Professor Mike Lord discusses Krispy Kreme's predicted profitability

Krispy Kreme chairman predicts profit in 2011
Originally Posted on Sunday, April 16, 2010 | By Richard Craver
Reposted from The Winston-Salem Journal

Krispy Kreme Doughnuts Inc. barely missed posting itews first profitable year since 2004 despite having a fourth-quarter profit of $520,000.

The company reported yesterday that its loss for fiscal 2010, which ended Jan. 31, was $157,000, compared with a loss of about $4 million in fiscal 2009.

For the quarter, the company had earnings of 1 cent a share. For the full year, it had no earnings, compared with a loss of 6 cents a year ago.

Krispy’s share price slipped 8 cents to close at $4.96 yesterday — 19 cents below its 52-week high of $5.15 set on Tuesday. Because of the company’s financial difficulties in recent years, coverage of its stock has been dropped by most analysts.

Krispy reported a 65 percent increase in operating income during the quarter, to $2.4 million, even though revenues were down 6 percent to $86.8 million.

Jim Morgan, the company’s chairman, president and chief executive, cautioned at the 2008 shareholders meeting that there likely will be some “unevenness” in quarterly performance for up to two years.

“During fiscal 2010, we made substantial progress in building a stronger foundation for our company and improving our business model,” Morgan said in a statement. “We generated positive company same-store sales in all four quarters despite the difficult economy, while also delivering substantially higher operating income.”

He said that the company expects to show a profit in fiscal 2011.

“We are working vigorously to continue implementation of our strategic plans and, in doing so, we believe we are setting the stage for additional and more robust growth in revenues and earnings in fiscal 2012 and beyond,” Morgan said.

Company same store sales rose 1.1 percent — the fifth consecutive quarterly increase.

However, Krispy reported a 5 percent decrease in revenue at company stores to $60.6 million. Revenue from its international franchises rose 12 percent to $4.6 million.

The improvements in operating income and cash flow, and the significant reductions in debt, are positive trends, said Michael Lord, an associate professor of management at Wake Forest University.

“Krispy Kreme is improving its efficiency,” Lord said. “But both the top-line revenues and the bottom-line net-income results remain of concern. They’re either negative or have barely budged. The decline in both domestic and international franchisees’ same-store sales is of some concern as well. At best, this is clearly still a turnaround in progress.”

The company said it finished the fiscal year with 582 Krispy Kreme stores, a net gain of 59 from a year ago. There are 83 company stores and 499 franchise stores.

The company said it plans to add seven to 10 company stores, along with 35 to 45 domestic and international franchise shops.

Lord said that the company “most likely will continue the slow and steady struggle to transform itself toward a more workable business model and a profitable financial model.”

“Doughnuts and coffee are the ultimate convenience and repeat sort of business. If you’re not right where customers are, they’ll go somewhere else, no matter how good a dreamy, fluffy hot and fresh doughnut may be.

“Along the same lines, it’s expected for there to continue to be relatively less and less emphasis on the factory stores,” he said.