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Krispy Kreme sees recovery in U.S., but challenges abroad

Company posts its first profit in 7 years, but sales drop overseas

Krispy Kreme Doughnuts Inc. said last week it had turned the corner in its core U.S. market after six years of declining systemwide sales and seven years of net losses, but the company acknowledged major erosion in same-store sales overseas.

Details about international franchise operations released March 31 with Krispy Kreme’s fourth-quarter and full-year financial results for the fiscal year ended Jan. 30 may have struck a familiar chord with domestic franchisees of the brand who survived the massive rollback in U.S. sales and locations since fiscal 2005.

Krispy Kreme "posted our first year-over-year growth in revenues since fiscal 2005, and completed our second consecutive year of same store sales growth at company stores," James H. Morgan, chief executive and president of the Winston-Salem, N.C.-based company, said in a statement.

Morgan said those developments, among others, including improved operating income, “led to our first profitable year since fiscal 2004.”

For the latest fiscal year, Krispy Kreme reported net income of $7.6 million, compared with a loss of $157,000 a year earlier, and aggregate losses of $406.3 million since the fiscal year ended in January 2004.

In a conference call with analysts and investors, Morgan said the company plans to open five to 10 stores in the current fiscal 2012, while franchisees are expected to open five to 15 new units domestically and more than 30 new branches in international markets.

“We expect growth in same-store sales at domestic stores, and hope to see continued improvement in international franchise trends, although international same store sales comparisons will remain under pressure due to the substantial expansion in recent years,” Morgan said.

U.S. franchisee same-store on-premise sales, versus those made to nearby convenience or grocery stores or other resellers, increased 4.5 percent in fiscal 2011, compared with growth of 0.9 percent in fiscal 2010 and a decrease of 3.3 percent the preceding year, the company said.

Though the erosion of same-store on-premise sales lessened for international franchisees during fiscal 2011, to a drop of 8.8 percent, that decline came on the heels of a 24.2-percent decrease in fiscal 2010, a 23.4-percent dip in fiscal 2009 and an 11.0-percent falloff in fiscal 2008.

The number of international franchise stores jumped from 199 to 417 between the end of fiscal 2008 and fiscal 2011.

“Constant dollar same-store sales at international franchise stores fell 11 percent, reflecting, among other things, honeymoon effects from the approximately 300 stores opened internationally in the past three years, as well as cannibalization as markets develop,” Douglas Muir, Krispy Kreme’s executive vice president and chief financial officer, said during the conference call. “We continue to see moderation in the rate of decline in international comps as the decline in the fourth quarter was down substantially from the fourth quarter last year.”

Domestically, the number of franchise units declined by a net of one unit between the end of fiscal 2008 and fiscal 2011, to 144 restaurants, though that number represented a net addition of three locations from the previous year.

Krispy Kreme’s U.S. systemwide sales were $483.2 million in the latest year, up 4.1 percent from fiscal 2010, ending six years of declines in systemwide sales that, in half of those periods, registered in the double digits.

The U.S. system got over the hump by bumping its total domestic store base by 2.2 percent, to 229 units, while building estimated sales per unit by 3.2 percent, to $2.13 million, compared with the previous year.

In comparison, at its high point to date – the fiscal year ended in January of 2005 – Krispy Kreme reported U.S. systemwide sales of $1.04 billion from 396 locations and had estimated sales per unit of $2.73 million.

International same-store sales woes aside, Krispy Kreme worldwide system sales rose 11.1 percent, to $808.4 million, on improving domestic unit sales and an 11-percent gain in total units, to 646.

But it was the changing fortunes within Krispy Kreme’s home U.S. market, from which it derives 89.8 percent of its total revenues, that helped the company finally put a halt to its long string of net losses.

Worldwide, for the year ended in January, Krispy Kreme's revenue from all sources, including supply-chain sales, rose 4.5 percent, to $362 million, compared with a decrease of 10.1 percent for the fiscal year ended in January 2010.

Contact Alan J. Liddle at [email protected].

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