Krispy Kreme details four keys for growth

by Monica Watrous
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Menu innovation is a priority for Krispy Kreme in the year ahead.

WINSTON-SALEM, N.C. — Traffic fell at Krispy Kreme Doughnuts during the company’s fourth quarter, as the donut chain tweaked its promotional and incentive strategies to improve operating margins.

Net income for the fourth quarter ended Feb. 1 tumbled to $6,546,000, or 10c per share, compared with $14,760,000, or 21c per share, reflecting unusual tax credits in the prior year. Excluding special items, earnings per share increased to 17c from 12c.

Revenues increased 11% to $125,367,000 from $112,746,000 in the year-ago period.

For the year, net income declined to $30,060,000, equal to 44c per share on the common stock, which compared with $34,256,000, or 48c per share.

Revenues increased 6.5% to $490,334,000 from $460,331,000.

System-wide domestic same-store sales rose 3.6% for the quarter and 3.1% for the year on higher prices and average check. System-wide store count rose 19% to 987 company and franchise shops worldwide for the year.

Looking ahead, management is focused on four key strategies, which include accelerating global growth, leveraging technology, enhancing the core menu and maximizing brand awareness.

This year, Krispy Kreme executives project shop openings in at least six new countries, mostly in the Asia-Pacific region, where the chain already has a strong presence, and in Latin America, where it is establishing a foothold.

“We are evaluating a list of additional countries to build on our strong, global brand,” said Tony Thompson, president and chief executive officer, during a March 11 earnings call with analysts. “We believe that we can continue global system-wide unit growth at a double-digit rate for years to come.”

On the technology front, Krispy Kreme began testing a mobile platform late last year, which included the introduction of a loyalty and rewards program. A national roll-out is planned for later this year.

“The mobile app engages our guests through its Hot Light feature that notifies them when the Hot Light is on at their favorite Krispy Kreme shop, and it allows us to reward our guests with points that can be redeemed on future visits,” Mr. Thompson said. “The app also offers stored value, which can be securely loaded, and allows our guests to easily pay and go.”

Krispy Kreme’s third strategic focus is enhancing the core menu, particularly in beverages and limited-time donut varieties. Within the coming months, the chain plans to promote frozen lattes.

“Donuts will always be center of plate for us, and an important complement to our donuts is the significant opportunity to increase our in-store beverage attachment rate,” Mr. Thompson said. “We have devoted additional leadership resources to beverage, and currently are revamping our long-term beverage strategy, as well as working on short-term opportunities, both inside and outside of our shops.”

The final piece of the company’s plan is maximizing brand awareness through multiple channel opportunities, including wholesale donuts and snacks, licensing and a fundraising program.

“Wholesale, or consumer packaged goods, represent about half of the company’s shop revenues, and we believe the channel has significant growth opportunities over the long term,” Mr. Thompson said. “We have been adding new, longer shelf life products such as marble cake and fruit danishes, which have received positive feedback from consumers.”

The company announced a coffee licensing program last year that now includes packaged ground coffee, ready-to-drink coffee and K-Cup packs. Recently, Krispy Kreme announced a multi-year licensing agreement with Massimo Zanetti Beverage USA to roast and distribute 12-oz bags of Krispy Kreme ground coffee for grocery stores, mass merchants, club stores and on-line.

“Fundraising is a unique element in our effort to maximize brand awareness,” Mr. Thompson said. “Krispy Kreme’s fundraising program has assisted local charities for over 60 years, and we believe we can grow distribution through this channel. We are working on adding fundraising capability to our mobile guest engagement platform.”

The company has reaffirmed its outlook for adjusted net income for fiscal 2016 of $55,000,000 and $59,000,000, up 14% to 22% from adjusted net income of $48,300,000 in fiscal 2015.

After the earnings were reported, Krispy Kreme’s shares were trading mid-morning March 12 on Nasdaq at $19.07, down $1.28, or 6%, from the previous close of $20.35.
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