Krispy Kreme upbeat on commodity outlook

by Josh Sosland
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WINSTON SALEM, N.C. — Even as soy complex futures prices have surged and corn and wheat prices have moved higher, executives of Krispy Kreme Doughnuts, Inc. remain reasonably optimistic about ingredient cost prospects for the coming year.

Executives from the company were asked about commodity prices during an Aug. 29 conference call with investment analysts. The call also featured interesting observations about the growing importance of social media for Krispy Kreme and details of traffic patterns at the company’s new factory stores.

In recent weeks, soybean futures have risen nearly $2 a bu because of a late summer drought. Still, prices for soybean oil remain well beneath levels prevailing a year earlier. Prices for wheat flour have been roughly in line with September 2012 prices, and sugar prices have fallen sharply.

Asked about commodity inflation in fiscal 2014 and prospects for the year ahead, Douglas R. Muir, executive vice-president, chief financial officer and treasurer, characterized inflation this year as “very modest.” He deferred to James H. Morgan, chairman, president and chief executive officer, for a price outlook.

“We don’t try to play games with you, but this year prices have been a little softer than we thought they would be,” Mr. Morgan said. “As you know, there has been movement depending on global events and global weather and all that, which you would obviously expect. We have been doing some forward purchasing within the last month or so, on a couple commodities — particularly, I think, wheat. And I think that is sort of the course of action that we are taking right now. Some of the prices look a little bit more appealing than we thought they would look at this point in time. So right now we don’t see any factors that have us very alarmed about inflation or our cost of agricultural commodities over the coming next few quarters.”

Both Mr. Muir and Mr. Morgan elaborated on Krispy Kreme’s forward purchasing practices.

“Most of our hedging positions tend to be fairly short,” Mr. Muir said. “We are in futures markets generally, and I think it’s unusual for us to have futures positions out more than about six months for so. We tend to lay in contracts more or less consistent with our purchasing needs.”

Sugar purchasing is handled differently at the company, Mr. Muir said.

“That has actually been done under a long-term contract with a supplier,” he said. “And we are out well into calendar 2015.”

The principal objective, Mr. Morgan said, is not necessarily to make significant gains through purchases.

“The way we approach that is when we take a position that allows us to lock in the commodity at a price that we know works for our franchisees and for us — we don’t really game it very much,” he said. “We are not trying to be traders or be overly cute. And so the good news is, when we take a loss in a commodity position, it means the price of the commodity is going down, which means we are going to be buying it cheaper.”

Other topics of discussion during the call included the increased importance of social media in how Krispy Kreme interacts with customers.

“We are active across Facebook, Twitter and other social medial platforms, and of course we have our own Hot Light smart phone app,” Mr. Morgan said. “Between the smart phone app and our web site, there have been more than 97 million searches for Krispy Kreme locations since rolling out the app less than two years ago. The interest that we garner within the social medial realm is simply incredible and demonstrates how a 76-year-old brand can seamlessly transition into the Internet age.”

Also during the call, Mr. Muir offered interesting detail on the traffic patterns at the company’s new smaller “factory shops.” The company said it has been pleased by the consumer response to the stores to the point it is recommending franchisees incorporate the model into their expansion plans. Mr. Muir was asked by an analyst to elaborate on the new stores’ performance.

“We have five of the new freestanding small factory shops currently in operation,” he said. “The oldest of them is in Greenville, South Carolina. That shop opened Jan. 22 of this year. So it only has just over six months of history. By the way, it was the second shop in the Greenville market. Typical of Krispy Kreme, and I am revisiting some numbers from last quarter just to get it in context, the shop opened with very high weekly sales levels. The store did $68,000 a week in January, $55,000 a week in February, $43,000 a week in March and $36,000 a week in April. As we expected, sales levels are settling in as the honeymoon effects wear off and seasonal effects come into play. In May, the shop did $31,000 a week. It did $33,000 a week in June and $30,000 a week in July. We are very pleased with these numbers, especially since the second quarter historically experiences a sales slowdown as the weather changes.”

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