for a company in the quick service restaurant industry. The Merger Agreement also contains customary covenants and agreements, including, among others, covenants relating to (1) the conduct of our business between the date of the Merger Agreement and the Effective Time and (2) the efforts of the parties to cause the Merger to be completed.

The completion of the Merger is subject to the satisfaction or waiver of a number of closing conditions, including, among others, (1) approval of the Merger Agreement by the holders of a majority of our outstanding common stock; (2) the absence of any “material adverse effect” on the Company occurring after the date of the Merger Agreement; (3) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (4) the absence of any legal prohibitions or certain governmental proceedings affecting the closing of the Merger; and (5) subject to certain materiality qualifications, the continued accuracy of our representations and warranties, and performance by the Company of required covenants and obligations (to be performed at or prior to the closing of the Merger), as of the closing of the Merger.

The Merger Agreement also includes provisions permitting termination by each of the Company and Cotton under certain circumstances, including (1) if the Merger is not completed by November 8, 2016 (the “Termination Date”), (2) if the required approval of our shareholders is not obtained or (3) if the other party breaches its representations, warranties or covenants and such breach would cause the failure of a corresponding closing condition to be satisfied by the Termination Date. In connection with a termination of the Merger Agreement under specified circumstances, including if we enter into an alternative transaction we determine is superior pursuant to the terms of the Merger Agreement, we may be required to pay Cotton a termination fee of $42.0 million.

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which was filed with our Current Report on Form 8-K filed with the United States Securities and Exchange Commission (the “SEC”) on May 9, 2016 and is hereby incorporated by reference. During the three months ended May 1, 2016, we recorded approximately $454,000 related to the proposed Merger which is included in general and administrative expenses in the Consolidated Statement of Income.

Significant Accounting Policies

BASIS OF PRESENTATION. The consolidated financial statements contained herein should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 (the “2016 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 our accounting practices described in the 2016 Form 10-K, but have not been audited. In our opinion, the financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of our results of operations for the periods presented. The consolidated balance sheet data as of January 31, 2016 were derived from our audited financial statements.

10



BASIS OF CONSOLIDATION. The financial statements include the accounts of KKDI and its subsidiaries. Investments in entities over which we have the ability to exercise significant influence but which we do not control, and whose financial statements are not otherwise required to be consolidated, are accounted for using the equity method.

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 the vesting of currently unvested restricted stock units.

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

Three Months Ended
May 1, May 3,
2016 2015
      (In thousands)
Numerator: net income $ 9,416       $       10,666
Denominator:  
       Basic earnings per share - weighted average shares outstanding       64,098 66,603
       Effect of dilutive securities:
              Stock options 1,171 1,643
              Restricted stock units 138 327
       Diluted earnings per share - weighted average shares
              outstanding plus dilutive potential common shares 65,407 68,573

Stock options with respect to 244,000 and 302,000 shares for the three months ended May 1, 2016 and May 3, 2015, respectively, and 190,000 and 171,000 unvested restricted stock units for the three months ended May 1, 2016 and May 3, 2015, respectively, have been excluded from the computation of the number of shares used to compute diluted earnings per share because their inclusion would be antidilutive.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which amends existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”, which changes guidance for subsequent measurement of inventory from the lower of cost or market to the lower of cost and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” This guidance states that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to the line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. This guidance became effective in the first quarter of fiscal 2017. As all of our debt issuance costs are related to line-of-credit arrangements and are currently classified as assets, the adoption of this guidance did not have any impact on our consolidated financial statements.

11



In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”, which provides guidance about whether a cloud computing arrangement includes a software license. This guidance became effective in the first quarter of fiscal 2017 and did not impact our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, to clarify the principles used to recognize revenue for all entities. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations”, which further clarifies the implementation guidance on principal versus agent considerations”, and in April 2016, the FASB issued ASU 2016-10, “Revenue from contracts with customers (Topic 606): Identifying performance obligations and licensing”, an update on identifying performance obligations and accounting for licenses of intellectual property. Additionally, in May 2016, the FASB issued ASU 2016-12, “Revenue from contracts with customers (Topic 606): Narrow-scope improvements and practical expedients”, which includes amendments for enhanced clarification of the guidance. This guidance is effective for fiscal years beginning on or after December 15, 2017 including interim periods within those fiscal years and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.

Note 2 — Segment Information

Our operating and reportable segments are Company Stores, Domestic Franchise, International Franchise and KK Supply Chain.

The Company Stores segment is comprised of the stores owned and operated by us. These stores sell doughnuts and complementary products through both on-premises and consumer packaged goods - wholesale (“CPG”) channels, although some stores serve only one of these distribution channels.

The Domestic Franchise and International Franchise segments consist of our franchise operations. Under the terms of franchise agreements, domestic and international franchisees pay royalties and fees to us in return for the use of the Krispy Kreme trademark and ongoing brand and operational support. Revenues and costs related to licensing certain Company-owned trademarks to domestic third parties other than franchisees also are included in the Domestic Franchise segment. 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.

12



The following table presents the results of operations of our operating and reportable segments for the three months ended May 1, 2016 and May 3, 2015. Segment operating income is consolidated operating income before general and administrative expenses, corporate depreciation and amortization expense, impairment charges and lease termination costs, pre-opening costs related to Company Stores, gains on commodity derivatives, net and gain on refranchisings, net of business acquisition charges.

Three Months Ended
May 1, May 3,
2016       2015
(In thousands)
Revenues:
       Company Stores $ 93,993 $ 90,717
       Domestic Franchise 4,137 3,709
       International Franchise 6,855 6,728
       KK Supply Chain:
              Total revenues 64,049 63,517
              Less – intersegment sales elimination (32,550 ) (32,197 )
                     External KK Supply Chain revenues 31,499 31,320
                          Total revenues $       136,484 $       132,474
 
Operating income:
       Company Stores $ 5,963 $ 7,357
       Domestic Franchise 2,533 2,094
       International Franchise 4,578 4,904
       KK Supply Chain 11,972 10,949
              Total segment operating income 25,046 25,304
       General and administrative expenses (7,483 ) (7,554 )
       Corporate depreciation and amortization expense (609 ) (595 )
       Impairment charges and lease termination costs (453 ) (4 )
       Pre-opening costs related to Company Stores (607 ) (323 )
       Gains on commodity derivatives, net - 447
              Consolidated operating income $ 15,894 $ 17,275
 
Depreciation and amortization expense:
       Company Stores $ 3,270 $ 3,169
       Domestic Franchise 17 17
       International Franchise - -
       KK Supply Chain 160 212
       Corporate 609 595
              Total depreciation and amortization expense $ 4,056 $ 3,993

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 — Receivables

The components of receivables are as follows:

May 1, January 31,
2016 2016
(In thousands)
Receivables:            
       Consumer packaged goods - wholesale customers $       11,311 $          10,808
       Unaffiliated franchisees 13,960 13,233
       Due from third-party distributors 2,238 2,440
       Other receivables 1,530 667
       Current portion of notes receivable 1,170 1,224
  30,209 28,372
       Less — allowance for doubtful accounts:
              Consumer packaged goods - wholesale customers (181 ) (180 )
              Unaffiliated franchisees (165 ) (104 )
(346 ) (284 )
  $ 29,863 $ 28,088
 
Receivables from equity method franchisees (Note 5):
       Trade $ 468 $ 338

13



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

Three Months Ended
      May 1,       May 3,
2016 2015
(In thousands)
Allowance for doubtful accounts related to receivables:
       Balance at beginning of period $ 284 $ 495
       Provision for doubtful accounts 73        (118 )
       Net recoveries (chargeoffs) (11 ) (13 )
       Balance at end of period $        346 $ 364

We also have notes receivable from certain of our franchisees included in “Other assets” in the accompanying consolidated balance sheet, which are summarized in the following table.

May 1, January 31,
2016 2016
(In thousands)
Notes receivable:            
       Notes receivable from franchisees $ 4,413 $ 4,829
       Less — portion due within one year included in receivables       (1,170 )           (1,224 )
$ 3,243 $ 3,605

Notes receivable at May 1, 2016 and January 31, 2016 consist principally of amounts payable to us related to sales of equipment and to the sale of certain leasehold interests to a franchisee. In addition to the foregoing notes receivable, we had promissory notes totaling approximately $1.2 million at May 1, 2016 and January 31, 2016 principally representing royalties and fees due to us which, as a result of doubt about their collection, we had not yet recorded as revenues.

Note 4 — Inventories

The components of inventories are as follows:

May 1, January 31,
      2016       2016
(In thousands)
Raw materials $ 7,096 $ 6,844
Work in progress 126 126
Finished goods and purchased merchandise 9,714 9,342
$       16,936 $       16,312

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Note 5 — Investments in Franchisees

As of May 1, 2016, we had an ownership interest in two franchisees, the aggregate carrying value of which was zero. Our financial exposures related to franchisees in which we have an investment are summarized in the tables below.

May 1, 2016
Company Investment
Ownership and
Percentage Advances Receivables
(Dollars in thousands)
Kremeworks, LLC            25.0 % $ 900 $ 411
Kremeworks Canada, LP 24.5 % 667 57
1,567           468
Less: reserves and allowances        (1,567 ) -
$ - $ 468
 
January 31, 2016
Company Investment
Ownership and
Percentage       Advances       Receivables
Kremeworks, LLC 25.0 % $ 900 $ 300
Kremeworks Canada, LP 24.5 % 667 38
      1,567 338
Less: reserves and allowances (1,567 ) -
$ - $ 338

The carrying values of the Company’s investments and advances in Kremeworks, LLC (“Kremeworks”) and Kremeworks Canada, LP (“Kremeworks Canada”) were zero at May 1, 2016 and January 31, 2016. In addition, the Company had reserved all of the balance of its advances to Kremeworks and Kremeworks Canada at such dates; accrued but uncollected interest on such advances of approximately $380,000 and $370,000 at May 1, 2016 and January 31, 2016, respectively, had not been reflected in income at such date.

Note 6 — Credit Facility and Lease Obligations

Lease obligations consist of the following:

May 1, January 31,
2016       2016
(In thousands)
Capital lease obligations $ 2,754 $ 2,709
Financing obligations 8,845 8,834
        11,599       11,543
Less: current portion (333 ) (326 )
$ 11,266 $ 11,217

Lease Obligations

We acquire equipment and facilities under capital and operating leases and build-to-suit arrangements. In certain build-to-suit leasing arrangements, we incur hard costs related to the construction of leased stores and we are therefore deemed the owner of the leased stores for accounting purposes during the construction period. We record the related assets and liabilities for construction costs incurred under these build-to-suit leasing arrangements during the construction period. Upon completion of the leased store, we consider whether the assets and liabilities qualify for derecognition under the sale-leaseback accounting guidance. These leasing arrangements do not qualify for sale-leaseback treatment and, accordingly, we record the transactions as financing obligations. A portion of the lease payments is allocated to land and is classified as an operating lease. The remainder of the lease payments is allocated between interest expense and amortization of the financing obligations. The assets are depreciated over their estimated useful lives. At the end of the lease term, the carrying value of the leased asset and the remaining financing obligation are expected to be equal, at which time we may either surrender the leased assets as settlement of the remaining financing obligation or enter into a new arrangement for the continued use of the asset.

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2013 Revolving Credit Facility

On July 12, 2013, we entered into a $40 million revolving secured credit facility (the “2013 Facility”) which matures in July 2018. The 2013 Revolving Credit Facility is secured by a first lien on substantially all of our personal property assets and certain of our domestic subsidiaries. No borrowings were made on the 2013 Facility on the closing date.

Interest on borrowings under the 2013 Facility is payable either at the London Interbank Offered Rate (“LIBOR”) or the Base Rate (which is the greatest of the prime rate, the Federal funds rate plus 0.50%, or the one-month LIBOR rate plus 1.00%), in each case plus the Applicable Percentage. The Applicable Percentage for LIBOR loans ranges from 1.25% to 2.15%, and for Base Rate loans ranges from 0.25% to 1.15%, in each case depending on our leverage ratio. As of May 1, 2016, the Applicable Percentage was 1.25%.

The 2013 Facility contains provisions which permit us to obtain letters of credit, issuance of which constitutes usage of the lending commitments and reduces the amount available for cash borrowings. At May 1, 2016, we had approximately $10.3 million of letters of credit outstanding, substantially all of which secure our reimbursement obligations to insurers under our self-insurance arrangements.

We are required to pay a fee equal to the Applicable Percentage for LIBOR-based loans on the outstanding amount of letters of credit. There also is a fee on the unused portion of the 2013 Facility lending commitment, ranging from 0.15% to 0.35%, depending on our leverage ratio. As of May 1, 2016, the fee on the unused portion of the 2013 Facility was 0.15%.

The 2013 Facility requires us to meet certain financial tests, including a maximum leverage ratio and a minimum fixed charge coverage ratio. The leverage ratio is required to be not greater than 2.25 to 1.0 and the fixed charge coverage ratio is required to be not less than 1.3 to 1.0. As of May 1, 2016, our leverage ratio was 0.3 to 1.0 and the fixed charge coverage ratio was 3.4 to 1.0.

The operation of the restrictive financial covenants described above may limit the amount we are able to borrow under the 2013 Facility. The restrictive covenants did not limit our ability to borrow the full $29.7 million of unused credit under the 2013 Credit Facility as of May 1, 2016.

The 2013 Facility also contains covenants which, among other things, generally limit (with certain exceptions): liquidations, mergers, and consolidations; the incurrence of additional indebtedness (including guarantees); the incurrence of additional liens; the sale, assignment, lease, conveyance or transfer of assets; certain investments; dividends and stock redemptions or repurchases in excess of certain amounts; transactions with affiliates; engaging in materially different lines of business; certain sale-leaseback transactions; and other activities customarily restricted in such agreements. The 2013 Facility also prohibits the transfer of cash or other assets to the Parent Company (as defined in the 2013 Facility), whether by dividend, loan or otherwise, but provides for exceptions to enable the Parent Company to pay taxes, directors’ fees and operating expenses, as well as exceptions to permit dividends in respect of our common stock and stock redemptions and repurchases, to the extent permitted by the 2013 Facility.

The 2013 Facility also contains customary events of default including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other indebtedness in excess of $5 million, certain events of bankruptcy and insolvency, judgment defaults in excess of $5 million and the occurrence of a change of control. In the event the Merger is consummated, it is expected the 2013 Facility will be terminated.

Borrowings and issuances of letters of credit under the 2013 Facility are subject to the satisfaction of usual and customary conditions, including the accuracy of representations and warranties and the absence of defaults.

Note 7 Commitments and Contingencies

Except as disclosed below, we currently are not a party to any material legal proceedings.

Pending Litigation

K2 Asia Litigation

On April 7, 2009, a Cayman Islands corporation, K2 Asia Ventures, and its owners filed a lawsuit in Forsyth County, North Carolina Superior Court against us, our franchisee in the Philippines, and other persons associated with the franchisee. The suit alleges that we and the other defendants conspired to deprive the plaintiffs of claimed “exclusive rights” to negotiate franchise and development agreements with prospective franchisees in the Philippines, and seeks unspecified damages. We therefore do not know the amount or range of possible loss related to this matter. We believe that these allegations are false and continue to vigorously defend against the lawsuit. On July 26, 2013, the Superior Court dismissed the Philippines-based defendants for lack of personal jurisdiction, and the plaintiffs appealed that decision. On January 22, 2015, the North Carolina Supreme Court denied the plaintiffs’ request to review the case. We moved for summary judgment on May 7, 2015 and are awaiting a decision by the Superior Court. We do not believe it is probable that a loss has been incurred with respect to this matter, and accordingly no liability related to it has been reflected in the accompanying financial statements.

16



Merger-Related Litigation

On May 26, 2016, a purported shareholder of the Company, Ronnie Stillwell, filed a putative class action complaint challenging the Merger in Superior Court in the State of North Carolina. The complaint names as defendants JAB, Cotton, Merger Sub and the members of the Board and also names the Company as a nominal defendant. The complaint seeks, among other relief, an order enjoining the Merger, compensatory damages, and an award of attorney's fees and costs on the grounds that, among other things, the members of the Board allegedly breached their fiduciary duties in connection with entering into the Merger Agreement and adopting and approving the Merger. The complaint further alleges that JAB, Cotton and Merger Sub aided and abetted the alleged breaches of fiduciary duties. It is possible that this complaint will be amended to make additional claims and/or that additional lawsuits making similar or additional claims relating to the Merger will be brought.

On May 26, 2016, legal advisors representing Melissa Weers, who is purportedly a shareholder of the Company, submitted a letter through the mail to the Board of the Company demanding legal action against the Board for a purported breach of fiduciary duty related to the Merger. The letter alleges, among other things, that the directors of the Company agreed to inadequate merger consideration and undervalued the Company. Additionally, the letter alleges that measures in the Merger Agreement created unreasonable protective devices to preclude competing offers. The letter further states Ms. Weer’s belief that the Board of the Company was neither independent nor disinterested in the Merger, preventing directors from fulfilling their fiduciary duties to the Company’s shareholders. In closing, the letter demands attention from the Board. The letter further asks the Board to authorize litigation against Cotton and its affiliated entities for aiding and abetting these supposed breaches.

On June 8, 2016, the Company received a demand letter from legal advisors representing Stu Bonnin, who is also purportedly a shareholder of the Company. In addition to alleging a breach of fiduciary duty related to the Merger, the letter also alleges a breach by the members of the Board of their duties of care, candor and good faith by causing the Company to issue materially incomplete and misleading disclosures in the Company’s PREM14A Preliminary Proxy Statement filed on May 31, 2016. Specifically, the letter alleges that the disclosures were deficient and misleading because they did not include information as to the nature and timing of post-merger employment discussions. In closing, the letter demands that the Board take action to disclose the material information allegedly omitted from the Preliminary Proxy Statement.

Other Legal Matters

We are also engaged in various legal proceedings arising in the normal course of business. We maintain insurance policies against certain kinds of such claims and suits, including insurance policies for workers’ compensation and personal injury, all of which are subject to deductibles. While the ultimate outcome of these matters could differ from our expectations, we currently do not believe their resolution will have a material adverse effect on our consolidated financial statements.

Other Commitments and Contingencies

Our primary bank had issued letters of credit on our behalf totaling $10.3 million at May 1, 2016, substantially all of which secure our reimbursement obligations to insurers under our self-insurance arrangements.

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Note 8 Shareholders’ Equity

Share-Based Compensation for Employees and Directors

We measure and recognize 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 months ended May 1, 2016 and May 3, 2015 is set forth in the following table. We did not realize any excess tax benefits from the exercise of stock options or the vesting of restricted stock units during any of the periods.

Three Months Ended
May 1, May 3,
2016       2015
(In thousands)
Costs charged to earnings related to:
      Stock options $      99 $      323
      Restricted stock units 1,469 1,674
            Total costs $ 1,568 $ 1,997
 
Costs included in:
      Direct operating expenses $ 631 $ 1,028
      General and administrative expenses 937 969
            Total costs $ 1,568 $ 1,997

Repurchases of Common Stock

In fiscal 2014, our Board authorized the repurchase of our common stock, and subsequently increased that authorization such that it now totals $255 million. The authorization has no expiration date. Through May 1, 2016, we have cumulatively repurchased 8,612,395 shares under the authorization at an average price of $17.56 per share, for a total cost of $151.2 million. Repurchases of approximately $34.2 million and $5.9 million were settled during the three months ended May 1, 2016 and May 3, 2015, respectively. As of May 1, 2016, approximately $103.8 million remains available under the authorization for future share repurchases.

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

The following table summarizes repurchases of common stock for the three months ended May 1, 2016 and May 3, 2015.

Three Months Ended
May 1, May 3,
2016 2015
            Common             Common
Shares Stock Shares Stock
(In thousands)
Shares repurchased under share repurchase authorization            2,415 $      39,645      391 $      7,428
Shares surrendered in reimbursement for withholding taxes 30 450 11 197
2,445 $ 40,095 402  $ 7,625

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Note 9 Impairment Charges and Lease Termination Costs

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

Three Months Ended
May 1, May 3,
2016       2015
(In thousands)
Impairment of long-lived assets $        500 $             -
Lease termination costs:
      Provision for lease termination costs 203 4
      Less - reversal of previously recorded accrued rent expense (250 ) -
            Total lease termination costs (47 ) 4
                   Total impairment charges and lease termination costs $ 453 $ 4

We test 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, unfavorable 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 our annual budgeting process. Impairment charges generally relate to Company stores expected to be closed or refranchised, as well as to stores we believe will not generate sufficient future cash flows to enable us to recover the carrying value of the stores’ assets, but which we have not yet decided to close. When we conclude that the carrying value of long-lived assets is not recoverable (based on future projected undiscounted cash flows), we record 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 we currently are negotiating to sell, on our negotiations with unrelated third-party buyers. Impairment charges related to our long-lived assets were $500,000 in the first quarter of fiscal 2017 and relate to the refranchising of certain shop locations which was completed during the second quarter of fiscal 2017 as described in Note 14. The fair value of the impaired store assets was estimated based on our 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 we cease use of the leased property. The fair value of these liabilities was 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
May 1, May 3,
2016       2015
(In thousands)
Balance at beginning of period $           278 $          116
      Provision for lease termination costs:
            Provisions associated with store closings, net of estimated sublease rentals 202 -
            Adjustments to previously recorded provisions resulting from settlements
                  with lessors and adjustments of previous estimates (7 ) 1
            Accretion of discount 8 3
                  Total provision 203 4
      Payments on unexpired leases, including settlements with lessors (105 ) (35 )
Balance at end of period $ 376 $ 85

The lease termination accrual at May 1, 2016 of $376,000 is expected to be paid within one year.

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Note 10 Income Taxes

Our effective income tax rate was 39.3% for the three months ended May 1, 2016 compared to an effective income tax rate of 38.1% for the three months ended May 3, 2015. The increase in the effective income tax rate was due primarily to the benefit of specific incentive stock options being reclassified as non-qualified stock options during the three months ended May 3, 2015.

We have established a valuation allowance of $1.4 million at May 1, 2016 and January 31, 2016 that represents the portion of our deferred tax assets that management estimates will not be realized in the future. Such assets are associated principally with state net operating loss carryforwards related to states in which the scope of our operations has decreased. In such states, our ability to realize the net operating loss carryforwards is adversely affected because we are expected to have little income earned in or apportioned to those states in the future.

Realization of net deferred tax assets generally is dependent on generation of taxable income in future periods. 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.

Note 11 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 our assets and liabilities that are measured at fair value on a recurring basis at May 1, 2016 and January 31, 2016.

May 1, 2016(1)
Level 1 Level 2 Level 3
(In thousands)
Assets:            
      401(k) mirror plan assets $       2,517 $       - $       -
 
January 31, 2016(1)
  Level 1 Level 2 Level 3
(In thousands)
Assets:
      401(k) mirror plan assets $ 2,158 $ - $ -

(1) There were no transfers of financial assets or liabilities among the levels within the fair value hierarchy during the three months ended May 1, 2016 or during the year ended January 31, 2016.

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

The following table presents the nonrecurring fair value measurements recorded during the three months ended May 1, 2016. There were no material nonrecurring fair value measurements recorded during the three months ended May 3, 2015.

Three Months Ended May 1, 2016
Level 1        Level 2 Level 3        Total gain (loss)
(In thousands)      
Long-lived assets $       - $       2,457       $       - $                     (500 )
Lease termination liabilities $ - $ 202 $ - $ 48

Long-Lived Assets

During the three months ended May 1, 2016, long-lived assets having an aggregate carrying value of $3.0 million were written down to their estimated fair values of $2.5 million, resulting in recorded impairment charges of $500,000. The charges relate to the refranchising of certain shop locations which was completed during the second quarter of fiscal 2017 as described in Note 14. The fair value of the impaired store assets was estimated based on our negotiations with unrelated third-party buyers. These inputs are classified as Level 2 within the valuation hierarchy.

Lease Termination Liabilities

During the three months ended May 1, 2016, we recorded provisions for lease termination costs related to closed stores based upon the estimated fair values of the liabilities under unexpired leases as described in Note 9; such provisions were reduced by previously recorded accrued rent expense related to those stores. The fair value of these liabilities was computed 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. These inputs are classified as Level 2 within the valuation hierarchy. For the three months ended May 1, 2016, the $250,000 of previously recorded accrued rent expense, related to store closures, exceeded the $202,000 fair value of lease termination liabilities related to such stores, and such excess has been reflected as a credit to lease termination costs during the period.

Note 12 Derivative Instruments

We are exposed to certain risks relating to our ongoing business operations. The primary risk managed by using derivative instruments is commodity price risk. We do not hold or issue derivative instruments for trading purposes.

Commodity Price Risk

We are exposed to the effects of commodity price fluctuations in the cost of ingredients of our 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 we purchase exchange-traded commodity futures contracts, and options on such contracts, for raw materials which are ingredients of our products or which are components of such ingredients, including wheat and soybean oil. We are also exposed to the effects of commodity price fluctuations in the cost of gasoline used by our delivery vehicles. To mitigate the risk of fluctuations in the price of our gasoline purchases, we 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 we had 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. We had no commodity derivative contracts as of May 1, 2016.

Interest Rate Risk

We are exposed to market risk from increases in interest rates on any borrowings outstanding under our 2013 Credit Facility. As of May 1, 2016, there were no borrowings outstanding under such facility.

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

There were no derivative instruments in the consolidated balance sheet as of May 1, 2016 or January 31, 2016.

21



The effect of derivative instruments on the consolidated statement of income for the three months ended May 1, 2016 and May 3, 2015 was as follows:

Amount of Derivative Gain or
(Loss) Recognized in Income
Three Months Ended
Location of Derivative Gain or (Loss) Recognized in May 1, May 3,
Derivatives Not Designated as Hedging Instruments Income   2016       2015
(In thousands)
Agricultural commodity futures contracts       Gains on commodity derivatives, net       $                   -       $             (335 )
Gasoline commodity futures contracts Gains on commodity derivatives, net   -     782  
       Total   $ -   $ 447

Note 13 Acquisitions

Acquisition of Krispy Kreme Shop

On April 23, 2015, we entered into several legal arrangements with a franchisee, which included an asset purchase agreement and management agreement, whereby we agreed to operate the franchisee’s Krispy Kreme shop in Little Rock, Arkansas as a Company store. We paid $312,000 in cash for specific assets of the shop and have accounted for the transaction as the acquisition of a business. The acquired shop had fiscal 2015 sales of approximately $2.7 million. The allocation of the purchase price was as follows: $252,000 to property and equipment, $27,000 to inventory, $137,000 to reacquired franchise rights and $104,000 to a liability, related to a lease which included an unfavorable term compared to the market, which will be amortized over the remaining life of the lease agreement. Our results of operations, computed on a pro forma basis assuming the acquisition had been consummated at the beginning of the current and prior year periods, are not materially different from our historical results of operations and, accordingly, have been omitted. The acquired business’s revenues and earnings for periods subsequent to the acquisition are not material to our consolidated financial statements.

Acquisition of Franchise Rights

We acquired the franchise rights to develop certain CPG channels of trade from certain of our franchisees for approximately $185,000 in the first quarter of fiscal 2017 and $1.6 million in fiscal 2016. These transactions represented business acquisitions and the purchase price of each transaction has been allocated to reacquired franchise rights. These reacquired franchise rights will be amortized over the terms of the reacquired franchise agreements.

Note 14 Subsequent Events

On May 2, 2016, subsequent to the end of the first quarter of fiscal 2017, we completed the refranchising of four Company-owned locations in Jacksonville, Florida to a franchisee. The cash consideration received was approximately $1.5 million with an additional $1.3 million of purchase consideration dependent on the future performance of the sold locations. Assets related to the transaction totaling $2.5 million were classified as held for sale at May 1, 2016. Additionally, in connection with this sale, we closed two stores in the Jacksonville market.

Subsequent to the end of the first quarter of fiscal 2017, on May 8, 2016, we entered into a Merger Agreement with Cotton and JAB as more fully described in Note 1. Additionally, on May 26, a putative class action complaint challenging the Merger was filed in Superior Court in the State of North Carolina and a letter was received from lawyers representing a separate alleged shareholder demanding legal action against the Board for a purported breach of fiduciary duty related to the Merger, each as described in Note 7. On June 8, 2016, a second letter was received from lawyers representing yet another alleged shareholder demanding action from the Board related to purported breaches of fiduciary duties and the duties of care, candor and good faith, also as described in Note 7.

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

Merger Agreement

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. On May 8, 2016, Krispy Kreme Doughnuts, Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cotton Parent, Inc. a Delaware corporation (“Cotton”), Cotton Merger Sub Inc., a North Carolina corporation and a wholly owned subsidiary of Cotton (“Merger Sub”), and JAB Holdings B.V. a Dutch Besloten Vennootschap met beperkte aansprakelijkheid (private company with limited liability) (“JAB”). Cotton and Merger Sub are affiliates of JAB. Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and as a wholly owned subsidiary of Cotton (the “Merger”). Our Board of Directors (the “Board”) unanimously adopted, approved and declared advisable the Merger Agreement, the Merger, and the other transactions contemplated by the Merger Agreement and unanimously resolved to recommend that our shareholders vote to approve the Merger Agreement. The Merger is expected to close in the second half of fiscal 2017, subject to the approval of Krispy Kreme shareholders and customary conditions and regulatory approvals.

Executive Summary

Krispy Kreme Doughnuts, Inc. is a leading branded retailer and wholesaler of high quality doughnuts, coffee and other complementary beverages and treats and packaged sweets. Since 1937, our principal business has been owning and franchising Krispy Kreme stores that sell our products in both domestic and international markets. We believe that the one-of-a-kind taste experience of our doughnuts is the foundation of our concept and the common thread that binds generations of our loyal customers.

We have developed a number of strategic initiatives designed to foster our growth and improve our profitability. Our business strategy has four principal components:

accelerating global growth
 

leveraging technology
 

enhancing our core menu and
 

maximizing brand awareness.

Financial Highlights

During the first quarter of fiscal 2017, total revenues increased 3.0% to $136.5 million from $132.5 million during the same period last year. Systemwide domestic same store sales rose 0.7%, including a decline of 0.7% at Company stores. Our International Franchise same store sales declined 7.3% on a constant currency basis.

Net income for the first quarter of fiscal 2017 was $9.4 million, or $0.14 per share, compared to $10.7 million, or $0.16 per share in the first quarter of fiscal 2016. Adjusted earnings per share improved to $0.25 per share from $0.24 per share in the prior year. See discussion of “Non-GAAP Measures below.

23



Results of Operations

The following table sets forth operating metrics for the three months ended May 1, 2016 and May 3, 2015.

Three Months Ended
May 1, May 3,
      2016       2015
Change in Same Store Sales (retail sales only):
       Company stores (0.7 )% 4.3 %
       Domestic Franchise stores 1.6 % 5.8 %
       International Franchise stores (10.8 )% (9.2 )%
       International Franchise stores, in constant dollars(1) (7.3 )% (1.7 )%
 
Company Stores - Consumer Packaged Goods Metrics - wholesale sales:
       Change in average weekly number of doors 1.5 % 0.8 %
       Change in average weekly sales per door (1.0 )% 0.3 %
 
Systemwide Sales (in thousands):(2)
       Company stores $      93,247 $      89,968
       Domestic Franchise stores 97,907 91,772
       International Franchise stores 118,489 120,750
       International Franchise stores, in constant dollars(3) 118,489 115,229
 
Average Weekly Sales Per Store (in thousands):(4) (5) (6)
       Company stores:
              Factory stores:
                     Commissaries — consumer packaged goods - wholesale $ 253.2 $ 198.9
                     Dual-channel stores:
                            On-premises 44.9 43.7
                            Consumer packaged goods - wholesale 45.0 48.2
                                   Total 89.9 91.9
                     On-premises only stores 37.1 36.5
                     All factory stores 70.0 69.5
              Satellite stores 26.9 24.8
              All stores 63.9 61.9
 
       Domestic Franchise stores:
              Factory stores $ 50.5 $ 52.7
              Satellite stores 19.6 19.1
 
       International Franchise stores:
              Factory stores $ 35.0 $ 37.5
              Satellite stores 7.4 8.7

(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. Systemwide sales is a non-GAAP financial measure.
(3) Represents International Franchise store sales computed by reconverting International Franchise store sales for the three months ended May 3, 2015 to U.S. dollars based upon the weighted average of the exchange rates prevailing in the three months ended May 1, 2016.
(4) Includes sales between Company and franchise stores.
(5) Metrics are computed based on only stores open at the respective period end.
(6) Metrics are computed based on each store’s classification at the end of the respective period end.

The change in “same store sales” is computed by dividing the aggregate retail sales (excluding fundraising sales) during the current year period for all stores which had been open for 18 or more months during the current year by the aggregate retail sales of such stores for the comparable weeks in the preceding year. Once a store has been open for 18 or more months, 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.

24



For consumer packaged goods - wholesale (“CPG”) sales, “average weekly number of doors” represents the average number of customer locations to which product deliveries to grocers/mass merchants and convenience stores 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. We believe systemwide sales data are useful in assessing consumer demand for our products, the overall success of the Krispy Kreme brand and, ultimately, the performance of the Company. All of our royalty revenues are computed as percentages of sales made by our domestic and international franchisees, and substantially all of KK Supply Chain’s external sales of doughnut mixes and other ingredients ultimately are determined by demand for our products at franchise stores. Accordingly, sales by our franchisees have a direct effect on our royalty and KK Supply Chain revenues, and therefore on our profitability. Our 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 May 1, 2016 and May 3, 2015.

May 1, May 3,
      2016       2015
Number of Stores Open At Period End:
       Company stores:
              Factory:
                     Commissaries 7 8
                     Dual-channel stores 31 33
                     On-premises only stores 60 54
              Satellite stores 16 19
                            Total Company stores        114        114
 
       Domestic Franchise stores:
              Factory stores 131 115
              Satellite stores 52 51
                     Total Domestic Franchise stores 183 166
 
       International Franchise stores:
              Factory stores 140 133
              Satellite stores 696 590
                     Total International Franchise stores 836 723
 
                            Total systemwide stores 1,133 1,003

25



The following table sets forth data about the number of store operating weeks for the three months ended May 1, 2016 and May 3, 2015.

Three Months Ended
May 1, May 3,
      2016       2015
Store Operating Weeks: (1)
       Company stores:
              Factory stores:
                     Commissaries 93 104
                     Dual-channel stores 407 418
                     On-premises only stores 785 699
              Satellite stores 208 246
 
       Domestic Franchise stores:(2)
              Factory stores 1,682 1,486
              Satellite stores 676 663
 
       International Franchise stores:(2)
              Factory stores 1,526 1,459
              Satellite stores        8,639        7,502

(1)       Metrics for the three months ended May 1, 2016 and May 3, 2015 are computed based on each store’s classification at the end of the respective period.
(2) Metrics for the three months ended May 1, 2016 and May 3, 2015 are computed based only on stores open at the respective period end.

26



Changes in the number of Company stores during the three months ended May 1, 2016 and May 3, 2015 are summarized in the table below.

Number of Company Stores
Factory Satellite
      Stores       Stores       Total
Three months ended May 1, 2016
January 31, 2016              100              16              116
Opened 3 - 3
Closed (5 ) - (5 )
May 1, 2016 98 16 114
 
Three months ended May 3, 2015
February 1, 2015 92 19 111
Opened 2 - 2
Closed - - -
Acquired (divested) 1 - 1
May 3, 2015 95 19 114
           

Changes in the number of domestic franchise stores during the three months ended May 1, 2016 and May 3, 2015 are summarized in the table below.

 
Number of Domestic Franchise Stores
Factory Satellite
      Stores       Stores       Total
Three months ended May 1, 2016
January 31, 2016 129 52 181
Opened 2 - 2
Closed - - -
May 1, 2016        131        52        183
 
Three months ended May 3, 2015
February 1, 2015 116 51 167
Opened 2 - 2
Closed (2 ) - (2 )
Acquired (divested) (1 ) - (1 )
May 3, 2015 115 51 166

27



Changes in the number of international franchise stores during the three months ended May 1, 2016 and May 3, 2015 are summarized in the table below.

Number of International Franchise Stores
Factory Satellite
      Stores       Stores       Total
Three months ended May 1, 2016
January 31, 2016               141              683               824
Opened 1 24 25
Closed (2 ) (11 ) (13 )
May 1, 2016 140 696 836
 
Three months ended May 3, 2015
February 1, 2015 133 576 709
Opened 2 22 24
Closed (2 ) (8 ) (10 )
May 3, 2015 133 590 723

Three months ended May 1, 2016 compared to three months ended May 3, 2015

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

Non-GAAP Measures

Adjusted net income and adjusted earnings per share are non-GAAP measures.

We have substantial net operating loss carryforwards and, accordingly, our cash payments for income taxes are not significant and are expected to remain insignificant for the next three to five years. See “Provision for Income Taxes” below.

Management evaluates our results of operations using, among other measures, adjusted net income and adjusted earnings per share, which reflect the provision for income taxes only to the extent such taxes are currently payable in cash. In addition, management excludes from adjusted net income charges and credits that are unusual and infrequently occurring. Management believes adjusted net income and adjusted earnings per share are useful performance measures because they more closely measure the cash flows generated by our operations and the trends in those cash flows than do GAAP net income and earnings per share, and because they exclude the effects of transactions that are not indicative of our ongoing results of operations. Adjusted net income and adjusted earnings per share are non-GAAP measures.

We have reported cumulative pretax income of over $220 million since the beginning of fiscal 2010, and also have generated significant taxable income during this period. However, because of our utilization of our federal and state net operating loss carryovers and other deferred tax assets, our cash payments for income taxes have been relatively insignificant during this period. As a result, the provision for income tax expense has substantially exceeded cash payments for income taxes. Until such time as our net operating loss carryovers are exhausted or expire, GAAP income tax expense is expected to continue to substantially exceed the amount of cash income taxes payable by us.

In the first quarter of fiscal 2017, we recorded $1.2 million in employee termination benefits and $454,000 related to the Merger. Costs of this magnitude and nature are excluded from adjusted net income because including them is not representative of the ongoing performance of our remaining assets.

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The following non-GAAP financial information and related reconciliation of adjusted net income to GAAP net income are provided to assist the reader in understanding the effects of the above facts and transactions on our results of operations. In addition, the non-GAAP financial information is intended to illustrate the material difference between our income tax expense and income taxes currently payable, as well as reflect the ongoing performance of the business. These non-GAAP performance measures are consistent with other measurements made by management in the operation of the business which do not consider certain employee termination benefits, Merger costs and income taxes except to the extent to which those taxes currently are payable, for example, in capital allocation decisions and incentive compensation measurements that are made on a pretax basis.

Three Months Ended
May 1, May 3,
      2016       2015
(In thousands, except per share amounts)
Net income, as reported $ 9,416 $ 10,666
Employee termination benefits 1,192 -
Merger-related costs 454 -
Provision for deferred income taxes 5,412 5,950
Adjusted net income $                      16,474 $                      16,616
 
Adjusted earnings per common share:
       Basic $ 0.26 $ 0.25
       Diluted $ 0.25 $ 0.24
 
Weighted average shares outstanding:
       Basic 64,098 66,603
       Diluted 65,407 68,573

29



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
May 1, May 3,
      2016       2015
(Dollars in thousands)
Revenues by business segment:
       Company Stores $      93,993 $      90,717
       Domestic Franchise 4,137 3,709
       International Franchise 6,855 6,728
       KK Supply Chain:
              Total revenues 64,049 63,517
              Less - intersegment sales elimination (32,550 ) (32,197 )
                     External KK Supply Chain revenues 31,499 31,320
                            Total revenues $ 136,484 $ 132,474
 
Segment revenues as a percentage of total revenues:
       Company Stores 68.9 % 68.5 %
       Domestic Franchise 3.0 2.8
       International Franchise 5.0 5.1
       KK Supply Chain (external sales) 23.1 23.6
100.0 % 100.0 %
 
Segment operating results:
       Company Stores $ 5,963 $ 7,357
       Domestic Franchise 2,533 2,094
       International Franchise 4,578 4,904
       KK Supply Chain 11,972 10,949
              Total segment operating income 25,046 25,304
       General and administrative expenses (7,483 ) (7,554 )
       Corporate depreciation and amortization expense (609 ) (595 )
       Impairment charges and lease termination costs (453 ) (4 )
       Pre-opening costs related to Company Stores (607 ) (323 )
       Gains on commodity derivatives, net - 447
                     Consolidated operating income 15,894 17,275
       Interest income and (expense), net (368 ) (230 )
       Other non-operating income and (expense), net (2 ) 184
       Income before income taxes 15,524 17,229
       Provision for income taxes 6,108 6,563
       Consolidated net income $ 9,416 $ 10,666

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

30



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
May 1, May 3, May 1, May 3,
      2016       2015       2016       2015
(In thousands)
Revenues:
       On-premises sales:
              Retail sales $        47,129 $        45,095 50.1 % 49.7 %
              Fundraising sales 5,323 5,001 5.7 5.5
                     Total on-premises sales 52,452 50,096 55.8 55.2
       Consumer packaged goods sales - wholesale sales:
              Grocery/mass merchants 24,902 24,784 26.5 27.3
              Convenience stores 14,598 14,104 15.5 15.5
              Other consumer packaged goods 2,041 1,733 2.2 1.9
                     Total consumer packaged goods sales 41,541 40,621  44.2 44.8
                            Total revenues 93,993 90,717            100.0            100.0
 
Operating expenses:
       Cost of sales:
              Food, beverage and packaging 33,260 32,669 35.4 36.0
              Labor and benefit costs 30,606 28,018 32.6 30.9
                     Total cost of sales 63,866 60,687 67.9 66.9
              Vehicle costs(1) 3,678 3,830 3.9 4.2
              Occupancy(2) 3,396 2,959 3.6 3.3
              Utilities expense 1,689 1,668 1.8 1.8
              Other store operating expenses 5,305 4,756 5.6 5.2
                     Total store level costs 77,934 73,900 82.9 81.5
       Company Stores contribution (3) 16,059 16,817 17.1 18.5
       Marketing expense 2,049 1,591 2.2 1.8
       Depreciation and amortization expense 3,270 3,169 3.5 3.5
       Direct and indirect operating costs(4) 4,777 4,700 5.1 5.2
Segment operating income $ 5,963 $ 7,357 6.3 % 8.1 %

(1)       Includes fuel, maintenance and repairs, rent, taxes, insurance 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) Company Stores contribution is a non-GAAP financial measure. We believe that this is a useful metric to assess and evaluate the performance of Company shops.
(4) Includes marketing costs not charged to stores, segment management costs, CPG selling expenses and support functions and allocated corporate overhead.

A reconciliation of Company Stores segment sales for the three months ended May 3, 2015 to the three months ended May 1, 2016 follows:

Consumer
Packaged
Goods -
On-Premises Wholesale Total
            (In thousands)      
Sales for the three months ended May 3, 2015 $ 50,096 $ 40,621 $ 90,717
Sales at closed stores (2,556 ) (1,005 ) (3,561 )
Increase (decrease) in sales at established stores (open stores only) (1,212 ) 1,655 443
Increase in sales related to stores opened in fiscal 2016 and 2017 5,802 - 5,802
Increase in sales at stores acquired in fiscal 2016 322 270 592
Sales for the three months ended May 1, 2016 $            52,452 $             41,541 $            93,993

31



The increase in on-premises sales resulted from an increase in retail sales of 4.5% to $47.1 million in the first three months of fiscal 2017 compared to $45.1 million in the first three months of fiscal 2016. The growth in retail sales in the first three months of fiscal 2017 was principally due to a 1.8% increase in store operating weeks and increased sales at newer stores, partially offset by a 0.7% decrease in same stores sales. The decrease in same store sales in the first three months of fiscal 2017 was due to a decrease in customer traffic partially offset by an increase in the average guest check as a result of fewer promotional incentives in the current year period.

We continuously evaluate and adjust our marketing, promotional and operational activities and techniques with the goal of increasing both customer traffic and average guest check in our shops, which management believes will continue to be an important factor in increasing the profitability of the Company Stores segment. During the first quarter of fiscal 2017, we reduced our reliance on everyday discounting, shifted more toward leveraging special event days and continued utilizing our tiered menu pricing.

Sales to CPG accounts increased 2.3% to $41.5 million in the first three months of fiscal 2017 including an increase in sales to grocers/mass merchants, convenience stores and other CPG sales. Sales in the grocers/mass merchants and convenience stores channels increased from $38.9 million in the first three months of fiscal 2016 to $39.5 million in the first three months of fiscal 2017. The increase in these CPG channels reflects a 1.5% increase in the average number of doors served partially offset by a 1.0% decrease in average weekly sales per door.

The decrease in Company Stores segment operating income was driven by the decline in the Company Stores contribution margin (a non-GAAP financial measure) from 18.5% in the first three months of fiscal 2016 to 17.1% in the first three months of fiscal 2017. The margin decline was the result of an increase in store level costs as a percentage of revenues from 81.5% in the first three months of fiscal 2016 to 82.9% in the first three months of fiscal 2017. Of the 1.4 percentage point increase in store level costs as a percentage of revenues, total cost of sales increased 1.0 percentage point compared to the first three months last year principally due to higher labor and benefit costs.

Cost of food, beverage and packaging as a percentage of revenues decreased by 0.6 percentage points from the first three months of fiscal 2016 to 35.4% in the first three months of fiscal 2017. This improvement was principally due to lower commodity costs and an increase in on-premises sales, which typically have lower food costs compared to CPG sales, as a percentage of total revenues.

Labor and benefit costs as a percentage of revenues increased 1.7 percentage points in the first three months of fiscal 2017 compared to the first three months of fiscal 2016. Labor costs increased during the first three months of fiscal 2017 compared to the prior year period due to an increase in our average hourly wage rate and higher manager incentive compensation as a result of the implementation of a new shop level incentive program. Additionally, we recorded charges of approximately $370,000 related to employee termination benefits during the first three months of fiscal 2017.

Vehicle costs as a percentage of revenues decreased from 4.2% of revenues in the first three months of fiscal 2016 to 3.9% of revenues in the first three months of fiscal 2017, principally reflecting lower fuel costs and a reduction in mileage.

Other store operating expenses increased to 5.6% of revenues in the first three months of fiscal 2017 from 5.2% of revenues in the first three months of fiscal 2016 principally due to an increase in equipment repairs and maintenance and an increase in other supplies and services costs.

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

32



Domestic Franchise

Three Months Ended
May 1, May 3,
2016 2015
(In thousands)
Revenues:
       Royalties       $      3,598       $      3,286
       Development and franchise fees 100 100
       Other 439 323
              Total revenues 4,137 3,709
 
Operating expenses:
       Segment operating expenses 1,362 1,423
       Depreciation expense 17 17
       Allocated corporate overhead 225 175
              Total operating expenses 1,604 1,615
Segment operating income $      2,533 $     2,094
Segment operating margin 61.2 % 56.5 %

Domestic Franchise revenues increased 11.5% to $4.1 million in the first three months of fiscal 2017. The increase reflects higher domestic royalty revenues resulting from a 6.7% increase in sales by Domestic Franchise stores from $91.8 million in the first three months of fiscal 2016 to $97.9 million in the first three months of fiscal 2017. The increase in sales by Domestic Franchise stores was the result of an increase in store operating weeks and an increase in same store sales of 1.6% in the first three months of fiscal 2017.

Other Domestic Franchise revenues include revenue from the licensing of certain Company trademarks to third parties for use in marketing Krispy Kreme branded beverages and other consumer products and from rental income charged to franchisees for stores leased or subleased to franchisees. The increase in other Domestic Franchise revenue was principally due to an increase in licensing revenue in the first three months of fiscal 2017 compared to the prior year.

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 segment operating expenses decreased in the first three months of fiscal 2017 compared to the first three months of fiscal 2016, principally reflecting lower professional fees and personnel related costs partially offset by charges of $210,000 related to employee termination benefits in the three months of fiscal 2017.

Domestic franchisees opened two stores in the first three months of fiscal 2017. As of May 1, 2016, development agreements for territories in the United States provide for the development of approximately 160 additional stores through fiscal 2023. Royalty revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on our revenues, results of operations and cash flows.

33



International Franchise

Three Months Ended
May 1, May 3,
      2016       2015
(In thousands)
Revenues:
       Royalties $ 6,474 $ 6,425
       Development and franchise fees 381 303
              Total revenues 6,855 6,728
 
Operating expenses:
       Segment operating expenses 2,102 1,624
       Depreciation expense - -
       Allocated corporate overhead 175 200
              Total operating expenses 2,277 1,824
Segment operating income $      4,578 $      4,904
Segment operating margin 66.8 % 72.9 %

International Franchise royalties increased 0.8% to $6.5 million in the first three months of fiscal 2017 from $6.4 million in the first three months of fiscal 2016. Changes in the rates of exchange between the U.S. dollar and the foreign currencies in which our international franchisees do business decreased sales by international franchisees measured in U.S. dollars by approximately $5.7 million in the first three months of fiscal 2017 compared to the first three months of fiscal 2016, which adversely affected royalties by approximately $300,000. Excluding the effects of changes in exchange rates, sales by international franchisees rose 2.8% to $118.5 million in the first three months of fiscal 2017 from $115.2 million in the same period last year.

International Franchise same store sales, measured on a constant currency basis to eliminate the effects of changing exchange rates between foreign currencies and the U.S. dollar (“constant dollar same store sales”), fell 7.3%. The decline in International Franchise same store sales reflects, among other things, the normal, on-going impact of high shop growth on existing unit sales resulting from the market penetration strategy of our international franchisees.

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 segment operating expenses increased to $2.1 million in the first three months of fiscal 2017 from $1.6 million in the first three months of fiscal 2016 principally as a result of charges of approximately $290,000 related to employee termination benefits and an increase in bad debt expense of approximately $100,000 in the first three months of fiscal 2017.

International franchisees opened 25 stores and closed 13 stores in the first three months of fiscal 2017. As of May 1, 2016, development agreements for territories outside the United States provide for the development of approximately 430 additional stores through fiscal 2026. Royalty revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on our revenues, results of operations and cash flows.

34



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
May 1, May 3, May 1, May 3,
2016 2015 2016 2015
(In thousands)            
Revenues:                  
       Doughnut mixes $      24,198 $      22,943 37.8 %       36.1 %
       Other ingredients, packaging and supplies 36,096 37,314 56.4 58.7
       Equipment 3,277 2,947 5.1 4.6
       Freight revenue 478 313 0.7 0.5
              Total revenues before intersegment sales elimination 64,049 63,517               100.0             100.0
 
Operating expenses:
       Cost of goods produced and purchased 43,877 44,773 68.5 70.5
       Distribution costs 4,732 4,453 7.4 7.0
       Other segment operating costs 2,983 2,830 4.7 4.5
       Depreciation expense 160 212 0.2 0.3
       Allocated corporate overhead 325 300 0.5 0.5
              Total operating costs 52,077 52,568 81.3 82.8
Segment operating income $ 11,972 $ 10,949 18.7 % 17.2 %

Sales of doughnut mixes increased 5.5% year-over-year in the first three months of fiscal 2017, due to higher unit volumes and higher selling prices. Sales of other ingredients, packaging and supplies, made principally to Company and Domestic Franchise stores, decreased 3.3% year-over-year in the first three months of fiscal 2017 due to lower selling prices partially offset by a slight increase unit sales volumes.

KK Supply Chain adjusts the selling prices on the majority of ingredients, packaging and supplies sold to Company-owned and franchise stores on a quarterly basis at the beginning of each quarter. As a result, KK Supply Chain operating margin can vary between quarters but the Company’s objective is to keep operating margins at KK Supply Chain relatively constant by passing increases and decreases in input costs to Company-owned and franchise stores by adjusting such sales prices.

The decrease in cost of goods produced and purchased as a percentage of sales in the first three months of fiscal 2017 compared to the first three months of fiscal 2016 reflects, among other things, lower input costs for other ingredients, packaging and supplies and an increase in the percentage of doughnut mix sales composed of mix concentrates, which carry higher profit margins than sales of finished doughnut mixes. Mix concentrates have higher profit margins than finished doughnut mixes because we attempt to maintain the gross profit on sales of mix concentrates and finished mixes relatively constant when measured on a finished mix equivalent basis.

Distribution costs rose in the first three months of fiscal 2017 compared to the first three months of fiscal 2016 due to an increase in unit volumes. Distribution costs increased as a percentage of sales because selling prices on certain ingredients and supplies decreased compared to the same period last year.

Other segment operating costs include segment management, purchasing, customer service and support, laboratory and quality control costs, and research and development expenses. Other segment operating costs increased in the first three months of fiscal 2017 compared to the first three months of fiscal 2016 as a result of recording charges of approximately $180,000 related to employee termination benefits in the first three month of fiscal 2017.

General and Administrative Expenses

General and administrative expenses consist of costs incurred in various functional areas whose activities are not associated exclusively with an individual business segment. Such costs include expenses associated with finance and accounting; internal and external financial reporting, including financial planning and analysis; internal audit; human resources; risk management; information technology; training; corporate office occupancy; public company costs; and executive management. Certain personnel and other costs in some of these functional areas (for example, some of the costs of information technology and human resources) are associated primarily with the operation of individual business segments, and are allocated to those segments as allocated corporate costs. General and administrative expenses in the consolidated statement of income are presented net of such allocated costs, which are reflected in the results of operations of the four operating segments. Such allocated costs totaled approximately $1.9 million in first quarter of fiscal 2017 and fiscal 2016.

35



General and administrative expenses decreased to $7.5 million in the first three months of fiscal 2017 from $7.6 million in the first three months of fiscal 2016 and, as a percentage of revenues, decreased to 5.5% from 5.7% principally due to lower system implementation costs in the first three months of fiscal 2017 as we implemented a new enterprise resource planning system that included a new general ledger and accounting system in the first quarter last year. These lower system implementation costs were partially offset by Merger-related costs of approximately $454,000 recorded in the first three months of fiscal 2017 in connection with the Merger as described in Note 1 to the consolidated financial statements appearing elsewhere herein.

Impairment Charges and Lease Termination Costs

Impairment charges and lease termination costs were $453,000 in the first three months of fiscal 2017 compared to $4,000 in the first three months of fiscal 2016.

Three Months Ended
May 1, May 3,
2016 2015
(In thousands)
Impairment of long-lived assets $ 500 $ -
Lease termination costs (47 ) 4
      $          453       $          4

We test 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 our annual budgeting process. Impairment charges generally relate to Company stores expected to be closed or refranchised, as well as to stores we believe will not generate sufficient future cash flows to enable us to recover the carrying value of the stores’ assets, but which we have not yet decided to close. When we conclude that the carrying value of long-lived assets is not recoverable (based on future projected undiscounted cash flows), we record 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 we are currently negotiating to sell, on our negotiations with unrelated third-party buyers. During the first three months of fiscal 2017, we recorded impairment charges related to long-lived assets of $500,000 in connection with the refranchising of certain shop locations which was completed during the second quarter of fiscal 2017 as described in Note 9 and 14 to the consolidated financial statements appearing elsewhere herein. The fair value of the impaired store assets was estimated based on our 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 we cease use of the leased property. The fair value of these liabilities was 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. During the first three months of fiscal 2017, we recorded lease termination charges of $203,000 principally related to store closures in the first three months of fiscal 2017 offset by the reversal of previously recorded accrued rent of $250,000 related to the closed stores.

Pre-opening Costs Related to Company Stores

Pre-opening costs related to Company Stores include costs related to new stores, a portion of which relates to stores which had not yet opened by the end of the quarter. Pre-opening costs related to Company Stores increased to $607,000 in the first three months of fiscal 2017 compared to $323,000 in first three months of fiscal 2016 as a result of the timing of store openings. The average pre-opening costs per store are approximately $200,000.

36



Gains on Commodity Derivatives, Net

Gains on commodity derivatives, net represent the difference between the cost, if any, and the fair value of the commodity derivatives and are reflected in earnings because we had not designated any of these instruments as hedges. We recorded net gains on commodity derivatives of $447,000 in the first three months of fiscal 2016. We had no commodity derivative contracts outstanding as of May 1, 2016. Gains on commodity derivatives, net were comprised of the following:

May 3, 2015
(Gains) and Losses on Commodity Derivatives Agricultural Gasoline Total
(In thousands)
Realized $ 493 $ 120 $ 613
Unrealized       (158 )       (902 )       (1,060 )
       (Gains) and losses on commodity derivatives, net $              335   $                  (782 ) $        (447 )

Interest Expense

Interest expense increased to $439,000 in the first three months of fiscal 2017 from $377,000 in the first three months of fiscal 2016. This increase was due principally to interest expense related to financing obligations that we entered into in fiscal 2016 associated with approximately $8.8 million of build-to-suit leasing arrangements as described in Note 6 in the consolidated financial statements appearing elsewhere herein.

Other Non-Operating Income and Expense, Net

Other non-operating income and expense, net includes payments of approximately $185,000 in the first three months of fiscal 2016, received from an equity method franchisee on a promissory note representing amounts paid by us in fiscal 2014 pursuant to our guarantee of the investee’s indebtedness. Repayments were being reflected in income as received due to the uncertainty of their continued collection. In fiscal 2016, we conveyed our membership interest in this equity method franchisee to the majority owner upon receipt of payment of approximately $810,000 for all outstanding indebtedness which included the payment of approximately $500,000 for the remaining outstanding balance of this promissory note; therefore, no similar payments were received in the first three months of fiscal 2017.

Provision for Income Taxes

Our effective tax rate for the first three months of fiscal 2017 was 39.3% compared to 38.1% for the first three months of fiscal 2016. The increase in the effective income tax rate was due primarily to the benefit of specific incentive stock options being reclassified as non-qualified stock options during the three months ended May 3, 2015.

The portion of the income tax provision representing taxes estimated to be payable currently was $696,000 and $613,000 in the first three months of fiscal 2017 and 2016, respectively, consisting principally of foreign withholding taxes related to royalties and franchise fees paid by international franchisees. The current provision for income taxes also reflects adjustments to accruals for uncertain tax positions, including potential interest and penalties which could result from the resolution of such uncertainties.

37



LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes our cash flows from operating, investing and financing activities for the first three months of fiscal 2017 and fiscal 2016.

Three Months Ended
May 1, May 3,
2016 2015
(In thousands)
Net cash provided by operating activities $ 19,495 $ 17,145
Net cash used for investing activities (8,148 ) (3,821 )
Net cash used for financing activities (33,431 ) (5,653 )
       Net increase (decrease) in cash and cash equivalents       $      (22,084 )       $       7,671

Cash Flows from Operating Activities

Cash provided by operating activities increased $2.4 million in the first three months of fiscal 2017 from the comparable fiscal 2016 period which was primarily attributable to improvements in working capital. The improvements in working capital are principally due to the changes in receivables as a result of the timing of cash receipts.

Cash Flows from Investing Activities

Net cash used for investing activities was $8.1 million in the first three months of fiscal 2017 compared to $3.8 million in the first three months of fiscal 2016.

Capital expenditures increased to $8.0 million in the first three months of fiscal 2017 from $4.5 million in the first three months of fiscal 2016. The components of capital expenditures were as follows:

Three Months Ended
May 1, May 3,
2016 2015
(In thousands)
New store construction $ 4,517 $ 2,670
Store remodels and betterments 205 752
Other store equipment, including vehicles and technology 1,005 447
Mix manufacturing equipment and refurbishments 123 462
Corporate information technology       198       610
Other 75 115
Total capital expenditures 6,123 5,056
Assets acquired under leasing arrangements (140 ) (947 )
Net change in unpaid capital expenditures included in accounts payable
       and accrued liabilities 2,064 437
Cash used for capital expenditures $       8,047 $      4,546

We currently expect capital expenditures to be approximately $30 million in fiscal 2017. We intend 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 quarter of fiscal 2017, we acquired the franchise rights to develop certain CPG channels of trade from certain of our franchisees for approximately $185,000 and in the first quarter of fiscal 2016, we acquired a store from our franchisee in Little Rock, Arkansas, in exchange for $312,000 cash as more fully described in Note 13 to the consolidated financial statements appearing elsewhere herein.

38



Cash Flows from Financing Activities

Net cash used for financing activities for the three months ended May 1, 2016 was $33.4 million. This was primarily the result of our repurchase of 2,415,296 shares of our common stock during the three months ended May 1, 2016 for a total cost of $39.6 million. The settlement of such purchases was $34.2 million in the first three months of fiscal 2017. All of these shares were repurchased pursuant to our Board authorized common stock repurchase plan as more fully described in Note 8 to the consolidated financial statements appearing elsewhere herein. In March 2016, our Board increased the authorization by an additional $100.0 million to $255.0 million. Through May 1, 2016, we have cumulatively repurchased 8,612,395 shares under the authorization at an average price of $17.56 per share, for a total cost of $151.2 million. Including the March 2016 increase in authorization, $103.8 million remains available for future share repurchases. In addition to share repurchases made pursuant to the aforementioned repurchase plan, we repurchased $450,000 of common stock during the three months ended May 1, 2016, representing the value of shares surrendered by employees to satisfy their obligations to reimburse us for the minimum required statutory withholding taxes arising from the vesting of restricted stock awards by surrendering vested common stock in lieu of reimbursing us in cash. These amounts were partially offset by proceeds from the exercise of stock options which totaled $1.6 million during the first quarter of fiscal 2017, of which $1.3 million was settled in the first three month of fiscal 2017.

Net cash used for financing activities for the three months ended May 3, 2015 was $5.7 million. During the three months ended May 3, 2015, we repurchased 391,310 shares under the share repurchase authorization, for a total cost of $7.4 million. The settlement of such purchases was $5.9 million in the first three months of fiscal 2016. In addition to share repurchases made pursuant to the aforementioned repurchase program, we repurchased $197,000 of common shares in the first three months of fiscal 2016, representing the value of shares surrendered by employees to satisfy their obligations to reimburse us for the minimum required statutory withholding taxes arising from the vesting of restricted stock awards by surrendering vested common shares in lieu of reimbursing us in cash. This amount was partially offset by $519,000 of proceeds from the exercise of stock options.

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 2016 Form 10-K.

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

As of May 1, 2016, the end of the period covered by this Quarterly Report on Form 10-Q, management performed, under the supervision and with the participation of our chief executive officer and chief financial officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit 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 our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. Based on this evaluation, our chief executive officer and chief financial officer have concluded that, as of May 1, 2016, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the quarter ended May 1, 2016, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

The information called for by this item is incorporated herein by reference to Note 7 of the consolidated financial statements included in Part I, Item 1.

Item 1A. RISK FACTORS.

Except for the risk factors indicated below, there have been no material changes from the disclosures in Part I, Item 1A, “Risk Factors,” in the 2016 Form 10-K.

39



We may not be able to obtain satisfaction of all conditions to complete the Merger.

The consummation of the Merger is subject to customary closing conditions. A number of the conditions are not within our control, and may prevent, delay or otherwise materially adversely affect the completion of the Merger. These conditions include, among other things, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the absence of legal restraints prohibiting the completion of the Merger. It also is possible that an event, change, circumstance, occurrence, effect or state of facts that could result in a material adverse effect to the Company may occur, which may give Cotton the ability to avoid completing the Merger. We cannot predict with certainty whether and when any of the required closing conditions will be satisfied or if another uncertainty may arise. If the Merger does not receive, or timely receive, the required regulatory approvals and clearances, or if another event occurs that delays or prevents the Merger, such delay or failure to complete the Merger may cause uncertainty or other negative consequences that may materially and adversely affect our sales, financial performance and operating results, and the price per share for our common stock and perceived acquisition value.

In the event that the Merger is not completed, the trading price of our common stock and our future business and financial results may be negatively affected.

There is no assurance that the closing of the Merger will occur. The closing of the Merger is subject to certain conditions, including the approval of the Merger Agreement and the Merger by the Company's shareholders, the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, there being no material adverse effect on the Company prior to the closing of the Merger and other customary conditions. If the proposed Merger is not completed, our stock price may fall from the current market price which we believe reflects an assumption that the Merger will be completed. In addition, as described below, we may be required to pay a termination fee under the circumstances described in the Merger Agreement and would remain liable for significant transaction costs. Further, the failure of the proposed Merger to be completed may result in negative publicity and/or a negative impression of us in the investment community and may affect our relationship with employees, customers and other partners in the business community.

While the Merger is pending, we are subject to business uncertainties and contractual restrictions that could disrupt our business.

Whether or not the Merger is completed, the fact that it is pending may disrupt the current plans and operations of the Company, which could have an adverse effect on our business and financial results. The pendency of the Merger may also divert management's attention and our resources from ongoing business and operations and our employees and other key personnel may have uncertainties about the effect of the pending Merger and those uncertainties may impact our ability to retain, recruit and hire key personnel while the Merger is pending or if it fails to close. We may incur significant costs, charges or expenses relating to the Merger, regardless of whether or not it is completed. Furthermore, we cannot predict how our suppliers, customers and others with whom we do business will view or react to the pending Merger. If we are unable to maintain our normal relationships as a result of the pending Merger, our financial results may be adversely affected.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities and must generally operate our business in the ordinary course (subject to certain exceptions). These restrictions could prevent us from pursuing attractive business opportunities that arise prior to the completion of the Merger, could result in our inability to respond effectively to competitive pressures and industry developments and may otherwise have a material adverse effect on our future results of operations or financial condition.

The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire us prior to the completion of the proposed Merger.

The Merger Agreement contains provisions that restrict our ability to entertain a third-party proposal to acquire us. These provisions include the general prohibition on our soliciting or engaging in discussions or negotiations regarding any alternative acquisition proposal, subject to certain exceptions, the requirement to provide Cotton with the right to match any third-party proposal, and the requirement that we pay a termination fee of $42.0 million if the Merger Agreement is terminated under specified circumstances, including if we enter into an alternative transaction we determine to be superior. These provisions might discourage an otherwise-interested third party from considering or proposing to acquire us, even one that may be deemed of greater value than the proposed Merger to our shareholders. Furthermore, even if a third party elects to propose an acquisition, the termination fee payable in certain circumstances may result in that third party offering a lower value to our shareholders than such third party might otherwise have offered.

40



A putative shareholder class action challenging the Merger has been filed, and an unfavorable judgment or ruling could prevent or delay the consummation of the Merger and result in substantial costs.

A putative class action challenging the Merger has been filed on behalf of our shareholders. It is possible that the complaint in that lawsuit will be amended to make additional claims and/or that additional lawsuits making similar or additional claims relating to the Merger will be brought. If dismissals are not obtained or a settlement is not reached, these lawsuits could prevent or delay completion of the Merger and/or result in substantial costs to us, including any costs associated with the indemnification of our directors.

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

There were no unregistered sales of equity securities by the Company during the period covered by this report. Purchases of securities by the Company during the first quarter of fiscal 2017 are included in the table below.

Total Number of Maximum Number (or
Shares (or units) Approximate Dollar
Purchased as Part Value) of Shares (or
Total Number of of Publicly Units) that May Yet Be
Shares (or units) Average Price Paid Announced Plans Purchased Under the
  Purchased per Share (or unit) or Programs Plans or Programs
Period       (a)(1)       (b)       (c)       (d)
February 1, 2016 through February 28, 2016 - $ - - $ 143,432,531
February 29, 2016 through March 27, 2016 16,649 14.61 -   143,432,531
March 28, 2016 through May 1, 2016 2,428,280   16.41   2,415,296   103,787,347
       Total 2,444,929 $ 16.40 2,415,296

      (1)       On July 11, 2013, our Board authorized the repurchase of up to $50 million of our common stock and subsequently increased such authorization, such that it now totals $255 million. The authorization has no expiration date. Through May 1, 2016, we repurchased 8,612,395 shares under the authorization at an average price of $17.56 per share, for a total cost of $151.2 million. During the three months ended May 1, 2016, we repurchased 2,415,296 shares under the authorization at an average price of $16.41 per share, for a total cost of $39.6 million. Repurchases of approximately $34.2 million of the share repurchases were settled during the three months ended May 1, 2016. Due to our incorporation in North Carolina, which does not recognize treasury shares, the shares repurchased are canceled at the time of repurchase. Additionally, we generally permit holders of restricted stock unit awards to satisfy their obligations to reimburse us for the minimum required statutory withholding taxes arising from the vesting of such awards by surrendering vested common shares in lieu of reimbursing us in cash. During the three months ended May 1, 2016, we repurchased 29,633 shares to satisfy obligations to reimburse us at an average price of $15.19 per share, for a total cost of approximately $450,000.

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 43 and are incorporated herein by reference.

41



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:   June 10, 2016 By: /s/ Berry L. Epley  
  Name:      Berry L. Epley
Title: Chief Accounting Officer
(Duly Authorized Officer and Principal Accounting Officer)

42



Exhibit Index

2.1                

Agreement and Plan of Merger, dated as of May 8, 2016, by and among Krispy Kreme Doughnuts, Inc., Cotton Parent, Inc., Cotton Merger Sub Inc., and JAB Holdings B.V. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on May 9, 2016)*

 
3.1

Restated Articles of Incorporation of the Registrant, as amended through June 18, 2015 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on September 11, 2015)

 
3.3

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 on May 9, 2016)

 
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 May 1, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statement of Income for the three months ended May 1, 2016, and May 3, 2015; (ii) the Consolidated Balance Sheet as of May 1, 2016 and January 31, 2016; (iii) the Consolidated Statement of Cash Flows for the three months ended May 1, 2016 and May 3, 2015; (iv) the Consolidated Statement of Changes in Shareholders’ Equity for the three months ended May 1, 2016 and May 3, 2015; and (v) the Notes to the Condensed Consolidated Financial Statements

* Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of such schedules, or any section thereof, to the SEC upon request.

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

43


EX-31.1 2 exhibit31-1.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Tony Thompson, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Krispy Kreme Doughnuts, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 10, 2016

/s/ Tony Thompson  
Tony Thompson
Chief Executive Officer

44


EX-31.2 3 exhibit31-2.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, G. Price Cooper, IV, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Krispy Kreme Doughnuts, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 10, 2016

/s/ G. Price Cooper, IV  
G. Price Cooper, IV
Chief Financial Officer

45


EX-32.1 4 exhibit32-1.htm CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

EXHIBIT 32.1

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

I, Tony Thompson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the accompanying Quarterly Report on Form 10-Q of Krispy Kreme Doughnuts, Inc. (the “Company”) for the fiscal quarter ended May 1, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Tony Thompson
Tony Thompson
Chief Executive Officer

Date: June 10, 2016

This certification shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be incorporated by reference into any registration statement filed under the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated therein by reference.

A signed original of this written statement required by Section 906 has been provided to Krispy Kreme Doughnuts, Inc. and will be retained by Krispy Kreme Doughnuts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

46


EX-32.2 5 exhibit32-2.htm CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

EXHIBIT 32.2

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

I, G. Price Cooper, IV, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the accompanying Quarterly Report on Form 10-Q of Krispy Kreme Doughnuts, Inc. (the “Company”) for the fiscal quarter ended May 1, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ G. Price Cooper, IV
G. Price Cooper, IV
Chief Financial Officer

Date: June 10, 2016

This certification shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be incorporated by reference into any registration statement filed under the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated therein by reference.

A signed original of this written statement required by Section 906 has been provided to Krispy Kreme Doughnuts, Inc. and will be retained by Krispy Kreme Doughnuts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

47


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6"></w:LsdException> </w:LatentStyles> </xml><![endif]--> <!-- [if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman",serif;} </style> <![endif]--></font></p> <p style="margin: 0in 0in 10pt; line-height: 115%; font-family: 'Times New Roman', serif; font-size: 10pt;"><b><font style="mso-fareast-font-family: Calibri;">Recent</font></b><b style="mso-bidi-font-weight: normal;"><font style="mso-fareast-font-family: Calibri;"> Accounting Pronouncements<font style="mso-bidi-font-weight: bold;"> </font></font></b></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">In March 2016, the Financial Accounting Standards Board (&#147;FASB&#148;) issued Accounting Standard Update (&#147;ASU&#148;) 2016-09, &#147;Improvements to Employee Share-Based Payment Accounting&#148;, which amends existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">In February 2016, the FASB issued ASU 2016-02, &#147;Leases&#148;, which requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">In July 2015, the FASB issued ASU 2015-11, &#147;Simplifying the Measurement of Inventory&#148;, which changes guidance for subsequent measurement of inventory from the lower of cost or market to the lower of cost and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">In April 2015, the FASB issued ASU 2015-03, &#147;Simplifying the Presentation of Debt Issuance Costs.&#148; This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, &#147;Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.&#148; This guidance states that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to the line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. This guidance became effective in the first quarter of fiscal 2017. As all of our debt issuance costs are related to line-of-credit arrangements and are currently classified as assets, the adoption of this guidance did not have any impact on our consolidated financial statements.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">In April 2015, the FASB issued ASU 2015-05, &#147;Customer's Accounting for Fees Paid in a Cloud Computing Arrangement&#148;, which provides guidance about whether a cloud computing arrangement includes a software license. This guidance became effective in the first quarter of fiscal 2017 and did not impact our consolidated financial statements.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">In May 2014, the FASB issued ASU 2014-09, &#147;Revenue from Contracts with Customers&#148;, to clarify the principles used to recognize revenue for all entities. In March 2016, the FASB issued ASU 2016-08, &#147;Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations&#148;, which further clarifies the implementation guidance on principal versus agent considerations&#148;, and in April 2016, the FASB issued ASU 2016-10, &#147;Revenue from contracts with customers (Topic 606): Identifying performance obligations and licensing&#148;, an update on identifying performance obligations and accounting for licenses of intellectual property. Additionally, in May 2016, the FASB issued ASU 2016-12, &#147;Revenue from contracts with customers (Topic 606): Narrow-scope improvements and practical expedients&#148;, which includes amendments for enhanced clarification of the guidance. This guidance is effective for fiscal years beginning on or after December 15, 2017 including interim periods within those fiscal years and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.</font></p> <p style="margin: 0in 0in 0pt; text-indent: 13.5pt; font-family: 'Times New Roman', serif; font-size: 10pt;"><br/></p> </div> </div> 64098000 66603000 1171000 1643000 138000 327000 65407000 68573000 <div id='EdgarSAA123457890000' style="font-family : 'Times New Roman';"> <p align="left" style="color: #000000; text-transform: none; text-indent: 15pt; letter-spacing: normal; word-spacing: 0px; white-space: normal; widows: 1; -webkit-text-stroke-width: 0px;"><i><font size="2">BASIS OF CONSOLIDATION. </font></i><font size="2">The&#160;financial statements include the accounts of KKDI and its subsidiaries. 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Name="List Table 7 Colorful Accent 6"></w:LsdException> </w:LatentStyles> </xml><![endif]--> <!-- [if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman",serif;} </style> <![endif]--></font></p> <p style="margin: 0in 0in 10pt; line-height: 115%; font-family: 'Times New Roman', serif; font-size: 10pt;"><b><font style="mso-fareast-font-family: Calibri;">Recent</font></b><b style="mso-bidi-font-weight: normal;"><font style="mso-fareast-font-family: Calibri;"> Accounting Pronouncements<font style="mso-bidi-font-weight: bold;"> </font></font></b></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">In March 2016, the Financial Accounting Standards Board (&#147;FASB&#148;) issued Accounting Standard Update (&#147;ASU&#148;) 2016-09, &#147;Improvements to Employee Share-Based Payment Accounting&#148;, which amends existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">In February 2016, the FASB issued ASU 2016-02, &#147;Leases&#148;, which requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">In July 2015, the FASB issued ASU 2015-11, &#147;Simplifying the Measurement of Inventory&#148;, which changes guidance for subsequent measurement of inventory from the lower of cost or market to the lower of cost and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">In April 2015, the FASB issued ASU 2015-03, &#147;Simplifying the Presentation of Debt Issuance Costs.&#148; This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, &#147;Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.&#148; This guidance states that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to the line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. This guidance became effective in the first quarter of fiscal 2017. 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We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.</font></p> <p style="margin: 0in 0in 0pt; text-indent: 13.5pt; font-family: 'Times New Roman', serif; font-size: 10pt;"><br/></p> </div> <div id='EdgarSAA123457890000' style="font-family : 'Times New Roman';"> <p align="left" style="color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; widows: 1; background-color: #ffffff; -webkit-text-stroke-width: 0px;"><font size="2"><font size="3">&#160;&#160;&#160;&#160; </font><em>BASIS OF PRESENTATION. </em></font><font size="2">The consolidated financial statements contained herein should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 (the &#147;2016 Form 10-K&#148;). 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 (&#147;GAAP&#148;) with respect to annual financial statements. The interim consolidated financial statements have been prepared in accordance with our accounting practices described in the 2016 Form 10-K, but have not been audited. In our opinion, the financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of our results of operations for the periods presented. The consolidated balance sheet data as of January 31, 2016 were derived from our audited financial statements.</font>&#160;</p> </div> 244000 302000 190000 171000 93993000 4137000 6855000 64049000 -32550000 31499000 5963000 2533000 4578000 11972000 7483000 609000 453000 3270000 17000 160000 <div id='EdgarSAA123457890000' style="font-family : 'Times New Roman';"> <p align="left"><font style="font-size: 10pt;"><strong><font style="font-family: 'Times New Roman';">Note 2 &#151; Segment Information&#160;</font></strong></font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">Our operating and reportable segments are Company Stores, Domestic Franchise, International Franchise and KK Supply Chain.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">The Company Stores segment is comprised of the stores owned and operated by us. 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font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px;"><b><font size="2">Note 7 &#151; Commitments and Contingencies</font></b></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">Except as disclosed below, we currently are not a party to any material legal proceedings.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px;"><b><font size="2">Pending Litigation</font></b><font size="2"></font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 7.5pt;"><i><font size="2">K</font></i><i><font size="2"><sup>2 </sup></font></i><i><font size="2">Asia Litigation</font></i></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">On April 7, 2009, a Cayman Islands corporation, K<sup>2</sup> Asia Ventures, and its owners filed a lawsuit in Forsyth County, North Carolina Superior Court against us, our franchisee in the Philippines, and other persons associated with the franchisee. The suit </font><font size="2">alleges that we and the other defendants conspired </font><font size="2">to deprive the plaintiffs of claimed &#147;exclusive rights&#148; to negotiate franchise</font><b><font size="2"> </font></b><font size="2">and </font><font size="2"></font><font size="2">development agreements with prospective franchisees in the Philippines, and seeks unspecified damages. We therefore do not know the amount or range of possible loss related to this matter. We believe that these allegations are false and continue to vigorously defend against the lawsuit. On July 26, 2013, the Superior Court dismissed the Philippines-based defendants for lack of personal jurisdiction, and the plaintiffs appealed that decision. On January 22, 2015, the North Carolina Supreme Court denied the pl</font><font size="2">aintiffs' request to review the case. We moved for summary judgment on May 7, 2015 and are awaiting a decision by the Superior Court. We do not believe it is probable that a loss has been incurred with respect to this matter, and accordingly no liability related to it has been reflected in the accompanying financial statements.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 7.5pt;"><i><font size="2">Merger-Related Litigation</font></i></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">On May 26, 2016, a purported shareholder of the Company, Ronnie Stillwell, filed a putative class action complaint challenging the Merger in Superior Court in the State of North Carolina. The complaint names as defendants JAB, Cotton, Merger Sub and the members of the Board and also names the Company as a nominal defendant. The complaint seeks, among other relief, an order enjoining the Merger, compensatory damages, and an award of attorney's fees and costs on the grounds that, among other things, the members of the Board allegedly breached their fiduciary duties in connection with entering into the Merger Agreement and adopting and approving the Merger. The complaint further alleges that JAB, Cotton and Merger Sub aided and abetted the alleged breaches of fiduciary duties. It is possible that this complaint will be amended to make additional claims and/or that additional lawsuits making similar or additional claims relating to the Merger will be brought.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">On May 26, 2016, legal advisors representing Melissa Weers, who is purportedly a shareholder of the Company, submitted a letter through the mail to the Board of the Company demanding legal action against the Board for a purported breach of fiduciary duty related to the Merger. The letter alleges, among other things, that the directors of the Company agreed to inadequate merger consideration and undervalued the Company. Additionally, the letter alleges that measures in the Merger Agreement created unreasonable protective devices to preclude competing </font><font size="2">offers. The letter further states Ms. Weer's belief that the Board of the </font><font size="2">Company was neither independent nor disinterested in the Merger, preventing directors from fulfilling their fiduciary duties to the </font><font size="2">Company's </font><font size="2">shareholders. In closing, the letter demands attention from the Board. The letter </font><font><font size="2">further </font></font><font size="2">asks the Board to</font><b><font size="2"> </font></b><font size="2">authorize litigation against Cotton and its affiliated entities for aiding and abetting these supposed breaches.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">On June 8, 2016, the Company received a demand letter from legal advisors representing Stu Bonnin, who is also purportedly a shareholder of the Company. 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These events and changes in circumstances include store closing and refranchising decisions, the effects of changing costs on current results of operations, unfavorable 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 our annual budgeting process. Impairment charges generally relate to Company stores expected to be closed or refranchised, as well as to stores we believe will not generate sufficient future cash flows to enable us to recover the carrying value of the stores' assets, but which we have not yet decided to close. When we conclude that the carrying value of long-lived assets is not recoverable (based on future projected undiscounted cash flows), we record 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 we currently are negotiating to sell, on our negotiations with unrelated third-party buyers. Impairment charges related to our long-lived assets were $500,000 in the first quarter of fiscal 2017 and relate to the refranchising of certain shop locations which was completed during the second quarter of fiscal 2017 as described in Note 14. The fair value of the impaired store assets was estimated based on our negotiations with unrelated third-party buyers. </font></p> <p style="margin: 0pt; text-indent: 14.4pt; font-family: 'times new roman';"><font style="font-family: 'Times New Roman'; font-size: 10pt;">&#160;</font></p> <p style="margin: 0pt; text-indent: 18pt; font-family: 'times new roman';"><font style="font-family: 'Times New Roman'; font-size: 10pt;">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 we cease use of the leased property. The fair value of these liabilities was 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. 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Adjustments to previously recorded provisions resulting from settlements</font></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="right" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> </tr> <tr valign="bottom"> <td nowrap="nowrap" align="left" width="100%"><font style="font-size: 10pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; with lessors and adjustments of previous estimates</font></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="right" width="1%"><font style="font-size: 10pt;"><font>(7</font></font></td> <td nowrap="nowrap" align="left" width="1%">)</td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="right" width="1%"><font style="font-size: 10pt;"><font>1</font></font></td> <td nowrap="nowrap" align="left" width="1%"><br/></td> </tr> <tr valign="bottom" style="background-color: #c0c0c0;"> <td nowrap="nowrap" align="left" width="100%" style="background-color: #c0c0c0;"><font style="font-size: 10pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; 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&#160; &#160; &#160; &#160; &#160; &#160;&#160;Provisions associated with store closings, net of estimated sublease rentals</font></td> <td nowrap="nowrap" align="left" width="1%" style="background-color: #c0c0c0;"></td> <td nowrap="nowrap" align="left" width="1%" style="background-color: #c0c0c0;"></td> <td nowrap="nowrap" align="right" width="1%" style="background-color: #c0c0c0;"><font style="font-size: 10pt;"><font>202</font></font></td> <td nowrap="nowrap" align="left" width="1%" style="background-color: #c0c0c0;"><font style="font-size: 10pt;">&#160;</font></td> <td nowrap="nowrap" align="left" width="1%" style="background-color: #c0c0c0;"></td> <td nowrap="nowrap" align="left" width="1%" style="background-color: #c0c0c0;"></td> <td nowrap="nowrap" align="right" width="1%" style="background-color: #c0c0c0;"><font style="font-size: 10pt;"><font>-</font></font></td> <td nowrap="nowrap" align="left" width="1%" style="background-color: #c0c0c0;"></td> </tr> <tr valign="bottom"> <td nowrap="nowrap" align="left" width="100%"><font style="font-size: 10pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; Adjustments to previously recorded provisions resulting from settlements</font></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="right" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> </tr> <tr valign="bottom"> <td nowrap="nowrap" align="left" width="100%"><font style="font-size: 10pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; with lessors and adjustments of previous estimates</font></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="right" width="1%"><font style="font-size: 10pt;"><font>(7</font></font></td> <td nowrap="nowrap" align="left" width="1%">)</td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="right" width="1%"><font style="font-size: 10pt;"><font>1</font></font></td> <td nowrap="nowrap" align="left" width="1%"><br/></td> </tr> <tr valign="bottom" style="background-color: #c0c0c0;"> <td nowrap="nowrap" align="left" width="100%" style="background-color: #c0c0c0;"><font style="font-size: 10pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; 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border-bottom-style: solid !important; background-color: #c0c0c0;"></td> <td nowrap="nowrap" align="right" width="1%" style="border-bottom-color: #000000 !important; border-bottom-width: 1pt !important; border-bottom-style: solid !important; background-color: #c0c0c0;"><font style="font-size: 10pt;"><font>3</font></font></td> <td nowrap="nowrap" align="left" width="1%" style="border-bottom-color: #000000 !important; border-bottom-width: 1pt !important; border-bottom-style: solid !important; background-color: #c0c0c0;"></td> </tr> <tr valign="bottom"> <td nowrap="nowrap" align="left" width="100%"><font style="font-size: 10pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; Total provision</font></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%" style="border-bottom-color: #000000 !important; border-bottom-width: 1pt !important; border-bottom-style: solid !important;"></td> <td nowrap="nowrap" align="right" width="1%" style="border-bottom-color: #000000 !important; 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Payments on unexpired leases, including settlements with lessors</font></td> <td nowrap="nowrap" align="left" width="1%" style="background-color: #c0c0c0;"></td> <td nowrap="nowrap" align="left" width="1%" style="border-bottom-color: #000000 !important; border-bottom-width: 1pt !important; border-bottom-style: solid !important; background-color: #c0c0c0;"></td> <td nowrap="nowrap" align="right" width="1%" style="border-bottom-color: #000000 !important; border-bottom-width: 1pt !important; border-bottom-style: solid !important; background-color: #c0c0c0;"><font style="font-size: 10pt;"><font>(105</font></font></td> <td nowrap="nowrap" align="left" width="1%" style="border-bottom-color: #000000 !important; border-bottom-width: 1pt !important; border-bottom-style: solid !important; background-color: #c0c0c0;"><font style="font-size: 10pt;">)</font></td> <td nowrap="nowrap" align="left" width="1%" style="background-color: #c0c0c0;"></td> <td nowrap="nowrap" align="left" width="1%" style="border-bottom-color: #000000 !important; border-bottom-width: 1pt !important; border-bottom-style: solid !important; background-color: #c0c0c0;"></td> <td nowrap="nowrap" align="right" width="1%" style="border-bottom-color: #000000 !important; border-bottom-width: 1pt !important; border-bottom-style: solid !important; background-color: #c0c0c0;"><font style="font-size: 10pt;"><font>(35</font></font></td> <td nowrap="nowrap" align="left" width="1%" style="border-bottom-color: #000000 !important; border-bottom-width: 1pt !important; border-bottom-style: solid !important; background-color: #c0c0c0;"><font style="font-size: 10pt;">)</font></td> </tr> <tr valign="bottom"> <td nowrap="nowrap" align="left" width="100%"><font style="font-size: 10pt;">Balance at end of period</font></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="1%" style="border-bottom-width: 2.8pt !important; border-bottom-style: double !important; border-bottom-color: #000000 !important;"><font style="font-size: 10pt;">$</font></td> <td nowrap="nowrap" align="right" width="1%" style="border-bottom-width: 2.8pt !important; 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font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px;"><b><font size="2">Note 10 &#151; Income Taxes</font></b></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">Our effective income tax rate was&#160;<font>39.3</font>%<font style="color: #000000; font-family: 'Times New Roman'; font-size: small; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-align: -webkit-left; text-indent: 20px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; display: inline !important; float: none; background-color: #ffffff;">&#160;for the three months ended May 1, 2016 compared to an effective income tax rate of</font>&#160;<font>38.1</font>% for the three months ended May 3, 2015. The increase in the effective income tax rate was due primarily to the benefit of specific incentive stock options being reclassified as non-qualified stock options during the three months ended May 3, 2015.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font style="font-size: small; text-indent: 15pt;">We have established a valuation allowance of&#160;$<font>1.4</font></font><font style="font-size: small; text-indent: 15pt;">&#160;million at May 1, 2016 and January 31, 2016 that represents the portion of our deferred tax assets that management estimates will not be realized in the future. Such assets are associated principally with state net operating loss carryforwards related to states in which the scope of our operations has decreased. In such states, our ability to realize the net operating loss carryforwards is adversely affected because we are expected to have little income earned in or apportioned to those states in the future</font><font style="font-size: small; text-indent: 15pt;">.</font><br/></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">Realization of net deferred tax assets generally is dependent on generation of taxable income in future periods. 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.</font></p> </div> 0.393 0.381 1400000 2517000 2158000 <div id='EdgarSAA123457890000' style="font-family : 'Times New Roman';"> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px;"><b><font size="2">Note 11 &#151; Fair Value Measurements</font></b></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">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:</font></p> <div> <table cellspacing="0" cellpadding="0" width="100%" border="0" style="font-family: 'Times New Roman'; letter-spacing: normal; orphans: auto; text-indent: 0px; text-transform: none; widows: 1; word-spacing: 0px; border-collapse: collapse; text-align: left; margin-left: 0.1px;"> <tr> <td valign="top" width="1%" style="padding-right: 8pt; padding-left: 15pt;"><font style="font-size: 9.5pt;">&#149;</font></td> <td valign="top" width="99%"> <p align="left"><font size="2"></font><font size="2">Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.<br/></font></p> </td> </tr> <tr> <td valign="top" width="1%" style="padding-right: 8pt; padding-left: 15pt;"><font style="font-size: 9.5pt;">&#149;</font></td> <td valign="top" width="99%"> <p align="left"><font size="2"></font><font size="2">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. <br/></font></p> </td> </tr> <tr> <td valign="top" width="1%" style="padding-right: 8pt; padding-left: 15pt;"><font style="font-size: 9.5pt;">&#149;</font></td> <td valign="top" width="99%"> <p align="left"><font size="2"></font><font size="2">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. 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letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 9pt;"><i><font size="2">Long-Lived Assets</font></i><font></font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">During the three months ended May 1, 2016, long-lived assets having an aggregate carrying value of&#160;$<font>3.0</font>&#160;million were written down to their estimated fair values of $<font>2.5</font>&#160;million, resulting in recorded impairment charges of $<font>500,000</font>. 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width: 20px;"><font style="font-size: 10pt;">&#160;</font></td> <td nowrap="nowrap" align="left" width="1%" style="width: 20px;"><font style="font-size: 10pt;">$</font></td> <td nowrap="nowrap" align="right" width="3%" style="width: 20px;"><font style="font-size: 10pt;"><font>-</font></font></td> <td nowrap="nowrap" align="left" width="1%" style="width: 20px;"><font style="font-size: 10pt;">&#160;</font></td> <td nowrap="nowrap" align="left" width="1%" style="width: 20px;"><font style="font-size: 10pt;">$</font></td> <td nowrap="nowrap" align="right" width="3%" style="width: 20px;"><font style="font-size: 10pt;"><font><font> 48</font></font></font></td> </tr> </table> </div> </div> <div id='EdgarSAA123457890000' style="font-family : 'Times New Roman';"> <div> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px;"><b><font size="2">Note 12 &#151; Derivative Instruments</font></b></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">We are exposed to certain risks relating to our ongoing business operations. The primary risk managed by using derivative instruments is commodity price risk. We do not hold or issue derivative instruments for trading purposes.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px;"><b><font size="2">Commodity Price Risk</font></b></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">We are exposed to the effects of commodity price fluctuations in the cost of ingredients of our 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 we purchase exchange-traded commodity futures contracts, and options on such contracts, for raw materials which are ingredients of our products or which are components of such ingredients, including wheat and soybean oil. We are also exposed to the effects of commodity price fluctuations in the cost of gasoline used by our delivery vehicles. To mitigate the risk of fluctuations in the price of our gasoline purchases, we 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 we had 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. We had no commodity derivative contracts as of May 1, 2016.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px;"><b><font size="2">Interest Rate Risk</font></b></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">We are exposed to market risk from increases in interest rates on any borrowings outstanding under our 2013 Credit Facility. As of May 1, 2016, there were no borrowings outstanding under such facility.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px;"><b><font size="2">Quantitative Summary of Derivative Positions and Their Effect on Results of Operations</font></b></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">There were no derivative instruments in the consolidated balance sheet as of May 1, 2016 or January 31, 2016.</font></p> <p align="left" style="color: #000000; font-family: 'Times New Roman'; font-size: medium; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; text-indent: 15pt;"><font size="2">The effect of derivative instruments on the consolidated statement of income for the three months ended May 1, 2016 and May 3, 2015 was as follows:</font>&#160;</p> <p style="text-indent: 0.25in; margin: 0in 0in 0.0001pt; font-size: 10pt; font-family: 'Times New Roman', serif;">&#160;</p> <div> <div> <table cellspacing="0" cellpadding="0" width="100%" border="0" style="font-family: 'Times New Roman'; letter-spacing: normal; orphans: auto; text-indent: 0px; text-transform: none; widows: 1; word-spacing: 0px; border-collapse: collapse; margin-left: 0.1px;"> <tr valign="bottom"> <td nowrap="nowrap" align="left" width="82%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="5%"></td> <td nowrap="nowrap" align="right" width="1%"></td> <td nowrap="nowrap" width="11%" colspan="7" style="text-align: center;"><font style="font-size: 8pt;"><b>Amount of Derivative Gain or (Loss)</b></font></td> </tr> <tr valign="bottom"> <td nowrap="nowrap" align="left" width="82%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="5%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="center" width="11%" colspan="7" style="border-bottom-color: #000000; border-bottom-width: 1pt; border-bottom-style: solid;"><font style="font-size: 8pt;"><b>Recognized in Income</b></font></td> </tr> <tr valign="bottom"> <td nowrap="nowrap" align="left" width="82%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="5%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="center" width="11%" colspan="7" style="border-bottom-color: #000000; border-bottom-width: 1pt; border-bottom-style: solid;"><font style="font-size: 8pt;"><b>Three Months Ended</b></font></td> </tr> <tr valign="bottom"> <td nowrap="nowrap" align="left" width="82%"></td> <td nowrap="nowrap" align="left" width="1%"></td> <td nowrap="nowrap" align="left" width="5%"></td> <td nowrap="nowrap" width="1%" style="text-align: center;"></td> <td nowrap="nowrap" width="5%" colspan="3" style="text-align: center;"><font style="font-size: 8pt;"><b>May 1,</b></font></td> <td nowrap="nowrap" width="1%" style="text-align: center;"></td> <td nowrap="nowrap" width="5%" colspan="3" style="text-align: center;"><font style="font-size: 8pt;"><b>May 3,</b></font></td> </tr> <tr valign="bottom"> <td nowrap="nowrap" align="left" width="82%" style="border-bottom-color: #000000; 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border-bottom-style: double !important; border-bottom-color: #000000 !important; background-color: #c0c0c0;"><font style="font-size: 10pt;">$</font></td> <td nowrap="nowrap" align="right" width="3%" style="border-bottom-width: 2.8pt !important; border-bottom-style: double !important; border-bottom-color: #000000 !important; background-color: #c0c0c0;"><font style="font-size: 10pt;"><font> -</font></font></td> <td nowrap="nowrap" align="left" width="1%" style="border-bottom-width: 2.8pt !important; border-bottom-style: double !important; border-bottom-color: #000000 !important; background-color: #c0c0c0;">&#160;</td> <td nowrap="nowrap" align="left" width="1%" style="background-color: #c0c0c0;"></td> <td nowrap="nowrap" align="left" width="1%" style="border-bottom-width: 2.8pt !important; border-bottom-style: double !important; border-bottom-color: #000000 !important; background-color: #c0c0c0;"><font style="font-size: 10pt;">$</font></td> <td nowrap="nowrap" align="right" width="3%" style="border-bottom-width: 2.8pt !important; 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The complaint names as defendants JAB, Cotton, Merger Sub and the members of the Board and also names the Company as a nominal defendant. The complaint seeks, among other relief, an order enjoining the Merger, compensatory damages, and an award of attorney's fees and costs on the grounds that, among other things, the members of the Board allegedly breached their fiduciary duties in connection with entering into the Merger Agreement and adopting and approving the Merger. The complaint further alleges that JAB, Cotton and Merger Sub aided and abetted the alleged breaches of fiduciary duties. It is possible that this complaint will be amended to make additional claims and/or that additional lawsuits making similar or additional claims relating to the Merger will be brought. On May 26, 2016, legal advisors representing Melissa Weers, who is purportedly a shareholder of the Company, submitted a letter through the mail to the Board of the Company demanding legal action against the Board for a purported breach of fiduciary duty related to the Merger. The letter alleges, among other things, that the directors of the Company agreed to inadequate merger consideration and undervalued the Company. Additionally, the letter alleges that measures in the Merger Agreement created unreasonable protective devices to preclude competing offers. The letter further states Ms. Weer’s belief that the Board of the Company was neither independent nor disinterested in the Merger, preventing directors from fulfilling their fiduciary duties to the Company’s shareholders. In closing, the letter demands attention from the Board. The letter further asks the Board to authorize litigation against Cotton and its affiliated entities for aiding and abetting these supposed breaches. On June 8, 2016, the Company received a demand letter from legal advisors representing Stu Bonnin, who is also purportedly a shareholder of the Company. In addition to alleging a breach of fiduciary duty related to the Merger, the letter also alleges a breach by the members of the Board of their duties of care, candor and good faith by causing the Company to issue materially incomplete and misleading disclosures in the Company’s PREM14A Preliminary Proxy Statement filed on May 31, 2016. Specifically, the letter alleges that the disclosures were deficient and misleading because they did not include information as to the nature and timing of post-merger employment discussions. In closing, the letter demands that the Board take action to disclose the material information allegedly omitted from the Preliminary Proxy Statement. <div id='EdgarSAA123457890000' style="font-family : 'Times New Roman';"><p style="margin: 0in 0in 0pt; font-family: 'Times New Roman', serif; font-size: 10pt;"><b>Merger Agreement </b></p> <p style="margin: 0in 0in 0pt; font-family: 'Times New Roman', serif; font-size: 10pt;">&#160;</p> <p style="margin: 0in 0in 0pt; text-indent: 0.25in; font-family: 'Times New Roman', serif; font-size: 10pt;"><br/></p> <p style="margin: 0in 0in 0pt; text-indent: 0.25in; font-family: 'Times New Roman', serif; font-size: 10pt;">On May 8, 2016, we entered into an Agreement and Plan of Merger (the &#147;Merger Agreement&#148;) with Cotton Parent, Inc., a Delaware corporation (&#147;Cotton&#148;), Cotton Merger Sub Inc., a North Carolina corporation and a wholly owned subsidiary of Cotton (&#147;Merger Sub&#148;), and JAB Holdings B.V., a Dutch&#160;Besloten Vennootschap met beperkte aansprakelijkheid&#160;(private company with limited liability) (&#147;JAB&#148;). 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The Merger is subject to a vote of our shareholders.</p> <p style="margin: 0in 0in 0pt; font-family: 'Times New Roman', serif; font-size: 10pt;">&#160;</p> <p style="margin: 0in 0in 0pt; text-indent: 0.25in; font-family: 'Times New Roman', serif; font-size: 10pt;">As a result of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger (the &#147;Effective Time&#148;) (other than shares held by Cotton, Merger Sub, certain affiliates of Cotton, or direct or indirect wholly owned subsidiaries of the Company) will be canceled and automatically converted into the right to receive&#160;$<font>21.00</font>&#160;in cash, without interest and subject to any required tax withholding.</p> <p style="margin: 0in 0in 0pt; font-family: 'Times New Roman', serif; font-size: 10pt;">&#160;</p> <p style="margin: 0in 0in 0pt; text-indent: 0.25in; font-family: 'Times New Roman', serif; font-size: 10pt;">We have made various representations and warranties in the Merger Agreement that are customary for a company in the quick service restaurant industry.<font style="mso-spacerun: yes;">&#160; </font>The Merger Agreement also contains customary covenants and agreements, including, among others, covenants relating to (1) the conduct of our business between the date of the Merger Agreement and the Effective Time and (2) the efforts of the parties to cause the Merger to be completed.</p> <p style="margin: 0in 0in 0pt; font-family: 'Times New Roman', serif; font-size: 10pt;">&#160;</p> <p style="margin: 0in 0in 0pt; text-indent: 0.25in; font-family: 'Times New Roman', serif; font-size: 10pt;">The completion of the Merger is subject to the satisfaction or waiver of a number of closing conditions, including, among others, (1) approval of the Merger Agreement by the holders of a majority of our outstanding common stock; (2) the absence of any &#147;material adverse effect&#148; on the Company occurring after the date of the Merger Agreement; (3) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (4) the absence of any legal prohibitions or certain governmental proceedings affecting the closing of the Merger; and (5) subject to certain materiality qualifications, the continued accuracy of our representations and warranties, and performance by the Company of required covenants and obligations (to be performed at or prior to the closing of the Merger), as of the closing of the Merger.</p> <p style="margin: 0in 0in 0pt; font-family: 'Times New Roman', serif; font-size: 10pt;">&#160;</p> <p style="margin: 0in 0in 0pt; text-indent: 0.25in; font-family: 'Times New Roman', serif; font-size: 10pt;">The Merger Agreement also includes provisions permitting termination by each of the Company and Cotton under certain circumstances, including (1) if the Merger is not completed by November 8, 2016 (the &#147;Termination Date&#148;), (2) if the required approval of our shareholders is not obtained or (3) if the other party breaches its representations, warranties or covenants and such breach would cause the failure of a corresponding closing condition to be satisfied by the Termination Date. In connection with a termination of the Merger Agreement under specified circumstances, including if we enter into an alternative transaction we determine is superior pursuant to the terms of the Merger Agreement, we may be required to pay Cotton a termination fee of&#160;$<font>42.0</font>&#160;million.</p> <p style="margin: 0in 0in 0pt; text-align: justify; font-family: 'Times New Roman', serif; font-size: 10pt;">&#160;</p> <p style="margin: 0in 0in 0pt; text-align: justify; text-indent: 0.25in; font-family: 'Times New Roman', serif; font-size: 10pt;">The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which was filed with our Current Report on Form 8-K filed with the United States Securities and Exchange Commission (the &#147;SEC&#148;) on May 9, 2016 and is hereby incorporated by reference. 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Direct Operating Expense [Member] Direct Operating Expense [Member] Document and Entity Information [Abstract] Domestic Franchise Segment Domestic Franchise [Member] The aggregate amount of receivables to be collected from related parties where one party can exercise control or significant influence over another party; including affiliates, owners or officers and their immediate families, pension trusts, and so forth, at the financial statement date. which are usually due within one year (or one business cycle) before allowance for doubtful receivables. Due From Related Parties Current Gross Receivables Accumulated decline in value that has been recognized against an investment accounted for under the equity method of accounting. Equity Method Investment Accumulated Impairment Reserves and allowances The fix charge coverage ratio is calculated by dividing net cash to cover fixed charges (as defined by the Company's Credit Agreement) or the four most recent fiscal quarters by consolidated fixed charges (as defined by the Company's Credit Agreement) for the four most recent fiscal quarters. Fixed Charge Coverage Ratio Fixed charge coverage ratio The percentage of underlying debt guaranteed. Guarantee Obligations Maximum Exposure Percentage Guarantee obligations, maximum exposure percentage Information for the acquisition of a new operating store. Illinois Store Acquisition [Member] Current Fiscal Year End Date The charge against earnings resulting from the aggregate write down of all assets from their carrying value to their fair value and the cost representing 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, recorded when the lease contracts are terminated or, if earlier, the date on which the leased property ceases to be used. Impairment charges and lease termination costs Impairment charges and lease termination costs Total impairment charges and lease termination costs Impairment charges and lease termination costs Impairment Charges and Lease Termination Costs [Abstract] Disclosure of the charge against earnings resulting from the aggregate write down of all assets from their carrying value to their fair value and the cost representing 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, recorded when the lease contracts are terminated or, if earlier, the date on which the leased property ceases to be used. Impairment Charges and Lease Termination Costs Disclosure [Text Block] Impairment Charges and Lease Termination Costs International Franchise Segment International Franchise [Member] Information for the divestiture of a disposal group that has been refranchised. Kansas and Missouri Divestiture [Member] Kansas and Missouri Divestiture [Member] Kremeworks Canada, LP Kremeworks Canada LP [Member] Kremeworks, LLC Kremeworks LLC [Member] Kremeworks LLC [Member] Krispy Kreme South Florida, LLC Krispy Kreme South Florida LLC [Member] Krispy Kreme South Florida LLC [Member] Segment which supplies doughnut mix, other ingredients and supplies and doughnut making equipment to both Company and franchisee-owned stores. Krispy Kreme Supply Chain [Member] KK Supply Chain [Member] Document Period End Date The increase during the period in lease obligations due to entering into new leases in noncash investing or financing activities. Lease Obligations Incurred Assets acquired under leasing arrangements The charge against earnings representing 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, recorded when the lease contracts are terminated or, if earlier, the date on which the leased property ceases to be used. Lease Termination Costs Net Lease termination costs Total lease termination costs A roll forward is a reconciliation of a concept from the beginning of a period to the end of a period. Lease Termination Costs [Roll Forward] As of the balance sheet date, the total amount accrued for lease termination costs. Lease Termination Liability Balance at end of period Balance at beginning of period Total As of the balance sheet date, the current amount accrued for lease termination costs. Lease Termination Liability Current Current portion of lease termination costs Accrued liabilities Award Date [Axis] The leverage ratio is calculated by dividing total debt (as defined by the Company's Credit Agreement) as of the end of each quarter by consolidated EBITDA (as defined by the Company's Credit Agreement) for the four most recent fiscal quarters. Leverage Ratio Leverage ratio Award Type [Axis] Aggregate threshold amount above which payments on guaranty obligations are included in the covenant calculation. Line Of Credit Facility Covenant Terms Guaranty Obligations Aggregate Threshold Covenant calculation, aggregate threshold for guaranty obligations Reference period threshold amount above which payments on guaranty obligations are included in the covenant calculation. Line Of Credit Facility Covenant Terms Guaranty Obligations Reference Period Threshold Covenant calculation, reference period threshold for guaranty obligations Aggregate threshold amount above which payments on lease termination obligations are included in the covenant calculation. Line Of Credit Facility Covenant Terms Lease Termination Obligations Aggregate Threshold Covenant calculation, aggregate threshold for lease termination obligations Reference period threshold amount above which payments on lease termination obligations are included in the covenant calculation. Line Of Credit Facility Covenant Terms Lease Termination Obligations Reference Period Threshold Covenant calculation, reference period threshold for lease termination obligations Write-off of amounts previously capitalized as debt issuance cost in an extinguishment of debt Loss On Retirement Of Debt Loss on retirement of debt Loss on retirement of debt Primary financial statement caption in which reported facts about retirement of debt have been includeded. Loss on Retirement of Debt [Member] The percentage points added to the reference rate to compute the variable interest rate on the note receivable. Notes Receivable Spread on Variable Interest Rate Percentage Notes receivable, interest rate spread Amount of the required payments including both interest and principal payments received. Notes Receivable Payment Received Collection of notes receivable Notes receivable not reflected as an asset as a result of doubt about their collection. Notes Receivable Unrecognized Unrecognized notes receivable Notes receivable representing unrecognized franchise revenue as a result of doubt about their collection. Notes Receivable Unrecognized Franchise Revenue Unrecognized franchise revenue Represents the number of investments in franchisees. Number Of Investments In Franchisees Number of investments in franchisees The number of stores aquired by the entity during the period. Number Of Stores Acquired Number of stores acquired Number of stores leased to a franchisee in connection with the refranchisng of Company owned stores. Number Of Stores Leased To Franchisee Related To Divestiture Leased stores to franchisee The number of stores sold by the entity during the period. Number Of Stores Sold Number of stores sold Payments on unexpired leases related to closed stores including settlements with lessors. Payments On Unexpired Leases Incl Settlements Payments on unexpired leases, including settlements with lessors Percentage of stores' sales paid to the Company representing the required note receivable principal periodic payment. Percent Of Sales Used To Calculate Note Receivable Principal Payment Percent of sales used to calculate principal payment on note receivable Amount of expense (benefit) related to the amount of receivables expected to be collected. Includes, but is not limited to, accounts receivable and notes receivable. Provision for (Benefit from) Doubtful Accounts Provision for doubtful accounts Provisions associated with leased properties, net of estimated sublease rentals. Provisions For Lease Terminations Net Sublease Rentals Provisions associated with store closings, net of estimated sublease rentals The purchase price expected to be received upon exercise of the option to acquire leased stores by the lessee. Purchase Price For Sale Of Leased Stores Purchase price for sale of leased stores Total purchase price received from a combination of transactions in which noncurrent assets are sold, which may include the sale of a business, an investment in an affiliate (including an equity method investee), property, plant and equipment and intangible assets. Excludes sales of trading, available-for-sale, and held-to-maturity securities. Purchase Price From Sale Of Assets Aggregate purchase price Percentage of sales or other form of revenues representing wholesale revenue attributable to the disposal group during the reporting period. Revenue Wholesale Percentage Wholesale percentage of net sales The reversal of previously accrued rent expense related to unexpired leases recorded when the lease contracts are terminated or, if earlier, the date on which the leased property ceases to be used. Reversal Of Accrued Rent Expense Gain on reversal of accrued rent expense Reversal of previously recorded accrued rent expense Less - reversal of previously recorded accrued rent expense Tabular disclosure of the charge against earnings resulting from the aggregate write down of all assets from their carrying value to their fair value and the cost representing 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, recorded when the lease contracts are terminated or, if earlier, the date on which the leased property ceases to be used Schedule of Impairment Charges and Lease Termination Costs [Table Text Block] Schedule of Impairment Charges and Lease Termination Costs Tabular disclosure rolling forward the activity in the liability for lease termination costs and the current and noncurent portion of the liability. Schedule Of Lease Termination Liability [Table Text Block] Schedule of Lease Termination Liability Number of shares that have been repurchased during the period under the authorization of a stock repurchase program. Stock Repurchase Program Stock Repurchased During Period Shares Shares repurchased under share repurchase authorizations, shares Shares repurchased under share repurchase authorizations, shares Value of shares repurchased during the period under the authorization of a stock repurchase program. Stock Repurchase Program Stock Repurchased During Period Value Shares repurchased under share repurchase authorizations Value of shares repurchased under share repurchase authorization Shares repurchased under share repurchase authorizations Number of stores a franchisee is required to develop in future periods based on the related development agreement. Stores Required To Be Developed Future store locations required Third Party Distributors Due from Third Party Distributors [Member] Collateralized debt obligation backed by, for example, but not limited to, pledge, mortgage or other lien on the entity's assets for 2011 Term Loan and the arrangement in which loan proceeds can continuously be obtained following repayments, but the total amount borrowed cannot exceed a specified maximum amount 2011 Revolver. Twenty Eleven Secured Credit Facilities [Member] 2011 Secured Credit Facilities [Member] Arrangement in which loan proceeds can continuously be obtained following repayments, but the total amount borrowed cannot exceed a specified maximum amount 2013 Revolver . Twenty Thirteen Revolving Credit Facility [Member] 2013 Revolving Credit Facility [Member] Unaffiliated Franchisees Member Unaffiliated Franchisees [Member] Trading Symbol Wholesale Customers [Member] Consumer Packaged Goods - Wholesale Customers [Member] August 2006 Asset Acquisition [Member] August 2006 Asset Acquisition [Member] September 2012 Divestiture [Member] September 2012 Divestiture [Member] Maryland Divestiture [Member] Maryland Divestiture [Member] Amount of the required periodic payments including both interest and principal payments. Notes Receivable Periodic Payment Notes receivable, periodic payment Agricultural Commodity Futures Contracts [Member] Agricultural Commodity Futures Contracts [Member] Agricultural Commodity Futures Contracts [Member] Gasoline Commodity Futures Contracts [Member] Gasoline Commodity Futures Contracts [Member] Gasoline Commodity Futures Contracts [Member] Colchester Security Litigation Colchester Security Litigation [Member] The percentage of the purchase price of the sale of assets that must be received in cash to consider recognizing the deferred gain on the sale of assets. Percent Investment Must Exceed To Consider Gain Recognition Percent investment must exceed to consider gain recognition Carrying amount of assets sold. Assets Sold Carrying Amounts Carrying amount of assets sold Entity Well Known Seasoned Issuer The cash outflow to reacquire common stock during the period under the authorization of a stock repurchase program. Payments For Repurchase Of Common Stock Under Repurchase Authorization Repurchases settled during the period Entity Voluntary Filers Entity Current Reporting Status Entity Filer Category Entity Public Float Entity Registrant Name Entity Central Index Key Entity Common Stock Shares Outstanding Document Fiscal Year Focus Document Fiscal Period Focus Legal Entity [Axis] Document Type Warrants issues in Fiscal 2008 in connection with settlement of litigation. Litigation Warrant [Member] Warrants issued in fiscal 2006 as compensation for services provided. Warrants Issued As Compensation For Services Provided [Member] Accounting Policies [Abstract] Business acquisition in August 2012 of the assets and operations of two stores from a franchisee. August 2012 Business Acquisition [Member] Accounts Receivable [Member] Accounts Receivable, Gross, Current Receivables Trade receivables Notes and Loans Receivable Gross Net of Deferred Gain Notes receivable, net of deferred gain Receivable Type [Axis] The Company's 2012 Stock Incentive Plan Stock Incentive 2012 Plan [Member] Accounts Payable, Current Accounts payable Accounts, Notes, Loans and Financing Receivable [Line Items] Disclosure of share repurchase. Disclosure of share repurchase [Abstract] Number of shares that have been authorized to be repurchased during the period and have not been retired and are not held in treasury. Some state laws may govern the circumstances under which an entity may acquire its own stock and prescribe the accounting treatment therefore. This element is used when state law does not recognize treasury stock. Stock Repurchased Authorized During Period Shares Stock repurchased authorized during period, shares Repurchase of common shares Repurchase of common shares Shareholder Equity [Table] Equity Disclosure [Line Items] Accretion Expense Accretion of discount Share repurchase program authorized by the Board of Directors in 2013. Share Repurchase 2013 Program [Member] Share repurchase program authorized by the Board of Directors on March 27, 2012. Share Repurchase 2012 Program [Member] New share repurchase amount authorized by the Board of Directors subsequent to fiscal 2014 under the Share Repurchase 2013 Programs. Authorization Under Share Repurchase 2013 Program [Member] K2 Asia Litigation K2 Asia Litigation [Member] The total gross amount less the charge for the use of the long-lived depreciable assets subject to a lease. Lease Balance Sheet Assets By Major Class, Net Assets acquired under build-to-suit leasing arrangements Amount of lease obligations due as of the balance sheet date within one year or the normal operating cycle, if longer. Lease Obligations, Current Current portion of lease obligations Less: current portion Amount of lease obligations due as of the balance sheet date more than one year (or one operating cycle, if longer) after the balance sheet date. Lease Obligations, Noncurrent Lease obligations, less current portion Total amount of lease obligations due as of the balance sheet date. Lease Obligations Lease obligations Assets Under Financing Obligations [Member] Assets Under Financing Obligations [Member] Amount representing an agreement for an unconditional promise by the maker to pay the entity (holder) a definite sum of money at a future date. Such amount may include accrued interest receivable in accordance with the terms of the note. The note also may contain provisions and related items including a discount or premium, payable on demand, secured, or unsecured, interest bearing or noninterest bearing, among a myriad of other features and characteristics. Excludes amounts related to receivables held-for-sale. Notes Receivable Due Gross Notes receivable, gross Credit Facility and Lease Obligations [Abstract] The entire disclosure for debt and lease obligations can be reported. Information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. Also includes descriptions and amounts of leasing arrangements. Disclosure may include the effect on the balance sheet and the income statement resulting from a change in lease classification for leases that at inception would have been classified differently had guidance been in effect at the inception of the original lease. Debt And Lease Obligations Disclosure [Text Block] Credit Facility and Lease Obligations Equity Method Franchisees Receivables [Member] Interest accruing on advances to equity method franchisees that is uncollected and not reflected in income until payment is received. Interest Accruing On Note Unrecognized Accrued but uncollected interest on advances Kremeworks, LLC and Kremeworks Canada, LP [Member] Kremeworks, LLC and Kremeworks Canada, LP [Member] Soybean Oil Contracts [Member] Soybean Oil Contracts [Member] Little Rock Acquisition [Member] Little Rock Acquisition [Member] Wheat Commodity Contracts [Member] Wheat Commodity Contracts [Member] Gain (Loss) On Sale Of Business, Net Of Business Acquisition Charges Gain (Loss) On Sale Of Business, Net Of Business Acquisition Charges Gain on refranchisings, net of business acquisition charges (Gain) on refranchisings, net of business acquisition charges Royalties and Fees [Member] Royalties and Fees [Member] Lease Termination Costs [Abstract] Lease termination costs: Provision for lease termination costs: Single Sales Factor Apportionment [Member] Single Sales Factor Apportionment [Member] Automatic Reduction in State Corporate Income Tax Rate [Member] Automatic Reduction in State Corporate Income Tax Rate [Member] Accrued liabilities Accrued liabilities Accrued liabilities Change in deferred tax assets resulting from tax positions. Change In Deferred Tax Assets Resulting From Tax Positions Change in deferred tax assets resulting from tax positions Income Taxes Disclosure [Line Items] Disposal Group, Amount Of Contingent Consideration. Disposal Group, Amount Of Contingent Consideration Purchase consideration dependent on the future performance Jacksonville, Florida Stores [Member] Jacksonville, Florida Stores [Member] Termination fee required to be paid in the event of failure to consummate the business combination. Business Acquisition, Termination Fee Potential termination fee JAB Cotton Merger [Member] JAB/Cotton Merger [Member] Merger-Related Litigation [Member] Merger-Related Litigation [Member] Accrued Liabilities [Member] Accumulated Other Comprehensive Income (Loss) [Member] Unrealized Losses on Cash Flow Hedge [Member] Accumulated other comprehensive loss Accumulated other comprehensive income Balance at period end, net of tax Accumulated other comprehensive loss Adjustments Related to Tax Withholding for Share-based Compensation Shares surrendered in reimbursement for withholding taxes Shares surrendered in reimbursement for withholding taxes Adjustments to reconcile net income to net cash provided by operating activities: Adjustments to reconcile net income to net cash provided by operating activities: Adjustments to Additional Paid in Capital, Income Tax Deficiency from Share-based Compensation Write-off of tax assets Write-off of deferred tax assets related to the expiration of unexercised stock options Advertising Cost, Policy, Expensed Advertising Cost [Policy Text Block] MARKETING AND BRAND PROMOTION Allowance for Credit Losses on Financing Receivables [Table Text Block] Schedule of Changes in the Allowances for Doubtful Accounts Allowance for Notes, Loans and Financing Receivable, Current Less - allowance for doubtful accounts Allowance For Doubtful Accounts Receivable [Rollforward] Allowance For Doubtful Accounts Receivable [Roll Forward] Allowance for Doubtful Accounts Receivable, Current Balance at end of period Balance at beginning of period Less - allowance for doubtful accounts: Amortization of Financing Costs Amortization of deferred financing costs Antidilutive Securities [Axis] Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount Antidilutive securities Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] Antidilutive Securities, Name [Domain] Impairment charges of long-lived assets - current period charges Impairment charges Total impairment charges Impairment of long-lived assets Long-lived assets - total gain (loss) Total gain (loss) Assets, Fair Value Disclosure [Abstract] Assets: Assets Carrying value of assets Total assets Assets Held under Capital Leases [Member] Capital lease obligations [Member] Assets [Abstract] ASSETS Disposal Group, Including Discontinued Operation, Assets, Current Closed stores held for sale Assets held for sale CURRENT ASSETS: CURRENT ASSETS: Total current assets Total current assets Base Rate [Member] Base Rate [Member] Derivatives, Fair Value, by Balance Sheet Location [Axis] Balance Sheet Location [Domain] Basis Of Presentation And Significant Accounting Policies [Text Block] Accounting Policies BasisOfAccountingPolicyPolicyTextBlock BASIS OF PRESENTATION Buildings [Member] Business Acquisition [Axis] Business Acquisition, Share Price Share price Business Acquisition Effective Date Of Acquisition 1 Effective date of business acquisition Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Other Noncurrent Assets Other assets Business Acquisition, Acquiree [Domain] Business Acquisition, Transaction Costs Acquisition-related transaction costs Business Acquisition [Line Items] Business Acquisition, Preacquisition Contingency, Amount of Settlement Settlement of pre-existing franchise agreement Business Combinations and Other Purchase of Business Transactions, Policy [Policy Text Block] Merger Agreement Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Property, Plant, and Equipment Property and equipment Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Finite-Lived Intangibles Reacquired franchise rights Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Inventory Inventory Business Combination, Acquisition Related Costs Acquisition expenses Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract] Purchase price allocated to: Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net Purchase price Capital Leased Assets [Line Items] Capital Lease Obligations [Member] Carrying Value [Member] Carrying Value [Member] Cash and cash equivalents Cash and cash equivalents at end of period Cash and cash equivalents at beginning of period Cash and cash equivalents Cash and Cash Equivalents, Policy [Policy Text Block] CASH AND CASH EQUIVALENTS Cash And Cash Equivalents Period Increase Decrease Net increase (decrease) in cash and cash equivalents Changes Measurement [Member] Total Gain (Loss) [Member] Class of Warrant or Right [Axis] Commitments and Contingencies Disclosure [Text Block] Commitments and Contingencies Commitment And Contingencies Commitments and contingencies Commitments, Fair Value Disclosure Lease termination liabilities Commitments and Contingencies [Abstract] Common Stock, Shares, Issued Common stock, shares issued Common Stock Including Additional Paid in Capital [Member] Common Stock [Member] Common stock, shares authorized Common stock, shares authorized Common stock, no par value Common stock, no par value; 300,000 shares authorized; shares issued and outstanding: May 1, 2016 - 60,914 shares and January 31, 2016 - 63,069 shares Common stock Common Stock, Par or Stated Value Per Share Common stock, par value per share Balance at October 31, 2010 A Balance, shares Balance, shares Common stock, shares outstanding Comparability of Prior Year Financial Data, Policy [Policy Text Block] CHANGE IN PRESENTATION Components of Deferred Tax Assets and Liabilities [Abstract] Deferred Tax Assets Total comprehensive income Comprehensive income Comprehensive income Comprehensive Income [Policy Text Block] COMPREHENSIVE INCOME Concentration Risk Benchmark [Axis] Concentration Risk by Type [Axis] Concentration Risk, Credit Risk, Policy [Policy Text Block] CONCENTRATION OF CREDIT RISK Consolidation, Policy [Policy Text Block] BASIS OF CONSOLIDATION Consolidation Items [Axis] Consolidation Items [Domain] Construction and Projects in Progress [Member] Contractual Obligation, Fiscal Year Maturity Schedule [Table Text Block] Schedule of Future Minimum Lease Payments Corporate, Non-Segment [Member] Corporate [Member] Credit Concentration Risk [Member] Credit Facility [Axis] Customer Concentration Risk [Member] Designated as Hedging Instrument [Member] Debt Instrument Issuance Date 1 Issuance date Debt Instrument, Description of Variable Rate Basis Description of variable rate basis Debt Instrument [Axis] Debt Instrument, Basis Spread on Variable Rate Spread over variable rate Debt Instrument, Name [Domain] Debt Instrument, Unused Borrowing Capacity, Amount Available borrowing capacity Debt Instrument, Maturity Date Debt maturity date Deferred Gain on Sale of Property Deferred gain on sale Deferred income taxes Deferred income taxes Deferred Deferred Tax Asset [Domain] Deferred Tax Assets (Liabilities), Net, Noncurrent Net noncurrent assets Deferred income taxes Valuation allowance on deferred income tax assets Balance at end of year Balance at beginning of year Valuation allowance Valuation allowance on deferred income tax assets Defined Benefit Plan, Fair Value of Plan Assets 401(k) mirror plan assets (Notes 12 and 18) 401(k) mirror plan assets Depreciation and amortization expense Depreciation and amortization expense Depreciation and amortization expense Derivative Instrument [Axis] Derivative, Nonmonetary Notional Amount, Mass Aggregate contract mass Derivative Instruments And Hedging Activities Disclosure Text Block Derivative Instruments Derivative [Line Items] Derivative, Maturity Date Maturity date Derivative [Table] Derivative, Nonmonetary Notional Amount, Volume Aggregate contract volume Derivative Instruments [Abstract] Derivative Asset, Notional Amount Notional amount Derivative, Inception Date Inception date Derivative Instruments Not Designated as Hedging Instruments, Asset, at Fair Value Commodity future contracts - Assets Agricultural commodity futures contracts Derivative, Basis Spread on Variable Rate Spread over variable rate Derivative Instruments Not Designated as Hedging Instruments, Liability, at Fair Value Commodity futures contracts Commodity futures contracts Derivative, Gain (Loss) on Derivative, Net Gain (loss) recognized in income Derivative Instruments, Gain (Loss) [Line Items] Derivative Contract [Domain] Derivative Instruments, Gain (Loss) [Table] Derivatives, Fair Value [Line Items] Derivatives, Policy [Policy Text Block] DERIVATIVE FINANCIAL INSTRUMENTS AND DERIVATIVE COMMODITY INSTRUMENTS Direct operating expenses (exclusive of depreciation and amortization expense shown below) Direct operating expenses (exclusive of depreciation and amortization expense shown below) Disposal Group, Including Discontinued Operation, Revenue Net sales attributable to refranchised stores Disposal Groups, Including Discontinued Operations, Name [Domain] Receivables from equity method franchisees Receivables from equity method franchisees Receivables Earliest Tax Year [Member] Earnings Per Share, Policy [Policy Text Block] EARNINGS PER SHARE Basic Basic Diluted Diluted Earnings per common share: Earnings per common share: Effective Income Tax Rate Reconciliation, Percent Effective income tax rate Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items] Employee Stock Option [Member] Stock Options [Member] Equity Method Investee, Name [Domain] Equity Component [Domain] Equity Method Investee [Member] Equity Method Investment, Aggregate Cost Investment and advances Equity Method Investment, Ownership Percentage Company Ownership Percentage Ownership interest Investments in Franchisees [Abstract] Equity Method Investments Disclosure Text Block Investment in Franchisees Equity Method Investments In Franchisees [Table Text Block] Schedule of Investments in Franchisees Estimate of Fair Value [Member] Fair Value, Hierarchy [Axis] Fair Value by Measurement Frequency [Axis] Fair Value Measurements [Abstract] Measurement Basis [Axis] Fair Value, Measurements, Nonrecurring [Member] Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Table] Fair Value, Measurement Frequency [Domain] Fair Value, Measurements, Recurring [Member] Recurring [Member] Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] Fair Value, Measurements, Fair Value Hierarchy [Domain] Fair Value Disclosures Text Block Fair-Value Measurements Fair Value Measurements, Nonrecurring [Table Text Block] Schedule of Non-Recurring Measurements Fair Value, by Balance Sheet Grouping [Table Text Block] Schedule of Fair Values of Financial Instruments Fair Value Measurement [Domain] Fair Value, Inputs, Level 3 [Member] Level 3 [Member] Fair Value, Inputs, Level 1 [Member] Level 1 [Member] Fair Value, Inputs, Level 2 [Member] Level 2 [Member] Fair Values Derivatives, Balance Sheet Location, by Derivative Contract Type [Table] Financial Liabilities Fair Value Disclosure Total liabilities Finite-Lived Intangible Assets by Major Class [Axis] Finite-Lived Intangible Assets, Major Class Name [Domain] Fiscal Period, Policy [Policy Text Block] FISCAL YEAR Foreign Currency Transactions and Translations Policy [Policy Text Block] FOREIGN CURRENCY TRANSLATION Franchise Rights [Member] Gains and Losses on Commodity Derivatives, Net [Member] Gain (Loss) on Disposition of Assets Gain on refranchising transaction (Gain) on refranchising Gain (Loss) on Derivative Instruments, Net, Pretax Gains on commodity derivatives, net Amount of Derivative Gain or (Loss) Recognized in Income Gains on commodity derivatives, net Gain (Loss) on Contract Termination Provision for lease termination costs Total provision Loss on disposal of property and equipment Gain (loss) on sale of equipment Loss on disposal of property and equipment Gain Contingency, Unrecorded Amount Gain (Loss) Related to Litigation Settlement Gain related to settlement of claim General and administrative expenses General and administrative expenses General and administrative expenses General and Administrative Expense [Member] General and Administration Expenses [Member] Goodwill Goodwill Goodwill and Intangible Assets, Policy [Policy Text Block] GOODWILL Goodwill and Intangible Assets, Intangible Assets, Policy [Policy Text Block] REACQUIRED FRANCHISE RIGHTS Guarantor Obligations, Maximum Exposure, Undiscounted Loan guarantees Accrued guarantee liabilities (Note 13) Accrued guarantee liabilities Hedging Designation [Axis] Hedging Designation [Domain] Intersegment Eliminations [Member] Intersegment Elimination [Member] Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block] ASSET IMPAIRMENT Income Taxes [Abstract] Income Statement Location [Axis] Equity in losses of equity method franchisees Equity in losses of equity method franchisees Equity in income of subsidiaries Equity in losses of equity method franchisees Equity in income of subsidiaries Income Statement Location [Domain] Income Loss Before Income Taxes From Continuing Operations Income before income taxes Income before income taxes Income Tax Disclosure [Text Block] Income Taxes Provision for income taxes Provision for income taxes Provision for income taxes CONSOLIDATED STATEMENT OF INCOME [Abstract] STATEMENT OF INCOME Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Table] Disposal Group Name [Axis] Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] Effective Income Tax Rate Reconciliation, Change in Enacted Tax Rate, Amount Tax effect of change in tax rate Accounts payable and accrued liabilities Accounts payable and accrued liabilities Inventories1 Inventories Change in assets and liabilities: Change in assets and liabilities: Receivables1 Receivables Other current and non-current assets Other current and non-current assets Other long-term obligations and deferred credits Other long-term obligations and deferred credits Incremental Common Shares Attributable to Share-based Payment Arrangements Share-based payment arrangement Intangible Assets, Net (Including Goodwill) Goodwill and other intangible assets Goodwill and other intangible assets Interest Expense Interest expense Interest Rate Cash Flow Hedge Asset at Fair Value Interest rate derivative Interest Rate Contract [Member] Interest Rate Contract [Member] Interest Expense [Member] Inventory, Policy [Policy Text Block] INVENTORIES Inventories Inventories Inventories, Net, Total Finished goods and purchased merchandise Inventory Disclosure Text Block Inventories Inventories [Abstract] Work in progress Raw materials Interest income Interest income Investments in equity method franchisees Investments in equity method franchisees Investment and advances Investment in and advances to subsidiaries Latest Tax Year [Member] London Interbank Offered Rate (LIBOR) [Member] LIBOR [Member] Letters of Credit Outstanding, Amount Letters of credit outstanding Land [Member] Lease Arrangement, Type [Axis] Leasehold Improvements [Member] Leases [Abstract] Lease obligations: Legal Costs, Policy [Policy Text Block] LEGAL COSTS Liabilities, Other than Long-term Debt, Noncurrent Other long-term obligations and deferred credits Other long-term obligations and deferred credits Total liabilities and shareholders equity Total liabilities and shareholders' equity LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities, Fair Value Disclosure [Abstract] Liabilities: Total current liabilities Total current liabilities CURRENT LIABILITIES: CURRENT LIABILITIES: Line of Credit Facility [Table] Line of Credit Facility, Unused Capacity, Commitment Fee Percentage Fee on unused portion Line of Credit Facility [Line Items] Line of Credit Facility, Maximum Borrowing Capacity Maximum borrowing capacity Litigation Settlement, Amount Litigation settlement, amount Litigation Case Type [Domain] Litigation Case [Axis] Loans Notes Trade And Other Receivables Disclosure Text Block Receivables Loss Contingencies [Table] Loss Contingency, Actions Taken by Plaintiff Loss Contingencies [Line Items] Loss Contingency, Damages Sought, Value Loss Contingency, Name of Plaintiff LossContingencySettlementAgreementDate Loss Contingency, Lawsuit Filing Date LossContingencySettlementAgreementTerms Loss Contingency, Trial or Alternative Dispute Resolution Machinery and Equipment [Member] Marketing and Advertising Expense [Abstract] Marketing and Brand Promotion: Marketing and Advertising Expense Costs associated with products including advertising and other brand promotional activities Segment Reconciling Items [Member] Segment [Member] Maximum [Member] 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for acquisition Payments of Financing Costs Deferred financing costs Payments to Acquire Businesses, Net of Cash Acquired Payments to acquire businesses, net of cash acquired Acquisition of stores and franchise rights from franchisees Repurchase of common shares 1 Repurchase of common shares Repurchase of common shares Repurchase of common shares Repurchase of common shares Purchase of property and equipment Purchase of property and equipment Plan Name [Axis] Portion at Fair Value Measurement [Domain] Fair Value [Member] Pre-Opening Costs Pre-opening costs related to Company Stores Pre-opening costs related to Company Stores Preferred Stock, Shares Issued Preferred stock, shares issued Preferred stock, shares authorized Preferred stock, shares authorized Preferred Stock, Par or Stated Value Per Share Preferred stock, par value per share Preferred Stock, Shares Outstanding Preferred stock, shares outstanding Preferred stock, no par value Preferred stock, no par value; 10,000 shares authorized; none issued and outstanding Preferred stock Principal Owner [Member] Proceeds from Sales of Business, Affiliate and Productive Assets Proceeds from refranchising Proceeds from exercise of stock options Proceeds from exercise of stock options Proceeds from exercise of warrants Proceeds from exercise of warrants Proceeds from disposals of property and equipment Proceeds from disposals of property and equipment Proceeds from Stock Options Exercised Proceeds from exercise of stock options Products and Services [Axis] Property, Plant, and Equipment, Fair Value Disclosure Long-lived assets Property, Plant and Equipment, Type [Domain] Property, Plant and Equipment, Policy [Policy Text Block] PROPERTY AND EQUIPMENT Property and equipment Property and equipment Property plant and equipment, net Property, Plant and Equipment by Type [Axis] Purchase Obligation Range [Axis] Range [Domain] Receivable Type [Domain] Receivables, Trade and Other Accounts Receivable, Allowance for Doubtful 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Valuation Allowance [Table] Valuation Allowance, Deferred Tax Asset, Increase (Decrease), Amount Increase (decrease) in valuation allowance Valuation Allowance by Deferred Tax Asset [Axis] Variable Rate [Domain] Variable Rate [Axis] Weighted Average Number of Shares Outstanding, Diluted Diluted earnings per share - weighted average shares outstanding plus dilutive potential common shares Diluted earnings per share - weighted average shares outstanding plus dilutive potential common shares Weighted Average Number Diluted Shares Outstanding Adjustment [Abstract] Effect of dilutive securities: Weighted Average Number of Shares Outstanding, Basic Basic earnings per share - weighted average shares outstanding EX-101.CAL 10 kkd-20160501_cal.xml XBRL TAXONOMY EXTENSION CALCULATION LINKBASE EX-101.DEF 11 kkd-20160501_def.xml XBRL TAXONOMY EXTENSION DEFINITION LINKBASE XML 12 R1.htm IDEA: XBRL DOCUMENT v3.4.0.3
Document and Entity Information - shares
3 Months Ended
May. 01, 2016
May. 27, 2016
Document and Entity Information [Abstract]    
Document Type 10-Q  
Document Period End Date May 01, 2016  
Amendment Flag false  
Entity Registrant Name KRISPY KREME DOUGHNUTS INC  
Entity Central Index Key 0001100270  
Current Fiscal Year End Date --01-29  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock Shares Outstanding   60,993,276
Document Fiscal Year Focus 2017  
Document Fiscal Period Focus Q1  
Trading Symbol KKD  
XML 13 R2.htm IDEA: XBRL DOCUMENT v3.4.0.3
CONSOLIDATED STATEMENT OF INCOME - USD ($)
$ in Thousands
3 Months Ended
May. 01, 2016
May. 03, 2015
CONSOLIDATED STATEMENT OF INCOME [Abstract]    
Revenues $ 136,484 $ 132,474
Operating expenses:    
Direct operating expenses (exclusive of depreciation and amortization expense shown below) 107,991 103,772
General and administrative expenses 7,483 7,554
Depreciation and amortization expense 4,056 3,993
Impairment charges and lease termination costs 453 4
Pre-opening costs related to Company Stores $ 607 323
Gains on commodity derivatives, net (447)
Operating income $ 15,894 17,275
Interest income 71 147
Interest expense (439) (377)
Other non-operating income and (expense), net (2) 184
Income before income taxes 15,524 17,229
Provision for income taxes 6,108 6,563
Net income $ 9,416 $ 10,666
Earnings per common share:    
Basic $ 0.15 $ 0.16
Diluted $ 0.14 $ 0.16
XML 14 R3.htm IDEA: XBRL DOCUMENT v3.4.0.3
CONSOLIDATED BALANCE SHEET - USD ($)
$ in Thousands
May. 01, 2016
Jan. 31, 2016
CURRENT ASSETS:    
Cash and cash equivalents $ 28,701 $ 50,785
Receivables, net 29,863 28,088
Receivables from equity method franchisees 468 338
Inventories 16,936 $ 16,312
Assets held for sale 2,817
Other current assets 3,208 $ 3,619
Total current assets 81,993 99,142
Property and equipment $ 126,581 $ 127,709
Investments in equity method franchisees
Goodwill and other intangible assets $ 30,974 $ 30,985
Deferred income taxes 69,462 74,874
Other assets 10,004 10,165
Total assets 319,014 342,875
CURRENT LIABILITIES:    
Current portion of lease obligations 333 326
Accounts payable 22,695 19,760
Accrued liabilities 29,332 29,633
Total current liabilities 52,360 49,719
Lease obligations, less current portion 11,266 11,217
Other long-term obligations and deferred credits $ 26,734 $ 25,799
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: May 1, 2016 - 60,914 shares and January 31, 2016 - 63,069 shares $ 229,822 $ 266,724
Accumulated deficit (1,168) (10,584)
Total shareholders equity 228,654 256,140
Total liabilities and shareholders' equity $ 319,014 $ 342,875
XML 15 R4.htm IDEA: XBRL DOCUMENT v3.4.0.3
CONSOLIDATED BALANCE SHEET (Parentheticals) - $ / shares
shares in Thousands
May. 01, 2016
Jan. 31, 2016
CONSOLIDATED BALANCE SHEET [Abstract]    
Preferred stock, par value per share
Preferred stock, shares authorized 10,000 10,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value per share
Common stock, shares authorized 300,000 300,000
Common stock, shares issued 60,914 63,069
Common stock, shares outstanding 60,914 63,069
XML 16 R5.htm IDEA: XBRL DOCUMENT v3.4.0.3
CONSOLIDATED STATEMENT OF CASH FLOWS - USD ($)
$ in Thousands
3 Months Ended
May. 01, 2016
May. 03, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income $ 9,416 $ 10,666
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization expense 4,056 3,993
Deferred income taxes 5,412 $ 5,950
Impairment charges 500
Loss on disposal of property and equipment 29 $ 34
Share-based compensation $ 1,568 1,997
Unrealized gains on commodity derivative positions (1,060)
Other $ 178 74
Change in assets and liabilities:    
Receivables (1,465) (4,720)
Inventories (624) 1,869
Other current and non-current assets 520 1,039
Accounts payable and accrued liabilities (718) (2,771)
Other long-term obligations and deferred credits 623 74
Net cash provided by operating activities 19,495 17,145
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchase of property and equipment (8,047) (4,546)
Proceeds from disposals of property and equipment (5) 216
Acquisition of stores and franchise rights from franchisees (185) (312)
Other investing activities 89 821
Net cash used for investing activities (8,148) (3,821)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Repayment of lease obligations (86) (82)
Proceeds from exercise of stock options 1,334 519
Repurchase of common shares (34,679) (6,090)
Net cash used for financing activities (33,431) (5,653)
Net increase (decrease) in cash and cash equivalents (22,084) 7,671
Cash and cash equivalents at beginning of period 50,785 50,971
Cash and cash equivalents at end of period 28,701 58,642
Supplemental schedule of non-cash investing and financing activities:    
Assets acquired under leasing arrangements $ 140 $ 947
XML 17 R6.htm IDEA: XBRL DOCUMENT v3.4.0.3
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock [Member]
Accumulated Deficit [Member]
Beginning Balance at Feb. 01, 2015 $ 267,786 $ 310,768 $ (42,982)
Balance, shares at Feb. 01, 2015   64,926  
Comprehensive income 10,666 $ 10,666
Exercise of stock options 519 $ 519
Exercise of stock options, shares   81  
Share-based compensation 1,997 $ 1,997
Share-based compensation, shares   35  
Repurchase of common shares $ (7,625) $ (7,625)
Repurchase of common shares, shares (402) (402)  
Ending Balance at May. 03, 2015 $ 273,343 $ 305,659 $ (32,316)
Balance, shares at May. 03, 2015   64,640  
Beginning Balance at Jan. 31, 2016 $ 256,140 $ 266,724 (10,584)
Balance, shares at Jan. 31, 2016 63,069 63,069  
Comprehensive income $ 9,416 $ 9,416
Exercise of stock options 1,625 $ 1,625
Exercise of stock options, shares   200  
Share-based compensation 1,568 $ 1,568
Share-based compensation, shares   90  
Repurchase of common shares $ (40,095) $ (40,095)
Repurchase of common shares, shares (2,445) (2,445)  
Ending Balance at May. 01, 2016 $ 228,654 $ 229,822 $ (1,168)
Balance, shares at May. 01, 2016 60,914 60,914  
XML 18 R7.htm IDEA: XBRL DOCUMENT v3.4.0.3
Accounting Policies
3 Months Ended
May. 01, 2016
Accounting Policies [Abstract]  
Accounting Policies

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. We also license the Krispy Kreme business model and certain of our intellectual property to franchisees in the United States and over 25 other countries around the world, and derive revenue from franchise and development fees and royalties from those franchisees. Additionally, we sell doughnut mixes, other ingredients and supplies and doughnut-making equipment to franchisees.

 

Merger Agreement

 


On May 8, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cotton Parent, Inc., a Delaware corporation (“Cotton”), Cotton Merger Sub Inc., a North Carolina corporation and a wholly owned subsidiary of Cotton (“Merger Sub”), and JAB Holdings B.V., a Dutch Besloten Vennootschap met beperkte aansprakelijkheid (private company with limited liability) (“JAB”). Cotton and Merger Sub are affiliates of JAB. Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and as a wholly owned subsidiary of Cotton (the “Merger”). Our Board of Directors (the “Board”) unanimously adopted, approved and declared advisable the Merger Agreement, the Merger, and the other transactions contemplated by the Merger Agreement and unanimously resolved to recommend that our shareholders vote to approve the Merger Agreement. The Merger is subject to a vote of our shareholders.

 

As a result of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares held by Cotton, Merger Sub, certain affiliates of Cotton, or direct or indirect wholly owned subsidiaries of the Company) will be canceled and automatically converted into the right to receive $21.00 in cash, without interest and subject to any required tax withholding.

 

We have made various representations and warranties in the Merger Agreement that are customary for a company in the quick service restaurant industry.  The Merger Agreement also contains customary covenants and agreements, including, among others, covenants relating to (1) the conduct of our business between the date of the Merger Agreement and the Effective Time and (2) the efforts of the parties to cause the Merger to be completed.

 

The completion of the Merger is subject to the satisfaction or waiver of a number of closing conditions, including, among others, (1) approval of the Merger Agreement by the holders of a majority of our outstanding common stock; (2) the absence of any “material adverse effect” on the Company occurring after the date of the Merger Agreement; (3) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (4) the absence of any legal prohibitions or certain governmental proceedings affecting the closing of the Merger; and (5) subject to certain materiality qualifications, the continued accuracy of our representations and warranties, and performance by the Company of required covenants and obligations (to be performed at or prior to the closing of the Merger), as of the closing of the Merger.

 

The Merger Agreement also includes provisions permitting termination by each of the Company and Cotton under certain circumstances, including (1) if the Merger is not completed by November 8, 2016 (the “Termination Date”), (2) if the required approval of our shareholders is not obtained or (3) if the other party breaches its representations, warranties or covenants and such breach would cause the failure of a corresponding closing condition to be satisfied by the Termination Date. In connection with a termination of the Merger Agreement under specified circumstances, including if we enter into an alternative transaction we determine is superior pursuant to the terms of the Merger Agreement, we may be required to pay Cotton a termination fee of $42.0 million.

 

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which was filed with our Current Report on Form 8-K filed with the United States Securities and Exchange Commission (the “SEC”) on May 9, 2016 and is hereby incorporated by reference. During the three months ended May 1, 2016, we recorded approximately $454,000 related to the proposed Merger which is included in general and administrative expenses in the Consolidated Statement of Income.


 

Significant Accounting Policies

 

     BASIS OF PRESENTATION. The consolidated financial statements contained herein should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 (the “2016 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 our accounting practices described in the 2016 Form 10-K, but have not been audited. In our opinion, the financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of our results of operations for the periods presented. The consolidated balance sheet data as of January 31, 2016 were derived from our audited financial statements. 

 

BASIS OF CONSOLIDATION. The financial statements include the accounts of KKDI and its subsidiaries. Investments in entities over which we have the ability to exercise significant influence but which we do not control, and whose financial statements are not otherwise required to be consolidated, are accounted for using the equity method. 

  

     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 the vesting of currently unvested restricted stock units.

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

Three Months Ended
May 1,       May 3,
2016 2015
(In thousands)
         

Numerator:  net income             

  $ 9,416
  $ 10,666

Denominator:

       
 

Basic earnings per share - weighted average shares

       
 

outstanding             

  64,098     66,603  
 

Effect of dilutive securities:

 
     
      Stock options   1,171  
1,643
      Restricted stock units   138   327
 

Diluted earnings per share - weighted average shares

           
 

outstanding plus dilutive potential common shares             

  65,407     68,573  

 

Stock options with respect to 244,000 and 302,000 shares for the three months ended May 1, 2016 and May 3, 2015, respectively, and 190,000 and 171,000 unvested restricted stock units for the three months ended May 1, 2016 and May 3, 2015, respectively, have been excluded from the computation of the number of shares used to compute diluted earnings per share because their inclusion would be antidilutive. 

 

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which amends existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”, which changes guidance for subsequent measurement of inventory from the lower of cost or market to the lower of cost and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” This guidance states that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to the line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. This guidance became effective in the first quarter of fiscal 2017. As all of our debt issuance costs are related to line-of-credit arrangements and are currently classified as assets, the adoption of this guidance did not have any impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Customer's Accounting for Fees Paid in a Cloud Computing Arrangement”, which provides guidance about whether a cloud computing arrangement includes a software license. This guidance became effective in the first quarter of fiscal 2017 and did not impact our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, to clarify the principles used to recognize revenue for all entities. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations”, which further clarifies the implementation guidance on principal versus agent considerations”, and in April 2016, the FASB issued ASU 2016-10, “Revenue from contracts with customers (Topic 606): Identifying performance obligations and licensing”, an update on identifying performance obligations and accounting for licenses of intellectual property. Additionally, in May 2016, the FASB issued ASU 2016-12, “Revenue from contracts with customers (Topic 606): Narrow-scope improvements and practical expedients”, which includes amendments for enhanced clarification of the guidance. This guidance is effective for fiscal years beginning on or after December 15, 2017 including interim periods within those fiscal years and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.


XML 19 R8.htm IDEA: XBRL DOCUMENT v3.4.0.3
Segment Information
3 Months Ended
May. 01, 2016
Segment Information [Abstract]  
Segment Information

Note 2 — Segment Information 

Our operating and reportable segments are Company Stores, Domestic Franchise, International Franchise and KK Supply Chain.

The Company Stores segment is comprised of the stores owned and operated by us. These stores sell doughnuts and complementary products through both on-premises and consumer packaged goods - wholesale (“CPG”) channels, although some stores serve only one of these distribution channels.

The Domestic Franchise and International Franchise segments consist of our franchise operations. Under the terms of franchise agreements, domestic and international franchisees pay royalties and fees to us in return for the use of the Krispy Kreme trademark and ongoing brand and operational support. Revenues and costs related to licensing certain Company-owned trademarks to domestic third parties other than franchisees also are included in the Domestic Franchise segment. 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 our operating and reportable segments for the three months ended May 1, 2016 and May 3, 2015. Segment operating income is consolidated operating income before general and administrative expenses, corporate depreciation and amortization expense, impairment charges and lease termination costs, pre-opening costs related to Company Stores, gains on commodity derivatives, net and gain on refranchisings, net of business acquisition charges.  


    Three Months Ended
    May 1,       May 3,
        2016 2015
    (In thousands)
Revenues:                
       Company Stores   $       93,993   $       90,717
       Domestic Franchise     4,137       3,709  
       International Franchise     6,855     6,728
       KK Supply Chain:                
              Total revenues     64,049     63,517
              Less – intersegment sales elimination     (32,550 )     (32,197 )
                     External KK Supply Chain revenues     31,499       31,320  
                            Total revenues   $ 136,484     $ 132,474  
 
Operating income:                
       Company Stores   $ 5,963     $ 7,357  
       Domestic Franchise     2,533       2,094  
       International Franchise     4,578       4,904  
       KK Supply Chain     11,972       10,949  
              Total segment operating income     25,046       25,304  
       General and administrative expenses     (7,483 )     (7,554 )
       Corporate depreciation and amortization expense     (609 )     (595 )
       Impairment charges and lease termination costs        (453 )     (4 )
       Pre-opening costs related to Company Stores     (607 )     (323 )
       Gains on commodity derivatives, net     -
    447
              Consolidated operating income   $ 15,894     $ 17,275
 
Depreciation and amortization expense:                
       Company Stores   3,270     $ 3,169  
       Domestic Franchise     17       17  
       International Franchise     -       -  
       KK Supply Chain     160       212  
       Corporate     609       595  
              Total depreciation and amortization expense   $ 4,056     $ 3,993  

     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.

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Receivables
3 Months Ended
May. 01, 2016
Receivables [Abstract]  
Receivables

Note 3 — Receivables

     The components of receivables are as follows:

    May 1,   January 31,
        2016       2016
    (In thousands)
Receivables:                
       Consumer packaged goods - wholesale customers   $

11,311

    $ 10,808  
       Unaffiliated franchisees     13,960       13,233  
       Due from third-party distributors     2,238       2,440  
       Other receivables     1,530       667  
       Current portion of notes receivable     1,170     1,224  
      30,209       28,372  
       Less — allowance for doubtful accounts:            
              Consumer packaged goods - wholesale customers     (181 )     (180 )
              Unaffiliated franchisees     (165 )     (104 )
      (346 )     (284 )
    $ 29,863     $ 28,088  
   
Receivables from equity method franchisees (Note 5):                
       Trade   $ 468     $ 338  
 
The changes in the allowance for doubtful accounts are summarized as follows:              
 
Three Months Ended
  May 1,       May 3,  
  2016       2015  
(In thousands)
Allowance for doubtful accounts related to receivables:                
       Balance at beginning of period $

284

  $           495
       Provision for doubtful accounts     73
    (118 )
       Net recoveries (chargeoffs)   (11 )     (13 )
       Balance at end of period   $ 346     $ 364


We also have notes receivable from certain of our franchisees included in “Other assets” in the accompanying consolidated balance sheet, which are summarized in the following table.


May 1, January 31,
2016 2016
(In thousands)
Notes receivable:        
       Notes receivable from franchisees $ 4,413   $ 4,829  
       Less — portion due within one year included in receivables     (1,170 )     (1,224 )
    $ 3,243     $ 3,605  


Notes receivable at May 1, 2016 and January 31, 2016 consist principally of amounts payable to us related to sales of equipment and to the sale of certain leasehold interests to a franchisee. In addition to the foregoing notes receivable, we had promissory notes totaling approximately $1.2 million at May 1, 2016 and January 31, 2016 principally representing royalties and fees due to us which, as a result of doubt about their collection, we had not yet recorded as revenues.

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Inventories
3 Months Ended
May. 01, 2016
Inventories [Abstract]  
Inventories

Note 4 — Inventories 

     The components of inventories are as follows:

    May 1,   January 31,
        2016       2016
    (In thousands)
Raw materials   $ 7,096   $ 6,844
Work in progress     126     126
Finished goods and purchased merchandise     9,714     9,342
    $ 16,936   $        16,312
XML 22 R11.htm IDEA: XBRL DOCUMENT v3.4.0.3
Investments in Franchisees
3 Months Ended
May. 01, 2016
Investments in Franchisees [Abstract]  
Investment in Franchisees

Note 5 — Investments in Franchisees

As of May 1, 2016, we had an ownership interest in two franchisees, the aggregate carrying value of which was zero. Our financial exposures related to franchisees in which we have an investment are summarized in the tables below.


  May 1, 2016
  Company   Investment                      
  Ownership   and  
  Percentage   Advances   Receivables
  (Dollars in thousands)
Kremeworks, LLC   25.0 %     $ 900       $ 411
Kremeworks Canada, LP   24.5 %   667   57
    1,567   468
Less: reserves and allowances       (1,567 )     -
    $ -     $ 468
     
  January 31, 2016
  Company   Investment  
  Ownership   and  
  Percentage   Advances         Receivables
Kremeworks, LLC   25.0 %     $ 900       $ 300
Kremeworks Canada, LP   24.5 %   667     38
    1,567     338
Less: reserves and allowances       (1,567 )     -
    $ -   $ 338


The carrying values of the Company's investments and advances in Kremeworks, LLC (“Kremeworks”) and Kremeworks Canada, LP (“Kremeworks Canada”) were zero at May 1, 2016 and January 31, 2016. In addition, the Company had reserved all of the balance of its advances to Kremeworks and Kremeworks Canada at such dates; accrued but uncollected interest on such advances of approximately $380,000 and $370,000 at May 1, 2016 and January 31, 2016, respectively, had not been reflected in income at such date.

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Credit Facility and Lease Obligations
3 Months Ended
May. 01, 2016
Credit Facility and Lease Obligations [Abstract]  
Credit Facility and Lease Obligations

Note 6 — Credit Facility and Lease Obligations

Lease obligations consist of the following:


   

May 1,

  January 31,
    2016   2016
    (In thousands)
Capital lease obligations   $ 2,754     $ 2,709  
Financing obligations     8,845       8,834  
      11,599       11,543  
Less: current portion     (333 )     (326 )
    $ 11,266     $ 11,217  

Lease Obligations

We acquire equipment and facilities under capital and operating leases and build-to-suit arrangements. In certain build-to-suit leasing arrangements, we incur hard costs related to the construction of leased stores and we are therefore deemed the owner of the leased stores for accounting purposes during the construction period. We record the related assets and liabilities for construction costs incurred under these build-to-suit leasing arrangements during the construction period. Upon completion of the leased store, we consider whether the assets and liabilities qualify for derecognition under the sale-leaseback accounting guidance. These leasing arrangements do not qualify for sale-leaseback treatment and, accordingly, we record the transactions as financing obligations. A portion of the lease payments is allocated to land and is classified as an operating lease. The remainder of the lease payments is allocated between interest expense and amortization of the financing obligations. The assets are depreciated over their estimated useful lives. At the end of the lease term, the carrying value of the leased asset and the remaining financing obligation are expected to be equal, at which time we may either surrender the leased assets as settlement of the remaining financing obligation or enter into a new arrangement for the continued use of the asset.

2013 Revolving Credit Facility

On July 12, 2013, we entered into a $40 million revolving secured credit facility (the “2013 Facility”) which matures in July 2018. The 2013 Revolving Credit Facility is secured by a first lien on substantially all of our personal property assets and certain of our domestic subsidiaries. No borrowings were made on the 2013 Facility on the closing date.

Interest on borrowings under the 2013 Facility is payable either at the London Interbank Offered Rate (“LIBOR”) or the Base Rate (which is the greatest of the prime rate, the Federal funds rate plus 0.50%, or the one-month LIBOR rate plus 1.00%), in each case plus the Applicable Percentage. The Applicable Percentage for LIBOR loans ranges from 1.25% to 2.15%, and for Base Rate loans ranges from 0.25% to 1.15%, in each case depending on our leverage ratio.  As of May 1, 2016, the Applicable Percentage was 1.25%.

The 2013 Facility contains provisions which permit us to obtain letters of credit, issuance of which constitutes usage of the lending commitments and reduces the amount available for cash borrowings. At May 1, 2016, we had approximately $10.3 million of letters of credit outstanding, substantially all of which secure our reimbursement obligations to insurers under our self-insurance arrangements.

We are required to pay a fee equal to the Applicable Percentage for LIBOR-based loans on the outstanding amount of letters of credit. There also is a fee on the unused portion of the 2013 Facility lending commitment, ranging from 0.15% to 0.35%, depending on our leverage ratio. As of May 1, 2016, the fee on the unused portion of the 2013 Facility was 0.15%. 

The 2013 Facility requires us to meet certain financial tests, including a maximum leverage ratio and a minimum fixed charge coverage ratio. The leverage ratio is required to be not greater than 2.25 to 1.0 and the fixed charge coverage ratio is required to be not less than 1.3 to 1.0. As of May 1, 2016, our leverage ratio was 0.3 to 1.0 and the fixed charge coverage ratio was 3.4 to 1.0.

The operation of the restrictive financial covenants described above may limit the amount we are able to borrow under the 2013 Facility. The restrictive covenants did not limit our ability to borrow the full $29.7 million of unused credit under the 2013 Credit Facility as of May 1, 2016.

The 2013 Facility also contains covenants which, among other things, generally limit (with certain exceptions): liquidations, mergers, and consolidations; the incurrence of additional indebtedness (including guarantees); the incurrence of additional liens; the sale, assignment, lease, conveyance or transfer of assets; certain investments; dividends and stock redemptions or repurchases in excess of certain amounts; transactions with affiliates; engaging in materially different lines of business; certain sale-leaseback transactions; and other activities customarily restricted in such agreements. The 2013 Facility also prohibits the transfer of cash or other assets to the Parent Company (as defined in the 2013 Facility), whether by dividend, loan or otherwise, but provides for exceptions to enable the Parent Company to pay taxes, directors' fees and operating expenses, as well as exceptions to permit dividends in respect of our common stock and stock redemptions and repurchases, to the extent permitted by the 2013 Facility.

The 2013 Facility also contains customary events of default including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other indebtedness in excess of $5 million, certain events of bankruptcy and insolvency, judgment defaults in excess of $5 million and the occurrence of a change of control. In the event the Merger is consummated, it is expected the 2013 Facility will be terminated.

Borrowings and issuances of letters of credit under the 2013 Facility are subject to the satisfaction of usual and customary conditions, including the accuracy of representations and warranties and the absence of defaults.

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Commitments and Contingencies
3 Months Ended
May. 01, 2016
Commitments and Contingencies [Abstract]  
Commitments and Contingencies

Note 7 — Commitments and Contingencies

Except as disclosed below, we currently are not a party to any material legal proceedings.

Pending Litigation

K2 Asia Litigation

On April 7, 2009, a Cayman Islands corporation, K2 Asia Ventures, and its owners filed a lawsuit in Forsyth County, North Carolina Superior Court against us, our franchisee in the Philippines, and other persons associated with the franchisee. The suit alleges that we and the other defendants conspired to deprive the plaintiffs of claimed “exclusive rights” to negotiate franchise and development agreements with prospective franchisees in the Philippines, and seeks unspecified damages. We therefore do not know the amount or range of possible loss related to this matter. We believe that these allegations are false and continue to vigorously defend against the lawsuit. On July 26, 2013, the Superior Court dismissed the Philippines-based defendants for lack of personal jurisdiction, and the plaintiffs appealed that decision. On January 22, 2015, the North Carolina Supreme Court denied the plaintiffs' request to review the case. We moved for summary judgment on May 7, 2015 and are awaiting a decision by the Superior Court. We do not believe it is probable that a loss has been incurred with respect to this matter, and accordingly no liability related to it has been reflected in the accompanying financial statements.

Merger-Related Litigation

On May 26, 2016, a purported shareholder of the Company, Ronnie Stillwell, filed a putative class action complaint challenging the Merger in Superior Court in the State of North Carolina. The complaint names as defendants JAB, Cotton, Merger Sub and the members of the Board and also names the Company as a nominal defendant. The complaint seeks, among other relief, an order enjoining the Merger, compensatory damages, and an award of attorney's fees and costs on the grounds that, among other things, the members of the Board allegedly breached their fiduciary duties in connection with entering into the Merger Agreement and adopting and approving the Merger. The complaint further alleges that JAB, Cotton and Merger Sub aided and abetted the alleged breaches of fiduciary duties. It is possible that this complaint will be amended to make additional claims and/or that additional lawsuits making similar or additional claims relating to the Merger will be brought.

On May 26, 2016, legal advisors representing Melissa Weers, who is purportedly a shareholder of the Company, submitted a letter through the mail to the Board of the Company demanding legal action against the Board for a purported breach of fiduciary duty related to the Merger. The letter alleges, among other things, that the directors of the Company agreed to inadequate merger consideration and undervalued the Company. Additionally, the letter alleges that measures in the Merger Agreement created unreasonable protective devices to preclude competing offers. The letter further states Ms. Weer's belief that the Board of the Company was neither independent nor disinterested in the Merger, preventing directors from fulfilling their fiduciary duties to the Company's shareholders. In closing, the letter demands attention from the Board. The letter further asks the Board to authorize litigation against Cotton and its affiliated entities for aiding and abetting these supposed breaches.

On June 8, 2016, the Company received a demand letter from legal advisors representing Stu Bonnin, who is also purportedly a shareholder of the Company. In addition to alleging a breach of fiduciary duty related to the Merger, the letter also alleges a breach by the members of the Board of their duties of care, candor and good faith by causing the Company to issue materially incomplete and misleading disclosures in the Company's PREM14A Preliminary Proxy Statement filed on May 31, 2016. Specifically, the letter alleges that the disclosures were deficient and misleading because they did not include information as to the nature and timing of post-merger employment discussions. In closing, the letter demands that the Board take action to disclose the material information allegedly omitted from the Preliminary Proxy Statement.

Other Legal Matters

We are also engaged in various legal proceedings arising in the normal course of business. We maintain insurance policies against certain kinds of such claims and suits, including insurance policies for workers' compensation and personal injury, all of which are subject to deductibles. While the ultimate outcome of these matters could differ from our expectations, we currently do not believe their resolution will have a material adverse effect on our consolidated financial statements.

Other Commitments and Contingencies

Our primary bank had issued letters of credit on our behalf totaling $10.3 million at May 1, 2016, substantially all of which secure our reimbursement obligations to insurers under our self-insurance arrangements.

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Shareholders' Equity
3 Months Ended
May. 01, 2016
Shareholders' Equity [Abstract]  
Shareholders' Equity

Note 8 — Shareholders' Equity

 

Share-Based Compensation for Employees and Directors

 

We measure and recognize 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 months ended May 1, 2016 and May 3, 2015 is set forth in the following table. We did not realize any excess tax benefits from the exercise of stock options or the vesting of restricted stock units during any of the periods.

 

 

Three Months Ended

 

May 1,

 

May 3,

 

2016

 

2015

(In thousands)

Costs charged to earnings related to:

 

     

Stock options              

    $ 99   $ 323

Restricted stock units              

    1,469   1,674

Total costs              

    $ 1,568   $ 1,997
     

Costs included in:

         

Direct operating expenses              

    $ 631   $ 1,028

General and administrative expenses              

    937   969

Total costs              

    $ 1,568   $ 1,997

 

Repurchases of Common Stock

In fiscal 2014, our Board authorized the repurchase of our common stock, and subsequently increased that authorization such that it now totals $255 million. The authorization has no expiration date. Through May 1, 2016, we have cumulatively repurchased 8,612,395 shares under the authorization at an average price of $17.56 per share, for a total cost of $151.2 million. Repurchases of approximately $34.2 million and $5.9 million were settled during the three months ended May 1, 2016 and May 3, 2015, respectively. As of May 1, 2016, approximately $103.8 million remains available under the authorization for future share repurchases.

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

The following table summarizes repurchases of common stock for the three months ended May 1, 2016 and May 3, 2015. 

 

Three Months Ended

May 1,

 

May 3,

2016

 

2015

 

Common

   

Common

 

Shares

 

Stock

 

Shares

 

Stock

   

(In thousands)

           

Shares repurchased under share repurchase authorization             

2,415
  $ 39,645
  391
  $ 7,428

Shares surrendered in reimbursement for withholding taxes              

30
  450
  11
  197
2,445
  $ 40,095
  402
  $ 7,625

 

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Impairment Charges and Lease Termination Costs
3 Months Ended
May. 01, 2016
Impairment Charges and Lease Termination Costs [Abstract]  
Impairment Charges and Lease Termination Costs

Note 9 — Impairment Charges and Lease Termination Costs

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

Three Months Ended
      May 1,       May 3,
2016 2015
(In thousands)
Impairment of long-lived assets $       500   $       -
Lease termination costs:  
       Provision for lease termination costs 203   4
       Less - reversal of previously recorded accrued rent expense
(250 ) -
              Total lease termination costs (47 ) 4
       Total impairment charges and lease termination costs $ 453   $ 4

 

We test 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, unfavorable 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 our annual budgeting process. Impairment charges generally relate to Company stores expected to be closed or refranchised, as well as to stores we believe will not generate sufficient future cash flows to enable us to recover the carrying value of the stores' assets, but which we have not yet decided to close. When we conclude that the carrying value of long-lived assets is not recoverable (based on future projected undiscounted cash flows), we record 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 we currently are negotiating to sell, on our negotiations with unrelated third-party buyers. Impairment charges related to our long-lived assets were $500,000 in the first quarter of fiscal 2017 and relate to the refranchising of certain shop locations which was completed during the second quarter of fiscal 2017 as described in Note 14. The fair value of the impaired store assets was estimated based on our 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 we cease use of the leased property. The fair value of these liabilities was 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
      May 1,       May 3,
2016 2015
(In thousands)
Balance at beginning of period $       278   $       116
       Provision for lease termination costs:
              Provisions associated with store closings, net of estimated sublease rentals 202   -
              Adjustments to previously recorded provisions resulting from settlements
                     with lessors and adjustments of previous estimates (7 ) 1
              Accretion of discount 8   3
                     Total provision 203   4
       Payments on unexpired leases, including settlements with lessors (105 ) (35 )
Balance at end of period $ 376   $ 85

  

The lease termination accrual at May 1, 2016 of $376,000 is expected to be paid within one year.

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Income Taxes
3 Months Ended
May. 01, 2016
Income Taxes [Abstract]  
Income Taxes

Note 10 — Income Taxes

Our effective income tax rate was 39.3% for the three months ended May 1, 2016 compared to an effective income tax rate of 38.1% for the three months ended May 3, 2015. The increase in the effective income tax rate was due primarily to the benefit of specific incentive stock options being reclassified as non-qualified stock options during the three months ended May 3, 2015.

We have established a valuation allowance of $1.4 million at May 1, 2016 and January 31, 2016 that represents the portion of our deferred tax assets that management estimates will not be realized in the future. Such assets are associated principally with state net operating loss carryforwards related to states in which the scope of our operations has decreased. In such states, our ability to realize the net operating loss carryforwards is adversely affected because we are expected to have little income earned in or apportioned to those states in the future.

Realization of net deferred tax assets generally is dependent on generation of taxable income in future periods. 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.

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Fair Value Measurements
3 Months Ended
May. 01, 2016
Fair Value Measurements [Abstract]  
Fair-Value Measurements

Note 11 — 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 our assets and liabilities that are measured at fair value on a recurring basis at May 1, 2016 and January 31, 2016. 

  May 1, 2016(1)
  Level 1   Level 2   Level 3
  (In thousands)
Assets:                
       401(k) mirror plan assets $ 2,517   $ -   $ -
 
 
  January 31, 2016(1)
  Level 1   Level 2   Level 3
  (In thousands)
Assets:                          
      401(k) mirror plan assets $         2,158   $         -   $         -
(1) There were no transfers of financial assets or liabilities among the levels within the fair value hierarchy during the three months ended May 1, 2016 or during the year ended January 31, 2016.
 


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

The following table presents the nonrecurring fair value measurements recorded during the three months ended May 1, 2016. There were no material nonrecurring fair value measurements recorded during the three months ended May 3, 2015.

Three Months Ended May 1, 2016
Level 1 Level 2 Level 3 Total gain (loss)
(In thousands)
Long-lived assets   $            -   $ 2,457   $            -   $ (500)
Lease termination liabilities   -   $ 202   $ -   $ 48


Long-Lived Assets

During the three months ended May 1, 2016, long-lived assets having an aggregate carrying value of $3.0 million were written down to their estimated fair values of $2.5 million, resulting in recorded impairment charges of $500,000. The charges relate to the refranchising of certain shop locations which was completed during the second quarter of fiscal 2017 as described in Note 14. The fair value of the impaired store assets was estimated based on our negotiations with unrelated third-party buyers. These inputs are classified as Level 2 within the valuation hierarchy.

Lease Termination Liabilities

During the three months ended May 1, 2016, we recorded provisions for lease termination costs related to closed stores based upon the estimated fair values of the liabilities under unexpired leases as described in Note 9; such provisions were reduced by previously recorded accrued rent expense related to those stores. The fair value of these liabilities was computed 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. These inputs are classified as Level 2 within the valuation hierarchy. For the three months ended May 1, 2016, the $250,000 of previously recorded accrued rent expense, related to store closures, exceeded the $202,000 fair value of lease termination liabilities related to such stores, and such excess has been reflected as a credit to lease termination costs during the period.

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Derivative Instruments
3 Months Ended
May. 01, 2016
Derivative Instruments [Abstract]  
Derivative Instruments

Note 12 — Derivative Instruments

We are exposed to certain risks relating to our ongoing business operations. The primary risk managed by using derivative instruments is commodity price risk. We do not hold or issue derivative instruments for trading purposes.

Commodity Price Risk

We are exposed to the effects of commodity price fluctuations in the cost of ingredients of our 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 we purchase exchange-traded commodity futures contracts, and options on such contracts, for raw materials which are ingredients of our products or which are components of such ingredients, including wheat and soybean oil. We are also exposed to the effects of commodity price fluctuations in the cost of gasoline used by our delivery vehicles. To mitigate the risk of fluctuations in the price of our gasoline purchases, we 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 we had 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. We had no commodity derivative contracts as of May 1, 2016.

Interest Rate Risk

We are exposed to market risk from increases in interest rates on any borrowings outstanding under our 2013 Credit Facility. As of May 1, 2016, there were no borrowings outstanding under such facility.

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

There were no derivative instruments in the consolidated balance sheet as of May 1, 2016 or January 31, 2016.

The effect of derivative instruments on the consolidated statement of income for the three months ended May 1, 2016 and May 3, 2015 was as follows: 

 

Amount of Derivative Gain or (Loss)
Recognized in Income
Three Months Ended
May 1, May 3,
Derivatives Not Designated as Hedging Instruments       Location of Derivative Gain or (Loss) Recognized in Income       2016       2015
(In thousands)
Agricultural commodity futures contracts Gains on commodity derivatives, net $ -   $ (335 )
Gasoline commodity futures contracts Gains on commodity derivatives, net -   782
       Total $ -   $            447

 

XML 30 R19.htm IDEA: XBRL DOCUMENT v3.4.0.3
Acquisitions
3 Months Ended
May. 01, 2016
Acquisitions [Abstract]  
Acquisitions

Note 13 — Acquisitions

Acquisition of Krispy Kreme Shop

On April 23, 2015, we entered into several legal arrangements with a franchisee, which included an asset purchase agreement and management agreement, whereby we agreed to operate the franchisee's Krispy Kreme shop in Little Rock, Arkansas as a Company store. We paid $312,000 in cash for specific assets of the shop and have accounted for the transaction as the acquisition of a business. The acquired shop had fiscal 2015 sales of approximately $2.7 million.  The allocation of the purchase price was as follows: $252,000 to property and equipment, $27,000 to inventory, $137,000 to reacquired franchise rights and $104,000 to a liability, related to a lease which included an unfavorable term compared to the market, which will be amortized over the remaining life of the lease agreement. Our results of operations, computed on a pro forma basis assuming the acquisition had been consummated at the beginning of the current and prior year periods, are not materially different from our historical results of operations and, accordingly, have been omitted. The acquired business's revenues and earnings for periods subsequent to the acquisition are not material to our consolidated financial statements.

 

Acquisition of Franchise Rights

 

We acquired the franchise rights to develop certain CPG channels of trade from certain of our franchisees for approximately $185,000 in the first quarter of fiscal 2017 and $1.6 million in fiscal 2016.  These transactions represented business acquisitions and the purchase price of each transaction has been allocated to reacquired franchise rights.  These reacquired franchise rights will be amortized over the terms of the reacquired franchise agreements.

XML 31 R20.htm IDEA: XBRL DOCUMENT v3.4.0.3
Subsequent Events
3 Months Ended
May. 01, 2016
Subsequent Events [Abstract]  
Subsequent Events

Note 14 — Subsequent Events

 

On May 2, 2016, subsequent to the end of the first quarter of fiscal 2017, we completed the refranchising of four Company-owned locations in Jacksonville, Florida to a franchisee. The cash consideration received was approximately $1.5 million with an additional $1.3 million of purchase consideration dependent on the future performance of the sold locations. Assets related to the transaction totaling $2.5 million were classified as held for sale at May 1, 2016. Additionally, in connection with this sale, we closed two stores in the Jacksonville market.

 

 Subsequent to the end of the first quarter of fiscal 2017, on May 8, 2016, we entered into a Merger Agreement with Cotton and JAB as more fully described in Note 1. Additionally, on May 26, a putative class action complaint challenging the Merger was filed in Superior Court in the State of North Carolina and a letter was received from lawyers representing a separate alleged shareholder demanding legal action against the Board for a purported breach of fiduciary duty related to the Merger, each as described in Note 7. On June 8, 2016, a second letter was received from lawyers representing yet another alleged shareholder demanding action from the Board related to purported breaches of fiduciary duties and the duties of care, candor and good faith, also as described in Note 7

XML 32 R21.htm IDEA: XBRL DOCUMENT v3.4.0.3
Accounting Policies (Policies)
3 Months Ended
May. 01, 2016
Accounting Policies [Abstract]  
Merger Agreement

Merger Agreement

 


On May 8, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cotton Parent, Inc., a Delaware corporation (“Cotton”), Cotton Merger Sub Inc., a North Carolina corporation and a wholly owned subsidiary of Cotton (“Merger Sub”), and JAB Holdings B.V., a Dutch Besloten Vennootschap met beperkte aansprakelijkheid (private company with limited liability) (“JAB”). Cotton and Merger Sub are affiliates of JAB. Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and as a wholly owned subsidiary of Cotton (the “Merger”). Our Board of Directors (the “Board”) unanimously adopted, approved and declared advisable the Merger Agreement, the Merger, and the other transactions contemplated by the Merger Agreement and unanimously resolved to recommend that our shareholders vote to approve the Merger Agreement. The Merger is subject to a vote of our shareholders.

 

As a result of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares held by Cotton, Merger Sub, certain affiliates of Cotton, or direct or indirect wholly owned subsidiaries of the Company) will be canceled and automatically converted into the right to receive $21.00 in cash, without interest and subject to any required tax withholding.

 

We have made various representations and warranties in the Merger Agreement that are customary for a company in the quick service restaurant industry.  The Merger Agreement also contains customary covenants and agreements, including, among others, covenants relating to (1) the conduct of our business between the date of the Merger Agreement and the Effective Time and (2) the efforts of the parties to cause the Merger to be completed.

 

The completion of the Merger is subject to the satisfaction or waiver of a number of closing conditions, including, among others, (1) approval of the Merger Agreement by the holders of a majority of our outstanding common stock; (2) the absence of any “material adverse effect” on the Company occurring after the date of the Merger Agreement; (3) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (4) the absence of any legal prohibitions or certain governmental proceedings affecting the closing of the Merger; and (5) subject to certain materiality qualifications, the continued accuracy of our representations and warranties, and performance by the Company of required covenants and obligations (to be performed at or prior to the closing of the Merger), as of the closing of the Merger.

 

The Merger Agreement also includes provisions permitting termination by each of the Company and Cotton under certain circumstances, including (1) if the Merger is not completed by November 8, 2016 (the “Termination Date”), (2) if the required approval of our shareholders is not obtained or (3) if the other party breaches its representations, warranties or covenants and such breach would cause the failure of a corresponding closing condition to be satisfied by the Termination Date. In connection with a termination of the Merger Agreement under specified circumstances, including if we enter into an alternative transaction we determine is superior pursuant to the terms of the Merger Agreement, we may be required to pay Cotton a termination fee of $42.0 million.

 

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which was filed with our Current Report on Form 8-K filed with the United States Securities and Exchange Commission (the “SEC”) on May 9, 2016 and is hereby incorporated by reference. During the three months ended May 1, 2016, we recorded approximately $454,000 related to the proposed Merger which is included in general and administrative expenses in the Consolidated Statement of Income.

BASIS OF PRESENTATION

     BASIS OF PRESENTATION. The consolidated financial statements contained herein should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 (the “2016 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 our accounting practices described in the 2016 Form 10-K, but have not been audited. In our opinion, the financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of our results of operations for the periods presented. The consolidated balance sheet data as of January 31, 2016 were derived from our audited financial statements. 

BASIS OF CONSOLIDATION

BASIS OF CONSOLIDATION. The financial statements include the accounts of KKDI and its subsidiaries. Investments in entities over which we have the ability to exercise significant influence but which we do not control, and whose financial statements are not otherwise required to be consolidated, are accounted for using the equity method. 

EARNINGS PER SHARE

     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 the vesting of currently unvested restricted stock units.

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

Three Months Ended
May 1,       May 3,
2016 2015
(In thousands)
         

Numerator:  net income             

  $ 9,416
  $ 10,666

Denominator:

       
 

Basic earnings per share - weighted average shares

       
 

outstanding             

  64,098     66,603  
 

Effect of dilutive securities:

 
     
      Stock options   1,171  
1,643
      Restricted stock units   138   327
 

Diluted earnings per share - weighted average shares

           
 

outstanding plus dilutive potential common shares             

  65,407     68,573  

 

Stock options with respect to 244,000 and 302,000 shares for the three months ended May 1, 2016 and May 3, 2015, respectively, and 190,000 and 171,000 unvested restricted stock units for the three months ended May 1, 2016 and May 3, 2015, respectively, have been excluded from the computation of the number of shares used to compute diluted earnings per share because their inclusion would be antidilutive. 

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which amends existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”, which changes guidance for subsequent measurement of inventory from the lower of cost or market to the lower of cost and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” This guidance states that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to the line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. This guidance became effective in the first quarter of fiscal 2017. As all of our debt issuance costs are related to line-of-credit arrangements and are currently classified as assets, the adoption of this guidance did not have any impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Customer's Accounting for Fees Paid in a Cloud Computing Arrangement”, which provides guidance about whether a cloud computing arrangement includes a software license. This guidance became effective in the first quarter of fiscal 2017 and did not impact our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, to clarify the principles used to recognize revenue for all entities. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations”, which further clarifies the implementation guidance on principal versus agent considerations”, and in April 2016, the FASB issued ASU 2016-10, “Revenue from contracts with customers (Topic 606): Identifying performance obligations and licensing”, an update on identifying performance obligations and accounting for licenses of intellectual property. Additionally, in May 2016, the FASB issued ASU 2016-12, “Revenue from contracts with customers (Topic 606): Narrow-scope improvements and practical expedients”, which includes amendments for enhanced clarification of the guidance. This guidance is effective for fiscal years beginning on or after December 15, 2017 including interim periods within those fiscal years and early adoption is permitted. We are evaluating the impact that adoption of this guidance will have on our consolidated financial statements.


XML 33 R22.htm IDEA: XBRL DOCUMENT v3.4.0.3
Accounting Policies (Tables)
3 Months Ended
May. 01, 2016
Accounting Policies [Abstract]  
Schedule of Computation of Earnings Per Share
Three Months Ended
May 1,       May 3,
2016 2015
(In thousands)
         

Numerator:  net income             

  $ 9,416
  $ 10,666

Denominator:

       
 

Basic earnings per share - weighted average shares

       
 

outstanding             

  64,098     66,603  
 

Effect of dilutive securities:

 
     
      Stock options   1,171  
1,643
      Restricted stock units   138   327
 

Diluted earnings per share - weighted average shares

           
 

outstanding plus dilutive potential common shares             

  65,407     68,573  
XML 34 R23.htm IDEA: XBRL DOCUMENT v3.4.0.3
Segment Information (Tables)
3 Months Ended
May. 01, 2016
Segment Information [Abstract]  
Schedule of Operations by Reporting Segment

    Three Months Ended
    May 1,       May 3,
        2016 2015
    (In thousands)
Revenues:                
       Company Stores   $       93,993   $       90,717
       Domestic Franchise     4,137       3,709  
       International Franchise     6,855     6,728
       KK Supply Chain:                
              Total revenues     64,049     63,517
              Less – intersegment sales elimination     (32,550 )     (32,197 )
                     External KK Supply Chain revenues     31,499       31,320  
                            Total revenues   $ 136,484     $ 132,474  
 
Operating income:                
       Company Stores   $ 5,963     $ 7,357  
       Domestic Franchise     2,533       2,094  
       International Franchise     4,578       4,904  
       KK Supply Chain     11,972       10,949  
              Total segment operating income     25,046       25,304  
       General and administrative expenses     (7,483 )     (7,554 )
       Corporate depreciation and amortization expense     (609 )     (595 )
       Impairment charges and lease termination costs        (453 )     (4 )
       Pre-opening costs related to Company Stores     (607 )     (323 )
       Gains on commodity derivatives, net     -
    447
              Consolidated operating income   $ 15,894     $ 17,275
 
Depreciation and amortization expense:                
       Company Stores   3,270     $ 3,169  
       Domestic Franchise     17       17  
       International Franchise     -       -  
       KK Supply Chain     160       212  
       Corporate     609       595  
              Total depreciation and amortization expense   $ 4,056     $ 3,993  
XML 35 R24.htm IDEA: XBRL DOCUMENT v3.4.0.3
Receivables (Tables)
3 Months Ended
May. 01, 2016
Receivables [Abstract]  
Schedule of Components of Receivables
    May 1,   January 31,
        2016       2016
    (In thousands)
Receivables:                
       Consumer packaged goods - wholesale customers   $

11,311

    $ 10,808  
       Unaffiliated franchisees     13,960       13,233  
       Due from third-party distributors     2,238       2,440  
       Other receivables     1,530       667  
       Current portion of notes receivable     1,170     1,224  
      30,209       28,372  
       Less — allowance for doubtful accounts:            
              Consumer packaged goods - wholesale customers     (181 )     (180 )
              Unaffiliated franchisees     (165 )     (104 )
      (346 )     (284 )
    $ 29,863     $ 28,088  
   
Receivables from equity method franchisees (Note 5):                
       Trade   $ 468     $ 338  


May 1, January 31,
2016 2016
(In thousands)
Notes receivable:        
       Notes receivable from franchisees $ 4,413   $ 4,829  
       Less — portion due within one year included in receivables     (1,170 )     (1,224 )
    $ 3,243     $ 3,605  


Schedule of Changes in the Allowances for Doubtful Accounts
The changes in the allowance for doubtful accounts are summarized as follows:              
 
Three Months Ended
  May 1,       May 3,  
  2016       2015  
(In thousands)
Allowance for doubtful accounts related to receivables:                
       Balance at beginning of period $

284

  $           495
       Provision for doubtful accounts     73
    (118 )
       Net recoveries (chargeoffs)   (11 )     (13 )
       Balance at end of period   $ 346     $ 364


XML 36 R25.htm IDEA: XBRL DOCUMENT v3.4.0.3
Inventories (Tables)
3 Months Ended
May. 01, 2016
Inventories [Abstract]  
Schedule of Inventory
    May 1,   January 31,
        2016       2016
    (In thousands)
Raw materials   $ 7,096   $ 6,844
Work in progress     126     126
Finished goods and purchased merchandise     9,714     9,342
    $ 16,936   $        16,312
XML 37 R26.htm IDEA: XBRL DOCUMENT v3.4.0.3
Investments in Franchisees (Tables)
3 Months Ended
May. 01, 2016
Investments in Franchisees [Abstract]  
Schedule of Investments in Franchisees


  May 1, 2016
  Company   Investment                      
  Ownership   and  
  Percentage   Advances   Receivables
  (Dollars in thousands)
Kremeworks, LLC   25.0 %     $ 900       $ 411
Kremeworks Canada, LP   24.5 %   667   57
    1,567   468
Less: reserves and allowances       (1,567 )     -
    $ -     $ 468
     
  January 31, 2016
  Company   Investment  
  Ownership   and  
  Percentage   Advances         Receivables
Kremeworks, LLC   25.0 %     $ 900       $ 300
Kremeworks Canada, LP   24.5 %   667     38
    1,567     338
Less: reserves and allowances       (1,567 )     -
    $ -   $ 338


XML 38 R27.htm IDEA: XBRL DOCUMENT v3.4.0.3
Credit Facility and Lease Obligations (Tables)
3 Months Ended
May. 01, 2016
Credit Facility and Lease Obligations [Abstract]  
Schedule of Lease Obligations
   

May 1,

  January 31,
    2016   2016
    (In thousands)
Capital lease obligations   $ 2,754     $ 2,709  
Financing obligations     8,845       8,834  
      11,599       11,543  
Less: current portion     (333 )     (326 )
    $ 11,266     $ 11,217  
XML 39 R28.htm IDEA: XBRL DOCUMENT v3.4.0.3
Shareholders' Equity (Tables)
3 Months Ended
May. 01, 2016
Shareholders' Equity [Abstract]  
Schedule of Share-Based Compensation

 

 

Three Months Ended

 

May 1,

 

May 3,

 

2016

 

2015

(In thousands)

Costs charged to earnings related to:

 

     

Stock options              

    $ 99   $ 323

Restricted stock units              

    1,469   1,674

Total costs              

    $ 1,568   $ 1,997
     

Costs included in:

         

Direct operating expenses              

    $ 631   $ 1,028

General and administrative expenses              

    937   969

Total costs              

    $ 1,568   $ 1,997

 

Schedule of Repurchase of Common Stock

 

Three Months Ended

May 1,

 

May 3,

2016

 

2015

 

Common

   

Common

 

Shares

 

Stock

 

Shares

 

Stock

   

(In thousands)

           

Shares repurchased under share repurchase authorization             

2,415
  $ 39,645
  391
  $ 7,428

Shares surrendered in reimbursement for withholding taxes              

30
  450
  11
  197
2,445
  $ 40,095
  402
  $ 7,625
XML 40 R29.htm IDEA: XBRL DOCUMENT v3.4.0.3
Impairment Charges and Lease Termination Costs (Tables)
3 Months Ended
May. 01, 2016
Impairment Charges and Lease Termination Costs [Abstract]  
Schedule of Impairment Charges and Lease Termination Costs
Three Months Ended
      May 1,       May 3,
2016 2015
(In thousands)
Impairment of long-lived assets $       500   $       -
Lease termination costs:  
       Provision for lease termination costs 203   4
       Less - reversal of previously recorded accrued rent expense
(250 ) -
              Total lease termination costs (47 ) 4
       Total impairment charges and lease termination costs $ 453   $ 4
Schedule of Lease Termination Liability
Three Months Ended
      May 1,       May 3,
2016 2015
(In thousands)
Balance at beginning of period $       278   $       116
       Provision for lease termination costs:
              Provisions associated with store closings, net of estimated sublease rentals 202   -
              Adjustments to previously recorded provisions resulting from settlements
                     with lessors and adjustments of previous estimates (7 ) 1
              Accretion of discount 8   3
                     Total provision 203   4
       Payments on unexpired leases, including settlements with lessors (105 ) (35 )
Balance at end of period $ 376   $ 85
XML 41 R30.htm IDEA: XBRL DOCUMENT v3.4.0.3
Fair Value Measurements (Tables)
3 Months Ended
May. 01, 2016
Fair Value Measurements [Abstract]  
Schedule of Assets and Liabilities Measured at Fair Value on a Recurring Basis
  May 1, 2016(1)
  Level 1   Level 2   Level 3
  (In thousands)
Assets:                
       401(k) mirror plan assets $ 2,517   $ -   $ -
 
 
  January 31, 2016(1)
  Level 1   Level 2   Level 3
  (In thousands)
Assets:                          
      401(k) mirror plan assets $         2,158   $         -   $         -
(1) There were no transfers of financial assets or liabilities among the levels within the fair value hierarchy during the three months ended May 1, 2016 or during the year ended January 31, 2016.
Schedule of Non-Recurring Measurements
Three Months Ended May 1, 2016
Level 1 Level 2 Level 3 Total gain (loss)
(In thousands)
Long-lived assets   $            -   $ 2,457   $            -   $ (500)
Lease termination liabilities   -   $ 202   $ -   $ 48
XML 42 R31.htm IDEA: XBRL DOCUMENT v3.4.0.3
Derivative Instruments (Tables)
3 Months Ended
May. 01, 2016
Derivative Instruments [Abstract]  
Schedule of Derivative Gain (Loss)
Amount of Derivative Gain or (Loss)
Recognized in Income
Three Months Ended
May 1, May 3,
Derivatives Not Designated as Hedging Instruments       Location of Derivative Gain or (Loss) Recognized in Income       2016       2015
(In thousands)
Agricultural commodity futures contracts Gains on commodity derivatives, net $ -   $ (335 )
Gasoline commodity futures contracts Gains on commodity derivatives, net -   782
       Total $ -   $            447
XML 43 R32.htm IDEA: XBRL DOCUMENT v3.4.0.3
Accounting Policies (Schedule of Computation of Earnings Per Share) (Details) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
May. 01, 2016
May. 03, 2015
Accounting Policies [Abstract]    
Net income $ 9,416 $ 10,666
Basic earnings per share - weighted average shares outstanding 64,098 66,603
Diluted earnings per share - weighted average shares outstanding plus dilutive potential common shares 65,407 68,573
Stock Options [Member]    
Effect of dilutive securities:    
Share-based payment arrangement 1,171 1,643
Restricted Stock Units [Member]    
Effect of dilutive securities:    
Share-based payment arrangement 138 327
XML 44 R33.htm IDEA: XBRL DOCUMENT v3.4.0.3
Accounting Policies (Narrative) (Details) - USD ($)
3 Months Ended
May. 08, 2016
May. 01, 2016
May. 03, 2015
JAB/Cotton Merger [Member] | Subsequent Event [Member]      
Business Acquisition [Line Items]      
Share price $ 21.00    
Acquisition-related transaction costs $ 454,000    
Potential termination fee $ 42,000,000    
Stock options [Member]      
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]      
Antidilutive securities   244,000 302,000
Restricted Stock Units [Member]      
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]      
Antidilutive securities   190,000 171,000
XML 45 R34.htm IDEA: XBRL DOCUMENT v3.4.0.3
Segment Information (Details) - USD ($)
$ in Thousands
3 Months Ended
May. 01, 2016
May. 03, 2015
Segment Reporting Information [Line Items]    
Revenues $ 136,484 $ 132,474
General and administrative expenses (7,483) (7,554)
Depreciation and amortization expense (4,056) (3,993)
Impairment charges and lease termination costs (453) (4)
Pre-opening costs related to Company Stores $ (607) (323)
Gains on commodity derivatives, net 447
Operating income $ 15,894 17,275
Segments [Member]    
Segment Reporting Information [Line Items]    
Operating income 25,046 25,304
Corporate [Member]    
Segment Reporting Information [Line Items]    
General and administrative expenses (7,483) (7,554)
Depreciation and amortization expense (609) (595)
Impairment charges and lease termination costs (453) (4)
Pre-opening costs related to Company Stores $ (607) (323)
Gains on commodity derivatives, net 447
Company Stores [Member]    
Segment Reporting Information [Line Items]    
Revenues $ 93,993 90,717
Depreciation and amortization expense (3,270) (3,169)
Operating income 5,963 7,357
Domestic Franchise [Member]    
Segment Reporting Information [Line Items]    
Revenues 4,137 3,709
Depreciation and amortization expense (17) (17)
Operating income 2,533 2,094
International Franchise [Member]    
Segment Reporting Information [Line Items]    
Revenues $ 6,855 $ 6,728
Depreciation and amortization expense
Operating income $ 4,578 $ 4,904
KK Supply Chain [Member]    
Segment Reporting Information [Line Items]    
Revenues 31,499 31,320
Depreciation and amortization expense (160) (212)
Operating income 11,972 10,949
KK Supply Chain [Member] | Segments [Member]    
Segment Reporting Information [Line Items]    
Revenues 64,049 63,517
KK Supply Chain [Member] | Intersegment Elimination [Member]    
Segment Reporting Information [Line Items]    
Revenues $ (32,550) $ (32,197)
XML 46 R35.htm IDEA: XBRL DOCUMENT v3.4.0.3
Receivables (Components of Receivables) (Details) - USD ($)
$ in Thousands
May. 01, 2016
Jan. 31, 2016
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Other receivables $ 1,530 $ 667
Current portion of notes receivable 1,170 1,224
Receivables 30,209 28,372
Less - allowance for doubtful accounts: (346) (284)
Receivables, net 29,863 28,088
Receivables from equity method franchisees 468 338
Consumer Packaged Goods - Wholesale Customers [Member]    
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Trade receivables 11,311 10,808
Less - allowance for doubtful accounts: (181) (180)
Unaffiliated Franchisees [Member]    
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Trade receivables 13,960 13,233
Less - allowance for doubtful accounts: (165) (104)
Due from Third Party Distributors [Member]    
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Trade receivables $ 2,238 $ 2,440
XML 47 R36.htm IDEA: XBRL DOCUMENT v3.4.0.3
Receivables (Allowance for Doubtful Accounts) (Details) - USD ($)
$ in Thousands
3 Months Ended
May. 01, 2016
May. 03, 2015
Allowance For Doubtful Accounts Receivable [Roll Forward]    
Balance at beginning of period $ 284  
Balance at end of period 346  
Trade Accounts Receivable [Member]    
Allowance For Doubtful Accounts Receivable [Roll Forward]    
Balance at beginning of period 284 $ 495
Provision for doubtful accounts 73 (118)
Net recoveries (chargeoffs) (11) (13)
Balance at end of period $ 346 $ 364
XML 48 R37.htm IDEA: XBRL DOCUMENT v3.4.0.3
Receivables (Schedule of Other Notes Receivables) (Details) - USD ($)
$ in Thousands
May. 01, 2016
Jan. 31, 2016
Receivables [Abstract]    
Note receivable from franchisees $ 4,413 $ 4,829
Less - portion due within one year included in receivables (1,170) (1,224)
Non-current portion of notes receivable $ 3,243 $ 3,605
XML 49 R38.htm IDEA: XBRL DOCUMENT v3.4.0.3
Receivables (Narrative) (Details) - USD ($)
$ in Millions
May. 01, 2016
Jan. 31, 2016
Accounts, Notes, Loans and Financing Receivable [Line Items]    
Unrecognized franchise revenue $ 1.2 $ 1.2
XML 50 R39.htm IDEA: XBRL DOCUMENT v3.4.0.3
Inventories (Details) - USD ($)
$ in Thousands
May. 01, 2016
Jan. 31, 2016
Inventories [Abstract]    
Raw materials $ 7,096 $ 6,844
Work in progress 126 126
Finished goods and purchased merchandise 9,714 9,342
Inventories, Net, Total $ 16,936 $ 16,312
XML 51 R40.htm IDEA: XBRL DOCUMENT v3.4.0.3
Investments in Franchisees (Financial Exposure Related to Franchisee Investments) (Details) - USD ($)
$ in Thousands
May. 01, 2016
Jan. 31, 2016
Schedule of Equity Method Investments [Line Items]    
Investment and advances $ 1,567 $ 1,567
Reserves and allowances $ (1,567) $ (1,567)
Investment and advances
Receivables $ 468 $ 338
Reserves and allowances
Receivables $ 468 $ 338
Kremeworks LLC [Member]    
Schedule of Equity Method Investments [Line Items]    
Company Ownership Percentage 25.00% 25.00%
Investment and advances $ 900 $ 900
Receivables $ 411 $ 300
Kremeworks Canada LP [Member]    
Schedule of Equity Method Investments [Line Items]    
Company Ownership Percentage 24.50% 24.50%
Investment and advances $ 667 $ 667
Receivables $ 57 $ 38
XML 52 R41.htm IDEA: XBRL DOCUMENT v3.4.0.3
Investments in Franchisees (Narrative) (Details)
May. 01, 2016
USD ($)
franchises
Jan. 31, 2016
USD ($)
Schedule of Equity Method Investments [Line Items]    
Number of investments in franchisees | franchises 2  
Kremeworks, LLC and Kremeworks Canada, LP [Member]    
Schedule of Equity Method Investments [Line Items]    
Accrued but uncollected interest on advances | $ $ 380,000 $ 370,000
XML 53 R42.htm IDEA: XBRL DOCUMENT v3.4.0.3
Credit Facility and Lease Obligations (Schedule of Lease Obligations) (Details) - USD ($)
$ in Thousands
May. 01, 2016
Jan. 31, 2016
Lease obligations:    
Lease obligations $ 11,599 $ 11,543
Less: current portion (333) (326)
Lease obligations, less current portion 11,266 11,217
Capital lease obligations [Member]    
Lease obligations:    
Lease obligations 2,754 2,709
Assets Under Financing Obligations [Member]    
Lease obligations:    
Lease obligations $ 8,845 $ 8,834
XML 54 R43.htm IDEA: XBRL DOCUMENT v3.4.0.3
Credit Facility and Lease Obligations (2013 Revolving Credit Facility) (Details)
$ in Millions
3 Months Ended
May. 01, 2016
USD ($)
Credit Facility and Lease Obligations [Abstract]  
Letters of credit outstanding $ 10.3
2013 Revolving Credit Facility [Member]  
Line of Credit Facility [Line Items]  
Issuance date Jul. 12, 2013
Debt maturity date Jul. 12, 2018
Maximum borrowing capacity $ 40.0
Available borrowing capacity $ 29.7
Spread over variable rate 1.25%
Description of variable rate basis greatest of the prime rate, the Federal funds rate plus 0.50%, or the one-month LIBOR rate plus 1.00%
Fee on unused portion 0.15%
Leverage ratio 0.3
Fixed charge coverage ratio 3.4
Default triggering event $ 5.0
Covenant calculation, aggregate threshold for lease termination obligations $ 5.0
2013 Revolving Credit Facility [Member] | Minimum [Member]  
Line of Credit Facility [Line Items]  
Fee on unused portion 0.15%
Fixed charge coverage ratio 1.3
2013 Revolving Credit Facility [Member] | Minimum [Member] | LIBOR [Member]  
Line of Credit Facility [Line Items]  
Spread over variable rate 1.25%
2013 Revolving Credit Facility [Member] | Minimum [Member] | Base Rate [Member]  
Line of Credit Facility [Line Items]  
Spread over variable rate 0.25%
2013 Revolving Credit Facility [Member] | Maximum [Member]  
Line of Credit Facility [Line Items]  
Fee on unused portion 0.35%
Leverage ratio 2.25
2013 Revolving Credit Facility [Member] | Maximum [Member] | LIBOR [Member]  
Line of Credit Facility [Line Items]  
Spread over variable rate 2.15%
2013 Revolving Credit Facility [Member] | Maximum [Member] | Base Rate [Member]  
Line of Credit Facility [Line Items]  
Spread over variable rate 1.15%
XML 55 R44.htm IDEA: XBRL DOCUMENT v3.4.0.3
Commitments and Contingencies (Narratives) (Details)
$ in Millions
3 Months Ended
May. 01, 2016
USD ($)
Loss Contingencies [Line Items]  
Letters of credit outstanding $ 10.3
K2 Asia Litigation [Member]  
Loss Contingencies [Line Items]  
Loss Contingency, Actions Taken by Plaintiff On April 7, 2009, a Cayman Islands corporation, K2 Asia Ventures, and its owners filed a lawsuit in Forsyth County, North Carolina Superior Court against us, our franchisee in the Philippines, and other persons associated with the franchisee. The suit alleges that we and the other defendants conspired to deprive the plaintiffs of claimed “exclusive rights” to negotiate franchise and development agreements with prospective franchisees in the Philippines, and seeks unspecified damages. We therefore do not know the amount or range of possible loss related to this matter. We believe that these allegations are false and continue to vigorously defend against the lawsuit. On July 26, 2013, the Superior Court dismissed the Philippines-based defendants for lack of personal jurisdiction, and the plaintiffs appealed that decision. On January 22, 2015, the North Carolina Supreme Court denied the plaintiffs’ request to review the case. We moved for summary judgment on May 7, 2015 and are awaiting a decision by the Superior Court. We do not believe it is probable that a loss has been incurred with respect to this matter, and accordingly no liability related to it has been reflected in the accompanying financial statements.
Merger-Related Litigation [Member]  
Loss Contingencies [Line Items]  
Loss Contingency, Actions Taken by Plaintiff On May 26, 2016, a purported shareholder of the Company, Ronnie Stillwell, filed a putative class action complaint challenging the Merger in Superior Court in the State of North Carolina. The complaint names as defendants JAB, Cotton, Merger Sub and the members of the Board and also names the Company as a nominal defendant. The complaint seeks, among other relief, an order enjoining the Merger, compensatory damages, and an award of attorney's fees and costs on the grounds that, among other things, the members of the Board allegedly breached their fiduciary duties in connection with entering into the Merger Agreement and adopting and approving the Merger. The complaint further alleges that JAB, Cotton and Merger Sub aided and abetted the alleged breaches of fiduciary duties. It is possible that this complaint will be amended to make additional claims and/or that additional lawsuits making similar or additional claims relating to the Merger will be brought. On May 26, 2016, legal advisors representing Melissa Weers, who is purportedly a shareholder of the Company, submitted a letter through the mail to the Board of the Company demanding legal action against the Board for a purported breach of fiduciary duty related to the Merger. The letter alleges, among other things, that the directors of the Company agreed to inadequate merger consideration and undervalued the Company. Additionally, the letter alleges that measures in the Merger Agreement created unreasonable protective devices to preclude competing offers. The letter further states Ms. Weer’s belief that the Board of the Company was neither independent nor disinterested in the Merger, preventing directors from fulfilling their fiduciary duties to the Company’s shareholders. In closing, the letter demands attention from the Board. The letter further asks the Board to authorize litigation against Cotton and its affiliated entities for aiding and abetting these supposed breaches. On June 8, 2016, the Company received a demand letter from legal advisors representing Stu Bonnin, who is also purportedly a shareholder of the Company. In addition to alleging a breach of fiduciary duty related to the Merger, the letter also alleges a breach by the members of the Board of their duties of care, candor and good faith by causing the Company to issue materially incomplete and misleading disclosures in the Company’s PREM14A Preliminary Proxy Statement filed on May 31, 2016. Specifically, the letter alleges that the disclosures were deficient and misleading because they did not include information as to the nature and timing of post-merger employment discussions. In closing, the letter demands that the Board take action to disclose the material information allegedly omitted from the Preliminary Proxy Statement.
XML 56 R45.htm IDEA: XBRL DOCUMENT v3.4.0.3
Shareholders' Equity (Allocation of Share-based Compensation) (Details) - USD ($)
$ in Thousands
3 Months Ended
May. 01, 2016
May. 03, 2015
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]    
Share-based compensation $ 1,568 $ 1,997
Direct Operating Expense [Member]    
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]    
Share-based compensation 631 1,028
General and Administration Expenses [Member]    
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]    
Share-based compensation 937 969
Stock Options [Member]    
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]    
Share-based compensation 99 323
Restricted Stock Units [Member]    
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]    
Share-based compensation $ 1,469 $ 1,674
XML 57 R46.htm IDEA: XBRL DOCUMENT v3.4.0.3
Shareholders' Equity (Repurchases of Common Stock) (Details) - USD ($)
$ in Thousands
3 Months Ended 34 Months Ended
May. 01, 2016
May. 03, 2015
May. 01, 2016
Shareholders' Equity [Abstract]      
Shares repurchased under share repurchase authorizations, shares 2,415,000 391,000 8,612,395
Shares surrendered in reimbursement for withholding taxes, shares 30,000 11,000  
Repurchases of common shares, shares 2,445,000 402,000  
Shares repurchased under share repurchase authorizations $ 39,645 $ 7,428 $ 151,200
Shares surrendered in reimbursement for withholding taxes 450 197  
Repurchase of common shares $ 40,095 $ 7,625  
XML 58 R47.htm IDEA: XBRL DOCUMENT v3.4.0.3
Shareholders' Equity (Narrative) (Details) - USD ($)
$ / shares in Units, $ in Thousands
3 Months Ended 34 Months Ended
May. 01, 2016
May. 03, 2015
May. 01, 2016
Equity Disclosure [Line Items]      
Authorization amount for repurchases of common stock $ 255,000   $ 255,000
Shares repurchased under share repurchase authorizations, shares 2,415,000 391,000 8,612,395
Shares repurchased under share repurchase authorization, average price per share     $ 17.56
Value of shares repurchased under share repurchase authorization $ 39,645 $ 7,428 $ 151,200
Repurchases settled during the period 34,200 $ 5,900  
Amount remaining under repurchase authorization $ 103,800   $ 103,800
XML 59 R48.htm IDEA: XBRL DOCUMENT v3.4.0.3
Impairment Charges and Lease Termination Costs (Schedule of Impairment Charges and Lease Termination Costs) (Details) - USD ($)
$ in Thousands
3 Months Ended
May. 01, 2016
May. 03, 2015
Impairment Charges and Lease Termination Costs [Abstract]    
Impairment of long-lived assets $ 500
Lease termination costs:    
Provision for lease termination costs 203 $ 4
Less - reversal of previously recorded accrued rent expense (250)
Total lease termination costs (47) $ 4
Total impairment charges and lease termination costs $ 453 $ 4
XML 60 R49.htm IDEA: XBRL DOCUMENT v3.4.0.3
Impairment Charges and Lease Termination Costs (Narrative) (Details) - USD ($)
3 Months Ended
May. 01, 2016
May. 03, 2015
Loss Contingencies [Line Items]    
Impairment of long-lived assets $ 500,000
Current portion of lease termination costs $ 376,000  
XML 61 R50.htm IDEA: XBRL DOCUMENT v3.4.0.3
Impairment Charges and Lease Termination Costs (Schedule of Lease Termination Liability) (Details) - USD ($)
$ in Thousands
3 Months Ended
May. 01, 2016
May. 03, 2015
Lease Termination Costs [Roll Forward]    
Balance at beginning of period $ 278 $ 116
Provision for lease termination costs:    
Provisions associated with store closings, net of estimated sublease rentals 202
Adjustments to previously recorded provisions resulting from settlements with lessors and adjustments of previous estimates (7) $ 1
Accretion of discount 8 3
Total provision 203 4
Payments on unexpired leases, including settlements with lessors (105) (35)
Balance at end of period $ 376 $ 85
XML 62 R51.htm IDEA: XBRL DOCUMENT v3.4.0.3
Income Taxes (Details) - USD ($)
$ in Millions
3 Months Ended
May. 01, 2016
May. 03, 2015
Jan. 31, 2016
Income Taxes Disclosure [Line Items]      
Effective income tax rate 39.30% 38.10%  
Valuation allowance $ 1.4   $ 1.4
XML 63 R52.htm IDEA: XBRL DOCUMENT v3.4.0.3
Fair Value Measurements (Assets and Liabilities Measured at Fair Value on a Recurring Basis) (Details) - Recurring [Member] - USD ($)
$ in Thousands
May. 01, 2016
Jan. 31, 2016
Level 1 [Member]    
Assets:    
401(k) mirror plan assets $ 2,517 $ 2,158
Level 2 [Member]    
Assets:    
401(k) mirror plan assets
Level 3 [Member]    
Assets:    
401(k) mirror plan assets
XML 64 R53.htm IDEA: XBRL DOCUMENT v3.4.0.3
Fair Value Measurements (Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis) (Details) - USD ($)
$ in Thousands
3 Months Ended
May. 01, 2016
May. 03, 2015
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Reversal of previously recorded accrued rent expense $ 250
Carrying Value [Member]    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Long-lived assets 3,000  
Fair Value, Measurements, Nonrecurring [Member] | Total Gain (Loss) [Member]    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Long-lived assets (500)  
Lease termination liabilities $ 48  
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 1 [Member] | Estimate of Fair Value [Member]    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Long-lived assets  
Lease termination liabilities  
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 2 [Member] | Estimate of Fair Value [Member]    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Long-lived assets $ 2,457  
Lease termination liabilities $ 202  
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level 3 [Member] | Estimate of Fair Value [Member]    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Long-lived assets  
Lease termination liabilities  
XML 65 R54.htm IDEA: XBRL DOCUMENT v3.4.0.3
Derivative Instruments (Effect of Derivative Instuments by Income Statement Location) (Details) - USD ($)
$ in Thousands
3 Months Ended
May. 01, 2016
May. 03, 2015
Derivative Instruments, Gain (Loss) [Line Items]    
Amount of Derivative Gain or (Loss) Recognized in Income $ 447
Not Designated as Hedging Instrument [Member]    
Derivative Instruments, Gain (Loss) [Line Items]    
Gain (loss) recognized in income 447
Gains and Losses on Commodity Derivatives, Net [Member] | Agricultural Commodity Futures Contracts [Member] | Not Designated as Hedging Instrument [Member]    
Derivative Instruments, Gain (Loss) [Line Items]    
Gain (loss) recognized in income (335)
Gains and Losses on Commodity Derivatives, Net [Member] | Gasoline Commodity Futures Contracts [Member] | Not Designated as Hedging Instrument [Member]    
Derivative Instruments, Gain (Loss) [Line Items]    
Gain (loss) recognized in income $ 782
XML 66 R55.htm IDEA: XBRL DOCUMENT v3.4.0.3
Acquisitions (Details) - USD ($)
3 Months Ended 12 Months Ended
Apr. 23, 2015
May. 01, 2016
May. 03, 2015
Feb. 01, 2015
Jan. 31, 2016
Business Acquisition [Line Items]          
Payments to acquire businesses, net of cash acquired   $ 185,000 $ 312,000    
CPG Rights [Member] | Franchise Rights [Member]          
Business Acquisition [Line Items]          
Reacquired franchise rights   $ 185,000     $ 1,600,000
Little Rock Acquisition [Member]          
Business Acquisition [Line Items]          
Net sales       $ 2,700,000  
Payments to acquire businesses, net of cash acquired $ 312,000        
Property and equipment 252,000        
Inventory 27,000        
Reacquired franchise rights 137,000        
Unfavorable lease liability $ 104,000        
XML 67 R56.htm IDEA: XBRL DOCUMENT v3.4.0.3
Subsequent Events (Details) - Subsequent Event [Member] - Jacksonville, Florida Stores [Member]
$ in Millions
May. 02, 2016
USD ($)
stores
Subsequent Event [Line Items]  
Number of stores sold | stores 4
Proceeds from refranchising $ 1.5
Purchase consideration dependent on the future performance 1.3
Carrying amount of assets sold $ 2.5
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