Overview of company operations.
Krispy Kreme had its 15th consecutive quarter of increased same store sales. All business segments had improved performance.
Krispy Kreme achieved higher retail traffic through its quarterly marketing promotions, which included National Doughnut Day in June and Krispy Kreme's 75th birthday in July.
In wholesale, Krispy Kreme had an increase in the average weekly sales per door due to higher volume, but a decline in the number of doors in both wholesale channels. The decline in the number of doors is the result of store closures, product offering decisions, and ongoing route rationalization. Krispy Kreme has closed some doors on its volition because wholesale is a low margin business and it does not want to chase sales.
Krispy Kreme's recent consumer research has revealed the following findings: (1) the company has an untapped potential for doughnuts, (2) consumers are looking for more excuses to eat Krispy Kreme doughnuts, (3) consumers are willing to eat doughnuts any time of the day or night, (4) Krispy Kreme is viewed as a special brand that gives a special reward, (5) Krispy Kreme is viewed as an American classic and all consumers love the brand, whether or not they eat doughnuts, (6) consumers enjoy the sensory experience in the shops, and (7) hot doughnuts is a key element of the brand.
As a result of this research, Krispy Kreme's focus will be on enhancing the doughnut shop experience and creating more excuses for eating doughnuts. The National Doughnut Day and 75th birthday were examples of this strategy.
Krispy Kreme is also focusing on building awareness of its beverage program, which consumers have viewed as complementary to its doughnuts. It is offering new drip coffees, ice coffees, specialty coffee, frozen chillers and new iced tea. It will be rolling out espresso specialty drinks in October. Its beverage volume increased by approximately 7.6 percent and drip coffee volume increased by 5.4 percent in Q2. Krispy Kreme's goal is for coffee to go from 4 percent of its product mix to 12 percent and for beverages to go from 12 percent to 20 percent.
Krispy Kreme is continuing to build small factory shops. It opened a small factory store in Q2 in Greater Charlotte, North Carolina. It expects the number of partners in its small shop model to increase as those shops continue to deliver strong financial results.
Krispy Kreme has only 141 domestic franchise locations. Accordingly, it has plenty of room to grow the franchise base and believes it can do so in a disciplined manner. It has also announced international franchise development agreements in India and Russia. It expects more such agreements before the end of the year. It currently has 390 shops internationally and had 24 openings in Q2. It's goal is to have 900 international locations before the end of fiscal year 2017.
Krispy Kreme had purchased all flour and shortening requirements for the remainder of the year and it is currently purchasing flour and shortening for the first and second half of next year. It expects doughnut mixes and shortening prices to decline slightly in the second half of fiscal year 2013, but for flour and shortening costs to increase in fiscal year 2014. It has purchased sugar well into fiscal year 2015 at prices slightly higher than today's prices.
Financials.
Revenues increased by 4.3 percent. Same store sales increased by 5.4 percent. No price increases led to the increase. International franchise stores declined 10 percent as a result of the honeymoon effect of a substantial number of opening in the prior year comp period.
Krispy Kreme believes it can continue comp improvement, but cautions it will not be strong for the rest of the year. It expects same store sales for fiscal year 2013 to be in the low single digits.
Supply chain revenues increased by 2 percent.
Operating income increased by 87 percent in Q2. Krispy Kreme expects operating income in fiscal year 2013 to be between $29 and $33 million versus $25.6 million in fiscal year 2012.
EPS in Q2 doubled to $.12. Krispy Kreme expects adjusted EPS in fiscal year 2013 to be between $.36 and $.42.
The transcript of the earnings conference call can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/823341-krispy-kreme-doughnuts-ceo-discusses-f2q13-results-earnings-call-transcript?part=single
Copyright 2012 Jaygo's Earnings Conference Call Summaries
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