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Krispy Kreme Doughnuts Inc. (KKD - Snapshot Report) posted first quarter 2013 adjusted earnings of 12 cents per share. The results surpassed the Zacks Consensus Estimate by 7 cents and the year-ago earnings by 6 cents. On a reported basis, Krispy Kreme earned quarterly earnings of 7 cents per share.

Total revenue climbed 4.3% year over year to $102.1 million in the quarter. Within segments, company store revenues grew 5.1% year over year to $69.3 million, Domestic franchise revenue increased 3.4% to $2.4 million and International franchise revenue escalated 8.0% to $5.8 million, driven by higher royalty revenues. Total KK Supply Chain revenues inched up 2.2% year over year to $51.5 million.  

Same-store sales at company stores increased 5.4%, reflecting the 15th consecutive quarter of comps growth. Domestic franchise same-store sales grew 6.7%, but International franchise same-store sales fell 10.0%. Operating income in the quarter expanded 87% to $9.0 million in the second quarter of 2012.

Store Update

During the quarter, Krispy Kreme opened one company-owned and 24 franchise stores. The company also closed 6 franchised stores. At the end of the quarter, the company operated 93 company stores and 618 franchise stores.

Liquidity

Krispy Kreme ended the second quarter of 2013 with cash and cash equivalents of $41.0 million and shareholders’ equity of $235.1 million. Long-term debt less current maturities was $24.3 million versus $25.4 million as of January 29, 2012.

Share Repurchase

During the quarter, the company completed its $20 million share repurchase program with the repurchase of 2,858,000 shares at an average price of $6.35 per share.

Outlook

Krispy Kreme reaffirmed its outlook for 2013, but expects overall results to be at the higher end of the previously guided range. The company continues to expect operating income in the range of $29 million to $33 million, inclusive of impairment and lease termination costs. Earnings are expected between 22 cents and 25 cents per share. On an adjusted basis, management expects earnings per share of 36–42 cents, which includes only income tax. The big difference in both guidance is due to an estimated tax rate of 45% for 2013. The burden of the increased tax rate arises out of the reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012. Moreover, both the adjusted and GAAP EPS range for 2013 is a penny higher than the previously guided range, aided by the completion of the $20 million share repurchase program.

In 2013, the company plans to open 5 to 10 company stores, 10 to 15 domestic franchise stores and more than 75 international franchise stores.

Our Take

Krispy Kreme remains focused regarding its expansion plan, menu innovation and development of its beverage line.  Last year, Krispy Kreme introduced Coffee Blends in cups, brew boxes and fresh retail bags for home brewing. Buoyed by the strong results in coffee transactions, the company now looks steadfast to triple its coffee sales by the end of fiscal 2015. Moreover, Krispy Kreme puts concerted efforts to improve its menu in order to drive traffic, particularly on doughnuts, which is preferred by a large number of customers.
 
The company also remains committed to expand its business in both international and domestic markets. Management targets to operate 900 international stores by the end of fiscal 2017. Krispy Kreme is also focusing on building new, smaller factory stores in order to increase its presence in smaller markets.
 
However, stiff competition, lower consumer confidence, higher input costs and effective income tax rate remain areas of concern.
 
Krispy Kreme, which competes with the likes of Einstein Noah Restaurant Group, Inc. (BAGL - Snapshot Report) and Dunkin' Brands Group, Inc. (DNKN - Snapshot Report), currently carries a Zacks #1 Rank that translates into a short-term Strong Buy rating. We are also maintaining our long-term Neutral recommendation on the stock.

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