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8-K - CURRENT REPORT - KRISPY KREME DOUGHNUTS INC | krispykreme_8k.htm |
MANAGEMENT DISCUSSION SECTION
Operator: Good day, everyone, and
welcome to the Krispy Kreme Doughnuts Incorporated Fourth Quarter 2010
Earnings Conference Call. Today’s call is being recorded. At this time, I
would like to turn the call over to Ms. Anita Booe, Director of Investor
Relations for Krispy Kreme. Please begin when ready, Ms. Booe.
Anita Booe, Investor Relations
Thank you. Good afternoon, everyone.
Once again, let me apologize for the inconvenience that we may have caused
you. We welcome you to the Krispy Kreme Fourth Quarter Fiscal 2010
Earnings Call. As said, my name is Anita Booe, and I’m 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.
As you know, some of the statements in
our public filings and in today’s call reflect our expectations or beliefs
about the future. 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 can 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, which was filed today. Please note that all of our SEC
filings, along with other shareholder relevant information, can be found
on the IR portion of our website at www.krispykreme.com.
I will now turn the call over to Jim.
James H. Morgan, Chairman, President and
Chief Executive Officer
Thank you, Anita, and good afternoon to
everyone, and before I begin, I would like to add my apology to the one
that Anita gave you. I have – I spent a number of year sitting on your
side of the call and I know how precious 30 minutes is and how crammed
this particular time of year is, so we greatly apologize for the glitch
and hope that the information we provide will be well worth the wait.
I also want to begin by acknowledging
that our formal remarks are likely to run a little longer than they have
historically, and accordingly, we’d just ask for your patience. We believe
the information that we’re going to give you is key to your understanding
of our business and, more importantly, our strategy going forward.
Fiscal 2010 was a year of many
challenges for our business and for the industry as a whole. Our financial
results improved, but more importantly, the strategic initiatives we
instituted during fiscal 2009 gained traction and began to yield tangible
results. While we are confident that we have a firm foundation on which to
build, we know that continued execution is key to creating long-term
value.
Let me give you a few of the highlights
of this past fiscal year. Same-store sales at company stores rose 3.5%.
Despite a 10% decline in total revenues, our operating income more than
doubled to 11.8 million. In particular, we experienced a dramatic swing
year-over-year in company stores, which generated 2.3 million in operating
income, compared to an operating loss of 9.8 million in fiscal 2009.
We ended the fiscal year with 582 Krispy
Kreme stores across the U.S. and in 18 other countries. Together with our
franchise partners, we opened a net total of 59 Krispy Kreme stores in
fiscal 2010, and in particular, increased the number of smaller stores
across the system by 72. We signed development agreements for Thailand,
the Dominican Republic, and Albuquerque, New Mexico, and we opened our
first stores in China, Turkey and Malaysia.
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We currently have commitments for almost
200 new stores, both domestically and internationally. This is not as big
a pipeline as we’d like, but it’s one that we can build upon, now that we
have established the infrastructure to support franchise development in
both our domestic and international markets.
We placed a high priority on generating
free cash flow and reducing our leverage in fiscal 2010, and we
accomplished both of these objectives. Cash provided by operating
activities increased 19%, while debt fell by 42%, and we’re continuing to
evaluate ways to further improve and strengthen our balance sheet.
Switching gears now, let me talk about
our plans for 2011, which will build on the strategic initiatives we’ve
discussed on prior calls, and which we have summarized in the Annual
Report.
First, we continue to develop, test, and
refine our smaller satellite stores that are supplied through the
hub-and-spoke distribution model. We are also testing smaller factory
stores. These efforts offer a number of improvements to our operating
model, including reduced investment cost for a given level of sales, along
with greater efficiencies and quality consistency through centralized
production. Because these smaller stores serve only on-premises customers,
our team members in the stores can devote themselves exclusively to
delivering a quality product, and enhancing the in-shop guest experience.
By shifting to the smaller shop focus
and increasing the number of Krispy Kreme retail shops, we can potentially
increase on-premises sales of doughnuts and complementary products.
Establishing these small retail locations in high-traffic areas will make
us more convenient for our customers and, over time, should enable us to
achieve sufficient store density so that we can leverage broadcast media
advertising.
During fiscal 2010, we opened 6 new
company-owned small shops in the Southeast, in markets that we have
identified as attractive for new shops. All of these markets have
characteristics that are well-suited for our hub-and-spoke model,
including a history of success with our brand, along with an existing base
of factory shops from which to build. We plan to develop other domestic
markets, those outside the Southeast, through our existing franchising
network, as well as by attracting new franchisees to our brand.
The evolution of our business model is
not limited to providing our customers with greater convenience; it also
includes developing and deploying additional menu offerings so that
customers have more reasons to visit their local Krispy Kreme store.
Another objective is to improve sales in
relatively slower day parts and seasons. We are, therefore, continuing to
test our Kool Kreme soft serve line of traditional cones, shakes and, yes,
doughnut sundaes that can be paired with a variety of toppings. We will
soon complete deploying our soft-serve platform in four company and three
franchise markets, and this positions the product for meaningful exposure
over the summer months.
Improving our beverage sales also
represents a substantial opportunity for our brand. Beverages comprised
less than 12% of our total retail sales in fiscal 2010. Therefore, we
believe there is substantial sales upside in the beverage category. In
fiscal 2010, just over half of our shop sales were to off-premises
customers, including the grocery and convenience store channels. The
number of doors we served declined in both of the channels. Some of that
decline was initiated by us, as we worked to rationalize delivery routes
and reduce the number of low volume stops.
In the convenience store channel, we
also lost doors from two major chains; they took their doughnut programs
in-house this year. The average weekly sales per door was up 11% in
grocery last year, but down 4% in convenience stores, although the trends
in per-door averages are
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positive in both channels. To spur more
off-premises sales, we are introducing and marketing new, longer
shelf-life products.
Our initiatives in both on-premises and
off-premises are not limited to the top-line. We believe we can improve
our operating margins by creating and deploying more effective tools,
including labor and food cost management tools, by enhancing our
hospitality service and cleanliness standards, and by continuously
training our people. We are also modernizing our delivery fleet and
enhancing customer service to improve the economics of our off-premises
distribution.
Over time, it is this kind of blocking
and tackling that can have a large impact on our margins. As I mentioned
earlier, we also view the success of our franchisees and the expansion of
our franchise base, both domestically and internationally, as a key
measurement of our success. We are devoting additional resources to
supporting their operations, including increasing the number of personnel
in the field, as well as adding resources in the supply chain, to more
effectively manage what is becoming an increasingly global business.
On a related note, our international
franchisees’ expansion in the past three years has been outstanding, with
international stores growing from 123 to 358, and from 31% of our total
store count to 62%. Krispy Kreme is now represented in 18 foreign
countries around the world, and we view ongoing international growth
potential as a very significant part of our future. In the past few years,
we have focused on opportunities in Asia and in the Middle East, and this
year we will add to these ongoing development efforts with initial
franchisee discussions in Europe.
I know I’ve covered a lot of topics here
today, and I look forward to providing you with ongoing updates on these
items over the coming quarters. I will now turn the call over to Doug.
Douglas R. Muir, Executive Vice
President, Chief Financial Officer and Treasurer
Thank you, Jim, and good afternoon,
everyone. Let me start off by reviewing the highlights of the fourth
quarter. Total revenues decreased 5.6% to 87 million in the quarter, while
operating income increased to 2.4 million from 1.5 million in the prior
year. We showed year-over-year improvement in 3 of our 4 business
segments.
company stores generated 61 million in
revenues, a 5% decrease from the fourth quarter last year. The decline was
a function of the change in the company store base, as we either closed or
refranchised 8 stores over the past 5 quarters. Refranchising company
stores accounted for about $1 million of the sales decline. Refranchising
is likely to have a bigger impact on year-over-year sales comparisons in
the future, and we will be giving you data going forward, to quantify the
effects of refranchising on our revenue comparisons.
Same-store sales rose 1.1% in the fourth
quarter, a slower rate than in the 3 preceding quarters, and we attributed
that, at least in part, to unusually inclement weather. In the
off-premises channel, grocery sales rose year-over-year for the second
straight quarter, and we continued to reduce the erosion of average sales
per door in convenience stores, while raising average sales per door in
grocery by 13% year-over-year.
company stores incurred an operating
loss of 700,000, compared to an operating loss of 800,000 last year. The
fourth quarter of 2010 includes a charge of $950,000 for the settlement of
wage and hour litigation in Northern California. That charge was more than
offset by a $2 million favorable adjustment to self-insurance reserves,
principally related to workers’ compensation. The comparable favorable
adjustment on insurance in the fourth quarter last year was $1 million.
In the Domestic Franchise segment,
fourth quarter revenues of 2 million were up slightly year-over-year.
Domestic franchisees saw the same slowdown in same-store sales in the
fourth quarter that
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we saw in our company stores. Same-store
sales at domestic franchisees were down 0.4% for the quarter.
Operating income for the Domestic
Franchise segment was 800,000, down from 1.2 million last year, reflecting
increased resources devoted to franchisee support and higher allocated
management costs. As we have said in prior calls, we are increasing our
investment in franchisee support, including marketing support, as well as
incurring costs to improve our in-store merchandising in the off-premises
business, a portion of which is being charged to the Domestic Franchise
segment.
In the International Franchise segment,
sales by franchisees were 74 million, up 6 million from last year. The
entire increase is due to more favorable exchange rates. Same-store sales,
adjusted to eliminate the effects of changing foreign exchange rates, were
down 19% in the fourth quarter, which is about where they have been
running for the past couple of years.
The same-store sales decline reflects
the large number of store openings in the last 3 years, many of which are
coming off their honeymoon sales levels. Cannibalization of existing
stores by new stores in certain markets also contributed to the decline.
Still, sales at new stores largely offset lower sales at existing stores.
We’ve had a net increase of 60 International Franchise shops over the past
year.
Revenues in the International Franchise
segment were up 12% to 4.6 million, and operating income increased to 3.4
million in the fourth quarter from 2.8 million last year. While we were
pleased the incremental revenue dropped to the bottom line, as we’ve said
on earlier calls, we are increasing our spending on international
franchisee support and you should not expect International Franchise
operating expenses to stay flat going forward.
Total KK Supply Chain sales were down
10% in the quarter, or about 4.5 million, to $40 million. The decrease
reflects lower unit sales of doughnut mix and ingredients, due to lower
sales by company and domestic franchise operations, as well as lower
selling prices of doughnut mix and shortening, compared to last year.
However, operating income was up 800,000 to 6.6 million, reflecting, among
other things, lower freight and other distribution costs.
General and administrative expenses were
5.5 million in the fourth quarter, compared to 6 million in the same
period last year. This year’s fourth quarter included a non-recurring
credit of 1.3 million from the receipt of additional insurance proceeds
related to the securities class action suit that was settled way back in
October of 2006. The last element of the related shareholder derivative
action was also settled in February, so we do not expect further charges
and credits related to these matters.
We incurred 2 million in impairment and
lease termination costs during the fourth quarter, compared to 1.2 million
in similar charges in the same period last year. This year’s charges were
related principally to 3 stores that are underperforming, but which we
have no current plan to close.
Interest expense was 2.3 million, down
1.1 million from last year. Interest expense last year included a $900,000
mark-to-market charge on an interest-rate derivative and there was no
comparable charge in the fourth quarter of fiscal 2010.
Other non-operating income and expense
was 80,000 in the fourth quarter of 2010, while last year’s fourth quarter
included a non-cash gain of 2.8 million on the refranchising of our 4
stores in Eastern Canada. We had a $200,000 benefit on the income tax line
in the fourth quarter, compared to a $1.1 million charge last
year.
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The tax benefit in this year’s quarter
includes about $560,000 for additional federal tax refunds as a result of
recent legislation enacted by Congress. Most of last year’s tax provision
was a $1.2 million tax charge related to that refranchising gain in
Canada.
Finally, we reported net income of
520,000 for the quarter, compared to a net loss of 303,000 in the same
period last year.
In terms of our financial condition and
liquidity, cash provided by operating activities in fiscal 2010 was 19.8
million, up 16.6 million from fiscal 2009. We ended the year with 20
million of cash, even after making a total of 32 million in principal
payments on our indebtedness, reducing its principal balance to just over
43 million at yearend. Our net debt position, which we consider a little
more meaningful, was a very manageable 23 million at yearend. We also have
10 million of unused borrowing capacity on our revolver, so we continue to
feel pretty good about our ability to execute our plans going
forward.
I’d now like to discuss our outlook for
fiscal 2011. Please remember Anita’s a caution about forward-looking
statements at the beginning of today’s call, and please review the notice
about forward-looking statements, as well as the risk factors that appear
in our 10-K.
First, at company stores, total sales
were 246 million in fiscal 2010. Roughly 15 million of that was
attributable to stores that we have either closed or refranchised, making
our run rate, or base sales level, in company stores about 231 million
going into fiscal 2011.
We think our on-premises business is
poised to grow after a number of years of declining revenues tied to
declining store count. We anticipate low to mid-single-digit same-store
sales growth in the on-premises business, inclusive of pricing. With
respect to off-premises, our goal is to hold on to the grocery channel
gains of fiscal 2010, while expanding that success into convenience
stores, a channel where we have continued to face revenue pressure, mainly
from the loss of doors. We currently look for off-premises sales to be
flat to slightly up in fiscal 2011.
In fiscal 2011, we expect the first
increase in the total domestic store count since 2005, as we look to
improve and refine the hub-and-spoke store model. We plan to open between
7 and 10 new small shops, and we’ll also see the lapping effect in fiscal
2011 of the 6 stores we opened this year.
We forecast that higher input costs, led
by sugar, are likely to increase our ingredient costs by about 4 million
in fiscal 2011, and higher fuel costs are likely to add another 1 million,
or so to expenses. We hope to recoup most of that through pricing; a lot
will depend on how volumes are affected by price increases, particularly
in the off-premises channel.
In fiscal 2010, company store operating
income of 2.3 million included favorable insurance adjustments of 3.2
million that may not be repeated, or if they do repeat, probably will not
be as large next year as they were this year. This segment also took 1.7
million of litigation charges in fiscal 2010. Excluding these items,
company stores operating income was about $1 million. We currently expect
the company Stores segment to report a relatively small operating loss in
fiscal 2011.
Second, in the Domestic Franchise
segment, we think we have a greater opportunity to benefit from store
openings than be hurt by store closings in fiscal 2011. Accordingly, we’re
forecasting modestly higher franchisee sales and related royalty revenues,
notwithstanding unanticipated continued, but moderating, decline in
off-premises sales by our domestic franchisees. We currently estimate
domestic franchisees will open as many as 10 new stores in fiscal ‘11.
However, any gains in this segment from higher royalties will likely be
offset by higher support costs in the segment.
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We note that the hub-and-spoke model has
already taken root in two new franchise markets, where 12 stores have been
opened in the past 2 years, consisting of 3 factory stores and 9
satellites. On Tuesday, we announced that we had signed a development
agreement for 21 stores in the Greater Philadelphia market. All 3 of these
new franchisees are focusing exclusively on the on-premises restaurant
business.
Third, in the International Franchise
segment, it’s challenging to forecast the coming year, because
international markets are in so many different places on the growth curve.
The absolute average unit volumes in some major markets are encouraging,
but we expect to see continued pressure on International Franchise comps
due to honeymoon and cannibalization effects. While we expect to see
continued store growth by international franchisees, the number of store
openings in fiscal 2011 is likely to be down from the net 60 openings in
fiscal 2010, perhaps by as much as half. Therefore, we expect
international franchisee sales in fiscal 2011 to be largely similar to the
results in fiscal 2010.
We plan to continue to increase
investment in our International Franchise operations this year in order to
strengthen our franchisee recruiting efforts and to put more resources on
the ground overseas. Consequently, we expect International segment
operating income to decline in fiscal 2011.
In the Krispy Kreme Supply Chain, given
our current view of store sales in the other 3 segments, we do not see a
lot of revenue upside in the Supply Chain relative to fiscal 2010, in
which the Supply Chain posted sales of 162 million and operating income of
26 million. We forecast that KK Supply Chain operating income will be more
or less flat next year.
We expect G&A expenses of between 19
and 21 million for the full year.
Looking at all the segments combined,
and based on the factors I just discussed, we forecast that fiscal 2011
consolidated operating income will be roughly similar to the $12 million
we earned in fiscal 2010.
Looking at interest expense, the current
run rate is about 1.7 million per quarter.
In terms of income taxes, we currently
estimate income tax expense of roughly $1 million for fiscal 2011. I
should point out that because we are carrying a reserve for all of our net
deferred income tax assets, our income tax expense has no direct
relationship to pre-tax income.
All told, our current expectation is
that we will report a net profit in fiscal 2011.
The last item I want to touch on is
capital expenditures, which we currently expect to be in the range of 13
to 17 million.
At this time, I’d like to turn the call
back over to Jim.
James H. Morgan, Chairman, President and
Chief Executive Officer
Thank you, Doug. Some of you may
remember comments from our June 2008 shareholders meeting, when we
announced a series of strategic initiatives designed to lay a solid
foundation for future growth. We said it then, that the benefits of that
strategy implementation would not be clearly visible for at least 2 years.
We were debt-laden. We were handcuffed by lender covenants. We had little
free cash flow to invest in our future. We also had a myriad of other
problems, such as poor franchisee relationships, a rapidly declining
revenue base and a legacy of lawsuits and government investigations, to
name just a few.
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Despite these challenges, and with a
renewed commitment to our shareholders, we were determined to move forward
with confidence and with a brand and a product that we believe, were truly
iconic.
And while we have more work to do, there
has been significant progress over the last 22 months. Our net debt of
slightly over 23 million is manageable and our survival is no longer in
question. We are well clear of our bond covenants and we’re increasingly
looking for ways to strengthen our balance sheet. The legacy lawsuits and
government investigations are in the past. Our cash flow is healthy and we
have budgeted in excess of $13 million this year for capital expenditures,
much of which will be devoted to store renovation and prudent construction
of new stores.
We have openly admitted to our
franchisees that we had fallen short of their expectations of us as their
franchisor. We have set a goal of becoming a world-class franchisor, and
we’re developing strong and trusting relationships with our franchisees.
We are now providing our incredible group of franchisees value-added
support in areas, such as marketing and store operations.
We are also deploying tools to assist
them in areas of cost of goods sold, labor management and other areas, and
we have arrested the decline in off-premises grocery store sales and have
reenergized the off-premises business by rationalizing routes and
beginning to introduce new, longer shelf-life products. In addition, we
have slowly begun to add new domestic franchisees. We have achieved
positive same-store sales in our company stores for 5 consecutive
quarters. We have continued our measured and successful international
expansion and we are trial testing new products to create broader appeal,
addressing both seasonal and day part issues.
Despite this progress, fiscal 2011 will
still be part of the transition I spoke about a year and a half ago, but I
do believe that 12 months from now, we will have made more demonstrable
progress toward achieving our goals, and that our progress will be
increasingly evident.
I will conclude this portion of my
comments with a deep conviction that goes beyond fiscal 2011. The
groundwork for success has been laid by our team members and our
franchisees, the 2 groups who are largely responsible for our corporate
turnaround. There is no doubt in my mind that Krispy Kreme is once more
positioned to grow measurably in calendar 2011 and beyond.
New franchisees have joined us and
they’re off to a good start – Phoenix, Albuquerque, Japan, Puerto Rico and
others. In addition, we have new franchisee commitments in Philadelphia,
the Dominican Republic and in Thailand, where initial stores should open
this year. We are continually working on the model in order to reduce both
supply chain cost to our franchisees and operating costs in every single
store.
Small store development will be a key
factor in our success, and I believe deeply that Krispy Kreme will become,
if it is not already, one of the most recognizable and beloved brands in
the world.
In closing, I want to thank our
customers, our guests, our team members and our franchisees for their
ongoing support, and I also thank you for your time today.
Now I will return the call back to
Anita.
Anita Booe, Investor
Relations
Let me remind you that a webcast of
today’s call will be archived on the IR portion of our website at
www.krispykreme.com. With that, Melanie, we’re ready to take
questions.
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QUESTION AND ANSWER SECTION
Operator: Thank you, Ms. Booe. [Operator Instructions] And we will
go first to Jonathan Waite from Precipio Research.
<Q – Jonathan Waite>:
Yeah, hi, everyone.
Congratulations on turning the brand around and thanks for the level of
detail you put out in your press release. Question on the operating income
guidance: you said 10 to 13 million, equal to what you reported this year
– or last year. However, that include your impairment charges and lease
termination costs? So is this 10 to 13 inclusive of some sort of charges
there, or are we assuming that the operating income on a continuing basis,
or adjusted basis, is lower than the 17.7 you just reported?
<A – Douglas Muir>:
Sure, Jonathan. The
number for next year contemplates about $600,000 of lease termination
costs related to stores that we have already closed. It does not include
any provision for impairments, and it doesn’t include any lease
termination costs that might be recorded for stores that we have not
closed.
<Q – Jonathan Waite>:
So, you are, in
essence, guiding us to a much lower operating income level than last year?
<A – Douglas Muir>:
Ex charges, that’s
our current thinking, yes.
<Q – Jonathan Waite>:
Okay. And is this
mainly just from the company owned side? You said company owned and then
international franchisee side that that’s where the profit shortfall
year-over-year would be?
<A – Douglas Muir>:
Well I think I
indicated that we expect, basically, the Supply Chain to be relatively
flat.
<Q – Jonathan Waite>:
Yeah.
<A – Douglas Muir>:
We expect Domestic
Franchise to be relatively flat.
<Q – Jonathan Waite>:
Yeah.
<A – Douglas Muir>:
International, based
on our current forecast, we expect to be down. There’s – both from the
revenue side on our current expectation and for substantially increased
spending, and I think company stores will be down next year, compared to
this year, although that is traditionally the hardest one to get your hand
around. We’ll make some of that up in G&A, and in interest expense,
and that’s how we get to a forecast of a profit for the year.
<A – James Morgan>:
Jonathan, it’s Jim.
On the International side, one of the things we’ve been talking about for
about a year and half is we have slowed that growth down intentionally and
laid on some cost of support. It was growing so rapidly that we, quite
frankly, were not set up to support it; we had two key people supporting
18 countries. And so, that is part of the challenge and that’s why we’re
still in the end of that transition, so that’s one factor in there.
We’ve done the same thing with franchisee support. We had
undersupported them, and we’ve laid on some costs that will be getting a
full year’s worth of expenses in there.
And then third, I think Doug talked, mentioned the pretty
significant difference in input cost of – particularly in the sugar area,
of 4 to $5 million, and so those are the main variables that cause that
number to be lower.
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<Q – Jonathan Waite>:
Okay. Let’s talk
about that input cost. What kind of menu pricing do you have in your
system right now for this year?
<A – Douglas Muir>:
Yeah. Let me talk
about that just briefly. We, as you may remember, we started a price test
in the second quarter of fiscal 2010, and tested through the three
remaining quarters. In January, we rolled out our final pricing decisions
throughout all of our company stores.
Let’s just maybe compare February of
this year, February of calendar 2010, to February of calendar 2009, so as
to eliminate all the noise of the testing where we’re changing lots of
things. If you look at year-to-year – I’m looking at an average price
increase on-premises of – I’d guess about 4%. You will not see that much
in the same-store sales number because of the testing that was done this
year. In other words, some of that 4% is already reflected in the fiscal
2010 results.
In the off-premises channel, we didn’t
adjust prices on everything in the off-premises channel. We looked to
where we thought we had an opportunity to increase price and still remain
very competitive with competing products in the channel. In total, looking
across the whole spectrum of off-premises, I expect that the price
increase will be about 2.5%.
<Q – Jonathan Waite>:
Okay, okay. Thanks.
Operator: [Operators Instructions] And
we’ll go next to Chris Terry with Hodges Capital.
<Q – Christopher Terry>:
Hi, guys. Curious to
get a better idea on the packaged goods. I know it’s a new line out; can
you share some thoughts there? Is it still in a test? And maybe we can go
from there?
<A – Douglas Muir>:
Yeah, let me try and
put this in perspective for you. If you look at all of the products we
sell off-premises that we would consider to be relatively longer
shelf-life – in other words, I’m going to exclude these doughnuts and I’m
going to exclude cake doughnuts. We’re up this past year about 8.5% of
off-premises sales of what I would call snack items – Mini Crullers, Snack
Bag, Honey Buns, Krispy Juniors, Six Shooters, Snack Cups, all of those
kinds of things, but excluding the products we introduced this year. So,
8.5% of sale is longer shelf-life stuff that we’ve had for a number of
years.
The products that we introduced this
year, which were pies and cupcakes, in total, we sold about 1.4 million
this year; that’s about 1.1% of total off-premises sales. I would just
point out in evaluating that number, that we didn’t begin that test at the
beginning of the year, and when we rolled it out; we rolled it out in
phases, so I think the annualized number is bigger than 1.4 million, and I
think we’re pleased with that. We hope to do more.
<Q – Christopher Terry>:
What – and has this
been rolled out through all your channels nationally?
<A – Douglas Muir>:
It has been rolled
out – the new products have been rolled out in all company markets. Some,
but not all, domestic franchisees have also picked up the product line. I
do not know the percentage coverage of the entire 48 states, though.
Sorry.
<Q – Christopher Terry>:
Okay no, no problem.
And where does this fall in your segmented reporting? Is this an
off-premise line item, or is it your Supply Chain revenues?
<A – Douglas Muir>:
The sales to
off-premises customers of new products will be reflected in the company
stores off-premises revenue number.
<Q – Christopher Terry>:
Right.
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<A – Douglas Muir>:
But you won’t see
any effect in the Supply Chain, to speak of, of these new products because
the new products are being manufactured by a third-party provider, and so
there’s no doughnut mix sales in the Supply Chain related to these
products.
<Q – Christopher Terry>:
Okay. What’s – it
strikes me, as you’re still seeing somewhat a muted growth outlook, I
guess, on the company operated side, and what strikes me is you’ve got
these new products rolling out and I was thinking maybe it would be enough
to move the needle. Maybe my expectations were just too high, but have you
guys been disappointed by the initial launch here or what – can you share
with us your thoughts regarding that?
<A – James Morgan>:
This is Jim, Chris.
The numbers are not moving the needle; you’re right. I think we’re
probably not disappointed in the fact that we have kind of gone on this
thing slowly, but surely, and we assumed it would take some time and some
work on displays and promotions, et cetera, that we’re just now getting
into to get the consumer to turn to us for other sweet products, as
opposed to just doughnuts.
All of our consumer testing tells us
they will embrace that, so I don’t think we expected any overnight hero
shift in this, and I think probably this year will be a much better test
and we’ll be able to tell you whether we’re disappointed or not if we’re
still at numbers that we just reported, And as Doug said, the actual end
of the year run rate was somewhat higher than that number and appears to
still be growing. So, as long as we can keep the growth curve the way it
appears to be doing, I think we will not be disappointed, though, by the
time this year is over.
<Q – Christopher Terry>:
Okay all right, good
to know. All right guys, that’s all I had. Thank you.
Operator: And we will take our next
question from Sam Chase with Stephens Investment Management.
<Q – Samuel Chase>:
Good afternoon,
guys. Just a couple of quick questions. Just to start with, in the
guidance for 2011, I see that we’re guiding to low to mid-single-digits on
the comp line for the company side. Are you guys anticipating – or are you
seeing negative traffic?
<A – Douglas Muir>:
No.
<Q – Samuel Chase>:
Okay. So, there’s, I
guess, some conservativeness in the lower number, then?
<A – Douglas Muir>:
What we are seeing –
what we saw in the fourth quarter was, if you looked at traffic on a
same-store basis, traffic was up, albeit not at the rate of the three
earlier quarters, and the average check was actually down a little bit.
<Q – Samuel Chase>:
Okay, but so on a –
when – on the low single-digit side, with 4% price, I’m guessing check’s
up in that guidance, so they’re just – does that just give you some wiggle
room on the downside?
<A – Douglas Muir>:
Let me just be
clear: the 4% price increase is the aggregate price change after all the
pricing decisions were made and before any of the pricing decisions were
made. Some of that 4% increase is already in the fiscal 2010 numbers,
because we were testing higher prices as we went through the year.
<Q – Samuel Chase>:
Sure, sure.
<A – Douglas Muir>:
So in terms of the
rollout of the remaining pricing that was done in January to all of the
stores, in terms of a same-store effect, will be less than the 4 points;
probably, at a guess,
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I’d guess it’s probably half of that 4
percentage point price increase is already in the ‘10 numbers. So, you
might get a couple of points next year, would be my guess.
<A – James Morgan>:
Yes. So, Sammy, I
think one thing I think that you’re asking for, and maybe this would be a
clearer way to say it, is we do expect real same-store sales in this year,
in addition to the benefit of a price increase.
<Q – Samuel Chase>:
Okay, good. All
right. Thank you. So, just to be clear then, total price seems to be maybe
only, let’s call it, 2% or so.
<A – James Morgan>:
Yeah.
<Q – Samuel Chase>:
So probably on a
dollar basis, not even enough to cover the sugar input cost, or am I
missing that?
<A – James Morgan>:
Well, remember that
over half our production goes to off-premises, and so we expect to
recover, through off-premises pricing, some of these higher ingredient
costs, as well as through on-premises.
<Q – Samuel Chase>:
Got it, okay. And
then just from a big picture perspective, Jim, obviously, you guys have
done a good job on the liquidity front, getting this straightened out and
making this a viable go-forward business model, but just from the
standpoint of breaking even on a positive same-store basis, when you’re
growing same-store sales, you have a little bit of pricing on a company
store basis, it just seems – and I’ve struggled with this from looking at
the numbers previously – I’m just trying to figure out why there isn’t
more profit generation there?
<A – James Morgan>:
Yeah, there – that
in itself, we could have a real long, heartfelt discussion on that. I will
tell you, and I’ll take responsibility for it, we have made some decisions
across our business lines, International Franchise support, Domestic
Franchise support, slowing down the international growth while we were
supporting it, which we’re going why I think it will get wound back up
during the course of this year, rationalizing routes in the off-premises
and commitment to marketing.
We have made some decisions over the
past 12 months that have layered on some expenses that most companies that
were in a turnaround position, like we were, probably would not have done,
quite frankly. But we were that committed to our longer term growth; we
were that committed to the extraordinary future we think the company has
over the coming years and we felt like we needed to do that to be ready to
support the more robust growth that we see coming out of this year and
beyond, and those are not figments to us.
We think they look very real. We have
reasons to believe in it. But we have probably penalized this year – both
this year we just finished and the year coming up – as a result of that,
and it was conscious and we did it with all the interests in mind –
investors, shareholders and the long-term future of the company. So, we
made some long-term decisions that have hurt our near-term
performance.
<Q – Samuel Chase>:
Got it. Well good
luck.
<A – James Morgan>:
Thank
you.
<A – Douglas Muir>:
Thank
you.
Operator: And that concludes today’s
question-and-answer session. At this time, I would like to turn the
conference back over to Ms. Booe for any additional or closing remarks.
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Anita Booe, Investor Relations
Thank you, again and have a great
evening.
Operator: That concludes today’s
conference. We thank you for your participation.
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