WINSTON-SALEM, N.C. — Earnings and revenues increased during the second quarter ended Aug. 2 at Krispy Kreme Doughnuts, Inc., but flat year-over-year margins led to an overall disappointing quarterly performance at the Winston-Salem-based company. Of particular concern was softness in the company’s consumer packaged goods (C.P.G.) channel.
“The primary driver preventing continued margin expansion during the quarter was softness in our C.P.G., or consumer packaged goods channel, due to less profitable door count and product mix and less than planned loadout volume,” Tony Thompson, chief executive officer, said during a Sept. 9 conference call with analysts. “At the same time, we also experienced a higher return rate. We have made and continue to make adjustments to address these issues.
|Tony Thompson, c.e.o. of Krispy Kreme|
“However, changes in the C.P.G. business take some time to flow through, so we anticipate our C.P.G. business will remain softer than planned for the balance of the year. As we are addressing short-term performance issues in C.P.G., we are staying focused on driving our retail business model, which is the real key to our continued growth and long-term success. Above all, we continue managing the company for the long-term and focusing on the tremendous opportunity that we see for the Krispy Kreme brand.”
Net income at Krispy Kreme in the second quarter ended Aug. 9 was $5,918,000, equal to 9c per share on the common stock, up from $5,752,000, or 9c per share, in the same period a year ago. Revenues increased 6% to $127,336,000 from $120,516,000.
Highlights during the quarter included continued success from limited time offers, gains in the company’s licensed coffee program and international growth.
But discussion during the conference call kept coming back to the challenges in the C.P.G. side of the business.
Price Cooper, chief financial officer, said the total impact from the softness in the C.P.G. channel had about a $1 million to $1.2 million negative effect on the company’s bottom line during the quarter.
Anita Booe, senior director of investor relations, described the difficulties as a “perfect storm within C.P.G. for the quarter.”
“We had several factors, certainly loadout, along with higher returns, which anybody that is familiar with that business understands those two working against you,” Ms. Booe said. “In addition, we had within our customer base, a door mix or door impact from some customer decisions.
“Not consumer driven, again; customer decisions that impacted us. And the other variable that we had working against us, given the low loadouts, high returns was our mix of products. We had a higher proportion of lower-margin items that we were selling during the quarter versus higher margins. So you put all those together and it had a fairly sizable impact, and there was some residual detail on it, as far as being able to take corrective action … It’s continued into the third quarter, and consequently, that’s what led us to, as we looked at our forecast and dialing in the balance of the year, to feel like the prudent thing to do was to make adjustments to our guidance.
“As far as corrective actions, we have been aggressively addressing loadouts. We are continually aggressive, going after new door opportunities and then our product mix, as well. We’ve made some adjustments to our product mix from a margin standpoint.”
Specific to product mix, Mr. Thompson was asked whether Krispy Kreme’s strategy of introducing more longer-shelf life items with the object of reducing returns has failed.
“We’re still in our beginning stages of that approach,” he said. “I think we’ve mentioned some of the new products that we’ve introduced in the past year such as some of our flavored seasonal crullers, our Danishes. So we’re evaluating all the time what’s the right product mix, and, obviously, the bottom-line impact. But we haven’t — we’re not as far down the road yet on that part of our strategy. That’s going to be long-term in nature as we’re evaluating that path.”
Mr. Thompson also was asked whether Krispy Kreme is credible to the consumer as a cruller instead of a donut. He replied in the affirmative.
“Yes, absolutely,” he said. “On our C.P.G. side, our consumer research, actually, sales on those particular items are pretty good. It’s a matter though of, from a strategic viewpoint, of just getting that balance of returns, as well as shelf life. So if you have products sitting out there, what you’ve got on your shelf with your product mix and margin, you want to make sure you’ve got the right mix on the shelf, if you will, but also your return levels of your different products. And that’s what caught up to us in this particular quarter all at one time.”
Despite the difficulties in the C.P.G. business, Mr. Thompson was quick to separate the performance of C.P.G. from Krispy Kreme’s retail business and its potential long-term impact.“Today, we’re feeling the effects for this particular quarter of the fact that C.P.G. is interrelated to in a number of our shops within our company store segment,” he said. “But our development focus is on retail-only shops, which is what we’ve been doing now for the last couple of years and that’s our long-term focus. So, where that interdependence over time is going to become less and less, and secondly, our C.P.G. strategy long-term in nature is, again, not linked to our shop model, but focused on other avenues for driving and growing that business from a supply side standpoint.”