Krispy Kreme premium donuts
Premium L.T.O. donuts contributed to improved store-level margins in the recent year for Krispy Kreme.

WINSTON-SALEM, N.C. — Premium donuts and fewer discounts contributed to improved store-level margins in the recent year for Krispy Kreme Doughnuts, Inc. For the fiscal year ended Jan. 31, Krispy Kreme net income was $32,398,000, equal to 50c per share on the common stock, up nearly 8% from net income of $30,060,000, or 45c per share, for fiscal 2015. Revenues for the year increased nearly 6% to $518,714,000 from $490,334,000.

Still, results came in below analysts’ expectations. Krispy Kreme’s share price was down by as much as 10% in morning trading on March 23 from the previous close of $15.34.

Tony Thompson, Krispy Kreme
Tony Thompson, president and c.e.o. of Krispy Kreme

“During F.Y.16, we made headway on a number of key initiatives,” said Tony Thompson, president and chief executive officer of Krispy Kreme, during a March 22 earnings call with financial analysts. “One of the most significant was that we were able to drive positive comp sales while pulling back on the percentage of transactions involving a discount. We are pleased with what we’ve been able to accomplish directionally. However, we still have room for improvement on delivering consistent margin performance in the company store segment.

“It is a challenge for everyone in our industry to balance the promotional activity needed to drive sales with the ability to generate acceptable margins.”

Initiatives under way at Krispy Kreme include an incentive program to drive beverage attachment and the implementation of tiered pricing on specialty and limited-time offer donuts.

“The L.T.O. premium pricing that we put in place during F.Y.16 (was) very successful,” Mr. Thompson said. “So this year, we are adding a second tier that is incorporating not only those L.T.O. donuts, but within our current donut set, a number of donuts that are at that same premium price point. So, a second tier of pricing. Then of course, we have a third tier, such as our apple fritter, that we will work on developing out longer term that is at an even higher price point.”

Krispy Kreme apple fritter
Krispy Kreme is working on developing a tier of higher price point items, like its apple fritter.

The company said it also plans to expand distribution of some of its grocery products into convenience and drugstore channels in the coming months.

“We are partnering with a third party for the manufacturing and distribution of our longer-shelf-life, non-yeast-based products within the convenience and drugstore channels,” Mr. Thompson said. “This arrangement will enable us to achieve national distribution within these channels over time. …we expect this to add a couple million dollars to this year’s profits.

“The bigger accomplishment here is it will help us learn as we explore other longer-term opportunities to more efficiently distribute great Krispy Kreme products and increase our reach. With fewer than 300 shops domestically, and just over 800 locations internationally, there is tremendous runway for growth ahead of us.”

Net income for the fourth quarter was $8,246,000, or 13c per share, up 26% from $6,546,000, or 10c per share, for the prior-year period. Revenues were $130,360,000, up 4% from year-ago revenues of $125,367,000.

“Company same-store sales increased slightly for the quarter and rose 2.4% for F.Y.16, marking our seventh consecutive year of same-store sales growth,” Mr. Thompson said. “Domestic franchise comps outpaced company shops, increasing 2.5% and 4.8% for the quarter and year, respectively. International franchise comps were negative, as anticipated, given the growth strategy in those markets.”

During the year, the company added 134 net new units, representing 14% system-wide growth, led by double-digit unit growth in international markets, including new country openings in South Africa and Germany.

“We also signed development agreements for seven new countries, including Bangladesh, Cambodia, Guatemala, Panama, Peru, Bolivia and Myanmar,” Mr. Thompson said.

For the year ahead, the company expects to achieve continued growth in system-wide domestic same-store sales and to open approximately 30 new domestic shops and 120 to 140 new international franchise shops.

Price Cooper, Krispy Kreme
Price Cooper, c.f.o. of Krispy Kreme
“Since the start of the new fiscal year, comp sales have been slightly negative, changes in promotional calendars have driven some of this along with adverse weather conditions in some of our major markets,” said Price Cooper, chief financial officer. “However, sales for March are positive and we’re confident in our plans to deliver our eighth consecutive year of comp sales growth.”