Krispy Kreme Doughnuts Inc. (KKD) posted second quarter 2012 adjusted earnings of 6 cents per share, in line with the Zacks Consensus Estimate. However, on a GAAP basis, earnings in the quarter came in at 12 cents per share compared with 3 cents per share in the prior-year quarter. GAAP earnings included a gain on the sale of the company's equity interest in its Mexican franchisee.
Total revenue climbed 11.4% year over year to $87.9 million in the quarter. The company witnessed revenue growth across all its segments. Within segments, company stores revenues jumped 10.0% year over year to $66.0 million, Domestic franchise revenues increased 13.3% to $2.3 million, International franchise revenues escalated 33.5% to $5.4 million while KK Supply Chain revenues (excluding sales to Company stores) surged 12.1% to $50.3 million largely driven by price increases across all major product categories.
Same-store sales at Company stores rose 2.5%, reflecting the eleventh consecutive quarter of comps growth. Domestic franchise same-store sales grew 6.3%, but International franchise same-store sales plunged 11.7% mainly due to cannibalization from over 300 stores that were opened internationally over the past 3 years. Additionally, the after-effects of tsunami in Japan also hurt international comps by 4-5 percentage points in the quarter.
Direct operating expense, as a percentage of total revenue, dipped 21 basis points to 87.5% and general and administrative expenses dropped 57 basis points to 5.0%. As a result, operating income shot up 19.5% to $4.9 million. Interest expense reduced to $0.4 million from $1.6 million posted in the prior-year quarter due to lower debt.
Store Update
During the quarter, Krispy Kreme opened 22 franchise stores and 2 company-owned stores and closed 7 franchised stores. At the end of the quarter, the company had 88 company stores and 581 franchise stores.
Financial Position
Krispy Kreme ended second quarter 2012 with cash and cash equivalents of $32.3 million and shareholders’ equity of $96.9 million. As of July 31, 2011, long-term debt less current maturities was $25.6 million versus $32.9 million as of January 30, 2010.
Outlook
The company reaffirmed its fiscal 2012 outlook for operating income in the range of $22 million to $24 million, and expects to achieve the high end of the guided range based on strong second quarter earnings.
Our Take
Krispy Kreme’s earnings growth momentum remains on track. The company also remained optimistic on achieving the higher end of its operating outlook. The company also remains committed to expanding its business both internationally and domestically. The company has started 2012 on an optimistic note and we expect the same trend to continue for the remaining part of year.
One of Krispy Kreme’s primary competitors, Red Robin Gourmet Burgers Inc. (RRGB) reported second quarter 2011 adjusted earnings of 48 cents per share, which comprehensively beat our estimate.
Krispy Kreme currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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