Krispy Kreme Gets a Sweet Deal

Acquisition offer by JAB Beech for $1.35 billion

Specialty retailer Krispy Kreme Doughnuts Inc. (NYSE: KKD) announced its financial results for Q1 FY17 ended May 1st, 2016, on May 31st, 2016. Founded in 1937, the Company is known for its signature Original Glazed® doughnuts. As of May 1st, 2016, Krispy Kreme had 114 company, 183 domestic franchise, and 836 international franchise shops. The Company announced on May 9th, 2016, that it had accepted an offer of $1.35 billion to be acquired by JAB Beech Inc. and become a privately held company. The deal is expected to close in 3Q FY17, subject to customary closing conditions, including regulatory and shareholders’ approvals. Read more about its financial performance below.

Krispy Kreme to merge with JAB Beech

Source: Company's Website
Source: Company’s Website

Krispy Kreme operates in the quick service restaurant (QSR) category of the restaurant industry. In recent years, the Company has been facing intense competition from rivals such as Dunkin Brands Group Inc. (NASDAQ: DNKN), McDonald’s Corp. (NYSE: MCD), Starbucks Corp. (NASDAQ: SBUX), and The Wendy’s Co. (NASDAQ: WEN), which have a bigger spread to complement their beverage selection, doughnuts, sandwiches, and other food items. In fact, Krispy Kreme has been steadily ceding market share to rivals and has not met or exceeded earnings forecasts in seven of the previous nine quarters.

K2This is mainly because of an increased level of health conscious customers began opting for lighter eats with lesser calories, thereby hurting the Company’s sales. Hence, the upcoming merger with JAB Beech is expected to provide Krispy Kreme with enough financial muscle to take on rivals, and add more food options to its existing menu for different times of the day.

Krispy Kreme to operate as an independent company after merger

JAB Beech is an indirectly controlled subsidiary of JAB Holding Co., a German private investment firm that has a major stake in Keurig Green Mountain, Peet’s Coffee & Tea, and Caribou Coffee Co. Since Krispy Kreme is awaiting shareholder and regulatory approval of the deal, management has postponed the shareholder meeting set for June 14th, 2016. Even after the merger, Krispy Kreme would remain based in Winston-Salem, North Carolina, and operate as an independent company with local management in charge, a pattern seen with previous JAB Holding acquisitions.

Financials

For Q1 FY17, Krispy Kreme’s overall revenue rose 3% to $136.5 million from $132.5 million in the year-ago period. During Q1 FY17, Company store revenue was up 3.6% to $94 million, while domestic franchise revenue was up 11.5% to $4.1 million. International franchise revenue rose 1.9% to $6.8 million, and supply chain revenues rose 0.5% to $31.5 million, during Q1 FY17 as compared to the year-ago quarter.

Domestic system-wide same store sales rose 0.7%, while Company Stores clocked a 0.7% decrease during the quarter under review. On the other hand, same stores sales at domestic franchise stores grew 1.6% during Q1 FY17. On a constant currency basis, international franchise same store sales declined 7.3% during the quarter as compared to the year-ago period. System-wide store count rose 13% to 1,133 shops worldwide during the quarter under review.

During Q1 FY17, the Company’s operating income came in lower at $15.9 million compared to $17.3 million, because of $0.5 million in impairment and lease termination costs and $1.6 million in employee termination benefits and merger-related costs.

Source: Finviz.com
Source: Finviz.com

As a result, Krispy Kreme’s net income fell to $9.4 million ($0.14 per share) compared to $10.7 million ($0.16 per share) in the first quarter last year, when factoring in $454,000 in merger costs, $1.19 million employee termination costs and $5.4 million in a deferred income tax provisions. The Company’s adjusted net income was higher at $16.47 million for Q1 FY17, down 0.8% from a year ago, and adjusted earnings per share rose to $0.25 per share in Q1 FY17 from $0.24 in the year-ago period. Cash provided by operating activities was $19.5 million compared to $17.1 million in the first quarter last year.

Guidance

In view of the impending merger, Krispy Kreme did not provide an update to its earlier FY17 adjusted earnings guidance of $0.87 to $0.91, compared with $0.80 for FY16. Including charges, the earnings guidance is expected to be in the range of $0.54 to $0.58, compared with $0.50 in FY16. The Company plans to open 30 new domestic shops, including 10 company shops, and 120 to 140 international franchise shops during FY17.

Share repurchase program

Krispy Kreme raised its share-repurchase authorization by $100 million to $255 million in February 2016. The Company has spent $147.2 million on share buybacks so far, including $39.6 million to buy back 2.4 million shares in Q1 FY17.

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