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Carb Counting Craze Kicks Krispy Kreme
WINSTON-SALEM, N.C. -- Krispy Kreme Doughnuts Inc.,which recently opened a retail store in Boardman, Ohio, now expects fiscal 2005 diluted earnings per share from continuing operations, excluding certain charges, to be 10% lower than previously announced guidance."For several months, there has been increasing consumer interest in low-carbohydrate diets, which has adversely impacted several flour-based food categories, including bread, cereal and pasta," says Scott Livengood, chairman, president and chief executive officer. "This trend had little discernable effect on our business last year. However, recent market data suggests consumer interest in reduced carbohydrate consumption has heightened significantly following the beginning of the year and has accelerated in the last two to three months. This phenomenon has affected us most heavily in our off-premises sales channels, in particular sales of packaged doughnuts to grocery store customers."During the 12-week period ended April 18, Krispy Kreme experienced a 26.3% increase in systemwide volume in U.S. packaged doughnuts, predominantly through the addition of new accounts, while all other brands in the doughnut category combined experienced a 7.2% decrease in volume, according to a report from InfoScan Reviews. The packaged doughnut market data is based on volume sold through domestic grocery stores and does not include volume sold through convenience stores and mass merchants.For the first fiscal quarter ended May 2, the company expects to report an approximately 24% increase in systemwide sales, including sales of Krispy Kreme company and franchise stores. The company also expects to report Company Store segment sales of approximately $124 million, representing an approximately 21% increase from the prior year's first quarter. Systemwide sales are approximately evenly split between on-premises and off-premises sales, while approximately 60% of the Company Store sales are off-premises. In the first quarter, the Company's off-premises sales growth resulted from an increase in the number of customer doors served offset by a decrease in per-door productivity. As a result of these factors and a higher product return rate, we experienced certain operating inefficiencies and lower operating leverage relative to our existing route and delivery infrastructure. Due to these operating inefficiencies, which also impacted recently-acquired markets, we estimate that the first quarter Company Store segment margin will be below that of the fourth quarter of fiscal 2004."In order to intensify our focus on the core business and to avoid additional exposure to flour-based products in the current environment, we believe it is important that our focus be directed on our core Krispy Kreme concept and, therefore, we intend to minimize any expenditures related to both the existing Montana Mills concept and the developing concept prototype," Livengood says. "As a result, we will divest the existing Montana Mills operation. We plan to close the majority of the existing Montana Mills locations, which are underperforming, and will pursue a sale of the remaining Montana Mills stores. This action will result in restating prior and current financial results to recast Montana Mills as discontinued operations. In conjunction with this action, we will record a non-cash, pre-tax asset impairment charge of approximately $35 million to $40 million in the first quarter and anticipate recording pre-tax charges of approximately $2 million to $4 million in subsequent quarters related to potential lease and severance obligations."We have also analyzed our company store system with an objective of improving utilization of existing production capacity, optimizing our route structures and eliminating certain factory stores that do not fit the current prototype and business model," he continues. "As a result, we have determined that there are approximately six underperforming factory stores which should be closed. These stores consist of four older retail locations in below- average retail trade areas and two commissaries."Through this testing, As a result of testing, Krispy Kreme has determined that oughnut-and-coffee shop concept functions ideally in locations that accommodate drive-thrus and/or in destination locations that have substantial customer foot traffic (i.e., airports, casinos, etc.). "As a result, we intend to close three underperforming DCS units that are located in strip centers and, consequently, do not benefit from drive-thru business," Livengood says."While we regret having to lower our guidance, for the first time as a public company, it is equally important to be mindful that our expected growth rate remains robust," he adds. "With approximately 370 factory stores and a proven worldwide platform for expansion, we are still in the early stages of our company's development. We remain extremely excited about our significant long-term growth prospects both in the U.S. and internationally."Visit Krispy Kreme: at www.krispykreme.com "