Krispy Kreme Doughnuts, Inc. (KKD)

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Krispy Kreme Doughnuts, Inc. (KKD)

F3Q2013 Earnings Call

November 19, 2012 4:30 pm ET

Executives

Anita Booe - Director of Investor Relations

James Morgan - Chairman of the Board, President, Chief Executive Officer

Douglas Muir - Chief Financial Officer, Executive Vice President

Analysts

Michael Gallo - C.L. King & Associates

Will Slabaugh - Stephens Inc.

Conrad Lyon - B. Riley & Co.

Nick Setyan - Wedbush Securities

Howard Rosencrans - Value Advisory

Jerome Kaplan - Value Line, Inc.

Presentation

Operator

Good day, ladies and gentlemen and welcome to the 2013 Krispy Kreme Doughnuts Incorporated third quarter earnings conference call. My name is Kim. I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Ms. Anita Booe. Please proceed, ma'am.

Anita Booe

Good afternoon, and welcome to the Krispy Kreme third quarter conference call. My name is Anita Booe and I am the Director of Investor Relations. On the call with me today are Jim Morgan, President and Chief Executive Officer and Doug Muir, Executive Vice President and Chief Financial Officer.

Some of the information in today's press release and statements on today's call includes forward looking statements that reflect our expectations or beliefs about the future including but not limited to our expectations and beliefs regarding financial performance. We cannot assure you that we will achieve or realize these expectations.

Like any such statements, they are subject to a number of factors, risks, and uncertainties that could cause actual results to differ materially from our expectations or beliefs. These factors include items discussed today and in our SEC filings, including our annual report on Form 10-K for fiscal 2012.

I would now like to turn the call over to Jim.

James Morgan

Thank you, Anita, and good afternoon everyone. We enjoyed an outstanding quarter at Krispy Kreme despite the current economic challenges and overall consumer uncertainty. We have often referred to Krispy Kreme as an affordable indulgence and that description was strongly affirmed in the most recent quarter.

We had an 8.5% increase in total revenues with improvements in both revenues and operating income in each of our forward business segments. Revenues were driven in part by the 6.8% increase in same store sales at company stores, the 16th consecutive quarterly increase. This improvement was driven by higher traffic and was accomplished without any pricing assistance.

In the wholesale channels, we had an increase in average weekly sales per door in both grocery mass merchants and convenient stores, all of which was driven by higher volumes. We achieved impressive leverage of our top line growth as operating income and adjusted earnings per share grew 66% and 71% respectively, on an 8.5% revenue gain.

While we are very pleased with these results, we continue to see significant untapped opportunities for Krispy Kreme. Therefore, let's now talk about our ongoing initiatives to capitalize on those opportunities, initiative that we believe will substantially increase revenues, improve margins, and expand the Krispy Kreme domestic and international franchise system, while growing shareholder value over the long term.

On the development front, we added a net 20 Krispy Kreme stores in the quarter, including one new company store and 19 new franchise locations. We ended the third quarter with 731 Krispy Kreme stores system wide, over 85% of which are franchised. In the quarter, we announced a new international franchise development agreement for Singapore and earlier this year, we announced two new development agreements for India and one for Moscow. We anticipate announcing additional new international development agreements in coming quarters.

We continue to be a small factory shop with full doughnut making capabilities as a driver in developing domestic markets. Combined with our two primary satellite formats, we will have the suite of shops concepts we need to bring the Krispy Kreme experience to millions more consumers, and we expect to do so at lower investment costs and with superior operating performance compared to our traditional formats.

We opened a new small factory shop in the Greater Charlotte, North Carolina market last week and it features our new one 110M production line, a totally revamped production system that has the capacity to meet consumer demand but occupies much less square footage than our traditional production line.

In terms of domestic expansion, with only 238 shops in the United States, we clearly have lots of room to grow. We plan to open five to 10 new company shops next year and we expect existing franchisees to open as many as 15 new locations. We are interviewing candidates for our Vice President of franchise development position to lead domestic franchise marketing and we are taking other steps in preparation of expanding the number of domestic franchisees.

In addition to these initiatives, we are working to enhance the value of our most cherished asset, our Krispy Kreme brand. We recently shared the key findings from our domestic consumer research which said more consumers will buy more doughnuts if we provide them with reasons and opportunities to do so. Therefore, our immediate focus remains on enhancing our core doughnut offerings, continuing to enhance the doughnut experience and creating more doughnut use occasions.

Consumers also view our beverage program as complimentary to our doughnuts and we continue to focus on building top of mind awareness for our entire beverage line-up and for drip coffees, iced coffees and specialty coffees in particular. Consumer response has been positive. We remain excited about our enhanced beverage program and are relentlessly pursuing its growth but we must emphasize that it remains a work in progress.

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