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Krispy Kreme Doughnuts (NYSE:KKD)

Q4 2013 Earnings Call

March 14, 2013 4:30 pm ET

Executives

Anita Booe

James H. Morgan - Chairman, Chief Executive Officer, President, Chairman of Krispy Kreme Doughnut Corporation, Chief Executive Officer of Krispy Kreme Doughnut Corporation and President of Krispy Kreme Doughnut Corporation

Douglas R. Muir - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Michael W. Gallo - CL King & Associates, Inc., Research Division

Will Slabaugh - Stephens Inc., Research Division

Conrad Lyon - B. Riley Caris, Research Division

Nick Setyan - Wedbush Securities Inc., Research Division

Alton K. Stump - Longbow Research LLC

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Krispy Kreme Doughnuts Earnings Conference Call. My name is Darcell, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Ms. Anita Booe. Please proceed.

Anita Booe

Thank you. Good afternoon, and welcome to the Krispy Kreme fourth quarter conference call. My name is Anita Booe, and I'm the Director of Investor Relations. On the call with me today are Jim Morgan, President and Chief Executive Officer; and Doug Muir, Executive Vice President and Chief Financial Officer.

Some of the information in today's press release, and statements on today's call, includes forward-looking statements that reflect our expectations or beliefs about the future, including, but not limited to, our expectations and beliefs regarding financial performance. We cannot assure you that we will achieve or realize these expectations. Like any such statements, they are subject to a number of factors, risk and uncertainties that could cause actual results to differ materially from our expectations or beliefs. These factors include items discussed today, and in our SEC filings, including our Annual Report on Form 10-K for fiscal 2012.

I'd now like to turn the call over to Jim.

James H. Morgan

Thank you, Anita, and good afternoon, everyone. I am going to begin this afternoon by highlighting our key accomplishments from fiscal 2013, before moving on to how we intend to strengthen our business and drive value for our shareholders over the long-term. Afterwards, Doug will address our fourth quarter financial performance and discuss our outlook for fiscal 2014.

So now let's begin with a brief review of this past year. Systemwide sales increased nearly 8% to almost $1 billion. Company same-store sales grew 5.5%, driven by 6.2% rise in customer traffic. This marked our 17th consecutive quarter of rising comps. Wholesale sales rose over 3%, driven by an increase in average weekly sales per door. Company Stores' operating income, on a 52-week basis, grew to almost $8 million compared to approximately $300,000 in fiscal 2012. Together with our franchise partners, we added a net 54 Krispy Kreme stores worldwide in fiscal 2013, and had 748 in operation at year-end. Most of the growth came from franchisees, but we also added a net 5 company shops this past year, including the first of our new concept, freestanding small factory stores. Domestically, our franchise partners generated same-store sales growth of 6.8% on top of the 6.6% increase in fiscal 2012. Our International Franchise business continued to stabilize, with the currency adjusted same-store sales decline of just 8.1%.

From a profit standpoint, operating income on a 52-week basis rose over 40% to $36 million, and adjusted net income increased 49% to $33 million. Operating cash flow, on a 52-week basis, increased roughly 70% to $57 million, and we had a net cash balance at year-end of more than $40 million. And finally, we've repurchased $20 million of our shares last spring, at an average price of $6.42.

To summarize, it truly was, in our mind, a remarkable year. In our view, these results continue to distance Krispy Kreme from the turnaround story we had been telling in years past. Make no mistake, our company is now squarely on offense, and in my opinion, on an exciting path to ongoing and sustainable growth. With that in mind, let's discuss our strategic plan.

At existing companies stores, we intend to continue leveraging our brand's differentiation in order to grow sales and profits in 5 particular ways. First, we'll promote new doughnut use occasions throughout the day and night. Second, we seek to own the doughnut category by maximizing in dozens and continually creating new doughnut varieties and flavors. Third, we will continue to market and expand our beverage program with the goal of significantly increasing the percentage of transactions that include a beverage purchase. Fourth, we will leverage the brand's strength in social media and local relationship marketing to increase top-of-mind awareness. And fifth, we intend to further enhance the guest experience through our shop atmosphere and team member hospitality.

As you all know, we view ourselves as stewards of something very special, an iconic brand with one-of-a-kind products. Interestingly, our research and sales data demonstrate that consumers around the world do not think of Krispy Kreme just in terms of early morning or late evening, and are willing to buy doughnuts throughout the day and night if we simply provide them reasons to do so. In other words, people want more of what Krispy Kreme already provides, a selection of core flavors complimented by seasonal offerings, innovated LTL promotions, interesting doughnut and beverage pairings, and flavors to please local palettes in each of our 22 countries. In addition to the underlying demand for our products, successful brand marketing has also been a catalyst for traffic growth, and we are generating top-of-mind awareness through a variety of means. Perhaps the most prominent among them is our powerful social media presence, as exhibited by 4.6 million Facebook fans with whom we are in constant contact. We're driving new occasions throughout the day and night while leveraging everyday events like office parties, after school snacks and late night doughnut runs, while leveraging annual occasions like Valentine's Day, our birthday in July, Halloween and the holiday season. Our success in these efforts is evident in our same-store sales performance, which is being driven not only by improved marketing but also by continued strengthening of day-to-day execution capabilities by the managers and crews in our shops.

Our marketing and operations team have worked together to make a significant difference in both the number of people that come into our shops and the way we execute when they visit us. Fiscal 2013 demonstrated our ability to improve company store level operations, and with improved labor and food cost management tools now in place, we believe we have paved the way for continued profitability and margin expansion.

We have also made great strides in improving the in-store experience through a greater focus on hospitality and ensuring that our facilities are clean, contemporary and inviting to customers. Over the past several years, we have remodeled and improved the appearance of many of our shops while strengthening our training programs. Our mystery shopper scores demonstrate significant improvement in crew friendliness, helpfulness and efficiency. And the traction we have gained across these attributes, and others, is best exhibited by customer traffic growth.

As most of you know already know, the customer familiarity with Krispy Kreme mirrors that of much larger companies, despite our substantially smaller footprint. And this suggests that our runway for expansion is significant. In the fourth quarter, we reached a new milestone, as we celebrated our 500th international store, which opened in Mexico, and is our 90th store in that country.

For the past decade, we've expanded Krispy Kreme to 21 international markets across Latin America, Asia Pacific, the Middle East and the United Kingdom. And over the next 4 years we intend to increase our international store count to 900 locations from 509 at the end of fiscal 2013. Development is expected to come from building more stores in existing markets, in addition to adding new stores through recently signed development agreements for Taiwan, Singapore, Moscow and India. We're also working on opportunities in Europe, Central America and South America.

Domestically, we are continuing expansion of both company and franchise units with an objective of having over 400 shops by January 2017 compared to about 240 currently.

Whether in our core, Southeast markets or outside of them, our company store development model is predicated, in the short term, on building small freestanding factory shops that have the full doughnut making capability of our traditional stores, which are substantially smaller than the traditional doughnut factory. These small factories will serve retail consumers only and will not participate in wholesale distribution to grocers, mass merchants or convenience stores. This singular focus makes them a lot simpler to operate and less costly to build, and therefore, should generate a higher sales to investment ratio than our current base of stores.

In fiscal 2013, we built our first of the 2,300 square-foot stores. While the store is still in its honeymoon phase and we can't, therefore, assess its long-term success, we're optimistic that its results will show progress towards achieving our ultimate goal of producing a 20% cash-on-cash return with AUVs as low as $20,000 a week.

Outside of the Southeast, to perhaps a few special situation markets, we plan to grow, opening up the vast portion of the United States that has yet to be franchised. We're completing our Domestic Franchise development plans and have put in place the resources to execute those plans, including hiring a new Vice President of Franchise Development to lead our Domestic Franchise expansion efforts. In addition to signing new franchisees, it is important to note that we expect many of our existing franchisees will continue to build new shops in their territories.

Before I turn the call over to Doug, I would like to leave you with the following thought. We're a brand that is more than 75 years old. In many ways, we feel that our future is brighter than it has ever been. We are already blessed with several things that most companies can spend a lifetime attempting to achieve. A brand that is beloved worldwide, best-in-class products, compelling strategies, and an incredibly capable and energized team of franchisees and employees. To us, our performance in fiscal 2013 is only a starting point in what we ultimately hope to achieve, and through determination and hard work, we believe our potential is far greater than what you might imagine.

Now, I will turn the call over to Doug to review our financials.

Douglas R. Muir

Thank you, and thanks to everyone for joining us this afternoon. As you know, our fiscal year ends on the Sunday nearest to January 31. This periodically results in a 53-week year and a 14-week fourth quarter. Our fiscal year that ended on February 3rd was one of those years, so our fourth quarter this year had 14 weeks compared to 13 weeks in the fourth quarter last year. Accordingly, year-over-year comparisons are distorted since this year has an extra operating week. To help you better understand our results for the quarter, we displayed in our press release not only our results for the 14 and 53 weeks ended February 3rd, but also our results for the 13 weeks and 52 weeks ended January 27. Those 13 and 52-week results are the right numbers to compare to last year, and I'm going to focus on those numbers that exclude the extra week in all of my comments today.

Let's first take a look at Table 2 to the press release, which compares consolidated fourth quarter results to last year on that 13-week basis. Total revenues increased 7% to $109 million. Consolidated operating income rose 35% to 72 -- excuse me, to $7.2 million, while adjusted earnings per share rose 50% to $0.09 from $0.06 last year. As you recall, $0.09 per share for the quarter was the high-end of the guidance we gave you back in November.

Now let's turn to Table 8, which displays the 13-week comparisons by business segment. In the company store segment, total on-premises sales rose almost 14%. That's a function of great comps and a higher number of store operating weeks. The big story, of course, was the continued strength in comps, which rose 7.2 -- excuse me, 7.5%, our 17th consecutive quarter of higher same-store sales. As we have moved into the current year, we continue to see positive comparisons. Comps rose 6.5% in February, driven by traffic. Change in the average guest check approximately offset, and I'll talk more about pricing in a minute.

In the wholesale channel, fourth quarter revenues rose 6%, driven principally by higher sales to grocers and mass merchants. Average weekly sales per door, in both channels combined, rose 10% year-over-year, while the average weekly number of doors served declined about 3%.

The Company Stores segment posted operating income of $3 million for the fourth quarter, compared to a loss of $300,000 in the fourth quarter last year. We continue to be really pleased with the improvement in the profitability of the segment, and we believe we have a lot further to go in the coming years.

In the Domestic Franchise segment, fourth quarter revenues rose about 4%. Royalties were up about 9%, consistent with the rise in domestic franchisee sales, including a strong 9.6% increase in Domestic Franchise comps. The royalty increase was partially offset by lower initial franchise fees and other franchise revenues. The revenue increase was offset by higher costs, including costs we are incurring as we prepare to engage in active recruiting of domestic franchisees for the first time in years. Operating income in the segment was flat at $1.3 million.

Over in the International Franchise segment, revenues increased 6% to $6.7 million. Sales by International Franchise stores rose about 8%. Adjusted to eliminate the effects of changes in foreign exchange rates, same-store sales at International Franchise shops fell 7.4% reflecting, among other things, honeymoon effects from the substantial number of internationals store openings in recent years, as well as cannibalization as markets develop.

The International Franchise segment generated operating income of $4 million, and that was down slightly from the $4.2 million generated in the fourth quarter last year. International Franchise costs and expenses in the quarter included an increase of almost $200,000, compared to the prior year, in trademark protection and registration costs, including costs related to new markets. As previously disclosed, we are also incurring higher personnel and personnel related costs as we continue to add resources to support what we believe will be many years of continued dramatic growth internationally.

Finally, we had about $185,000 higher bad debt expense in the quarter compared to a year ago.

In the Supply Chain, revenues, including sales to company stores, were $53 million, an increase of about 2%. The Supply Chain generated operating income of $7.5 million in the fourth quarter compared to $7.1 million in the same period last year. Results for the fourth quarter this year include a credit of about $200,000 or recovery of a bad debt previously charged off.

Turning to general and administrative expenses. Total G&A was $8.4 million compared to $6.7 million last year. Last year's G&A included a nonrecurring credit of about $840,000. Excluding that item, G&A was 7.7% of revenues compared to 7.4% last year. There were a handful of unusual costs reflected in the fourth quarter that drove the increase in G&A as a percentage of revenues, including costs incurred with the project to select a new ERP technology system, professional costs associated with the decision to implement a tax asset protection plan to protect our net operating loss carryovers and the provision for potential settlement of what I'd characterize as some nuisance litigation. Those items, collectively, added up to about $1 million.

Adjusted net income for the quarter was $6.1 million, $0.09 a share, compared to $4 million or $0.06 a share in the fourth quarter last year. Adjusted net income and adjusted EPS, which are non-GAAP measures, reflect income tax expense only to the extent currently payable in cash. We think that's the most important metric to judge our performance because we have about $200 million of net operating loss carryovers, and the amount of taxes payable in cash is expected to remain insignificant for the foreseeable future.

Turning to our outlook. When I compare our expectations for fiscal 2014 to fiscal '13, I'm making those comparisons to the fiscal '13 52-week numbers. In our Company Stores operation, we plan to open as many as 10 new company shops this year. We currently have the real estate secured for 6 of those. Substantially all of them are expected to be our new small-format retail-only factory shops. These smaller shops are an important component in our initiative to enhance shop profitability for both company and domestic franchise stores.

Unlike the hot shops we have opened in recent years, opening factory shops involves substantial front-end training costs, and initial operating results reflect the learning curve of running the production line and learning to forecast demand. Consequently, it's not unusual for these shops to post losses in the range of $100,000 or so in the preopening period, and the first month or so, of operations. While we are very excited about these new openings, the front-end costs are going to put some pressure on current year results that we have not experienced recently, and those pressures are reflected in our outlook.

Moving to comps. We hope to achieve low single-digit comps in our company stores this year, exclusive of pricing. While we believe we have tremendous opportunities to drive traffic from the initiatives Jim mentioned, comps will likely be somewhat pressured and offset by some tough comps against some very, very big honeymoon openings last year.

Turning to pricing. We took retail pricing on February 18, in all our company shops, which we expect to add about 3% to this year's top line in off-premise -- excuse me, in on-premises. That's before allowing for any volume loss resulting from the pricing, but we think that volume loss will be very, very modest.

In wholesale, we plan to take pricing later this year. We haven't announced those moves to customers yet, so I don't want to get too granular on it right now. But at a guess, I currently estimate pricing would amount to about 5% on an annualized basis before taking volume off into account. We usually expect the volume loss, due to pricing, to be more pronounced in wholesale than in on-premises. So we think we'll give back a fair amount of pricing we decide on as consequence of volume loss. So success in getting the pricing to the bottom line is likely to depend on how good we are at keeping an eye on sales volumes and quickly reacting to any volume loss so that returns don't get out of hand.

There [indiscernible] is going to affect the top line in a big way this year, and that is a re-franchising of 3 company stores in Kansas and Missouri that we completed in February. We also closed 1 store in that market in connection with the transaction. Those 4 stores had sales, last year, of about $9 million, and that volume will be gone from company revenues this year, although we will pick up much, much smaller amounts of royalties and supply-chain sales to the new franchisee.

In summary, on the Company Stores' top line, we expect retail to grow much faster than wholesale. All things considered, we are looking for a revenue gain in the Company Stores segment in the range of 4% to 7%, measured on a 52-week basis. In terms of company store operating margins, we expect modest improvement. We expect to see the benefits of good margins at new stores after we get past the initial opening costs, we expect to see benefits of higher traffic, some uplift from a greater mix of sales coming from the on-premises channel compared to wholesale, a pickup from pricing that we expect to be larger than our input cost increases and continued progress on labor and materials cost management. On the minus side, we'll have the cost of new store openings, some comp erosion due to big honeymoon openings last year and some loss profits due to the downtime needed for planned store re-modelings. We'll also be incurring some extra training cost this year, as we try to make sure we have the people in place to support our ongoing store opening plan and we'll incur the cost [indiscernible] this year. All in though, we're looking for a gain in operating margin in the Company Stores segment in fiscal '14.

Moving on to Domestic [indiscernible], the 10 and 15 new shops this year, most of which will likely be satellites. We aren't expecting closures beyond the handful might one expect in any given year. We're forecasting domestic franchisees will post mid-single-digit comp gains. We expect operating profit to rise modestly, as much of the anticipated revenue gain will be offset by higher franchise recruiting and development expenses, but we view those franchise marketing and development expenses [indiscernible].

Looking at International Franchise, we expect to see a slight improvement in currency adjusted comps. This past year, we posted a negative 8%, and we expect to do a little bit better than that in fiscal 2014, but we don't expect overall international comps to be positive. We forecast about 75 gross openings and expect the number of closures will be much fewer than the 49 we posted in fiscal 2013.

Expansion into new markets is great for the long-term, but there are short-term costs associated with the expansion. New franchisees require greater support in opening their initial stores than do existing franchisees. So when we go into new countries or markets, we incur some extra costs, and those investments will adversely affect this year's result in the segment, although they are critical to building the business for the long-term.

We also will be adding new headcount in various parts of the international business, as we continue to make sure we have in place the resources to effectively support our International Franchisees [indiscernible] modest decline in segment operating margin from the levels we posted in fiscal 2013 as a result of these investments in the future. And we don't expect much overall increase in operating profit in the segment.

Looking to the Supply Chain, we see total revenues, including intercompany revenues, growing in the range of 4% to 7%, generally consistent with the growth we expect in systemwide sales. We look for operating margins in the Supply Chain to be flat.

On the G&A line, we expect spending to be flat to down slightly, with the exception of startup costs associated with our new planned ERP system. We spent about $0.5 million on that project this past year, all of which was expensed. That's almost $0.01 a share. This year, we intend to make a decision on what platform we'll use going forward, and begin implementation of that platform, with the goal of having the first elements of the new platform go live in the first or second quarter of next year. That's fiscal '15.

While much of the cost will be capitalized, our current estimate of costs that will be expensed this year is in the range of $1 million to $2 million or from $0.01 to $0.03 per adjusted share. Those costs are baked into our guidance for fiscal '14. Depreciation will likely be in the range of $10 million to $12 million, and we currently expect this year's CapEx to be in the range of $23 million to $35 million. Now that's a really wide range, and much depends on how fast we can lockup desirable real estate for new stores.

The net of all of the above is that we expect operating income in the range of $41 million to $44 million, and that would be an increase of 13% to 21% from the $36.4 million, 52, results for the past year. We expect the GAAP effective tax rate in fiscal '14 to be about 45%. In terms of current or cash basis income tax expense, we expect a number of roughly $3 million.

All of the above, if achieved, would put adjusted net income in the range of $37 million to $40 million or from $0.53 to $0.57 a share. Based on the current stock price, we forecast diluted shares outstanding for the year to be something along the order of 70 million shares.

And now I'd like to turn the call back to Jim for concluding comments.

James H. Morgan

Thank you, Doug. Let me attempt to summarize. We are firmly committed to growing our revenue this fiscal year, and delivering on our profitability targets as Doug outlined. [indiscernible] to continue to invest in the future, and that remains a priority at Krispy Kreme. Therefore, our spend on technology and global franchise development will increase, as well as investments of the resources required to accelerate the growth of company stores. Fortunately, despite these investments, we believe we can [indiscernible] We believe these investments will enhance our financial prospects for the long-term. In fact, these investments, along with a continued focus on our strategic initiatives, are key to our future. We believe they will enable us to generate very healthy and attractive cash flows, and enable us to smartly allocate capital and optimize long-term returns for all the stakeholders. We are particularly grateful to our team members and our franchisees for making this extraordinary year possible. And we also thank each of you for your interest in our company and for being with us today.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Michael Gallo with CL King.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Doug, just a clarification. I look at the adjusted earnings numbers, looking at it on a 14-week basis, if we take out of the $400,000 related to the 2 international items. Certainly, we haven't expected. And then also it sounded like $1 million of some other items with the tax asset protection plan, et cetera, which were in SG&A. Would the real operating income number on the 14-week basis have been more like that $9.8 million or am I missing something there?

Douglas R. Muir

No, it's hard to do math here on-the-fly, but that sounds right, Mike.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Okay. That's good. Second question I have is you now have your first of the new small boxes opened, I think, for mid-January. Is that pretty much performing to what your expectations were? And give us a feel for, Jim, how you expect the franchisees and others to look to the development agreements. Are there discussions going on now? Do you expect you'll need to get through this year and you really want to see how some of these stores are doing? Or is there enough excitement given where you expect the returns to be, that if people see just a couple of stores doing well for 3 or 6 months, that they might look to accelerate things?

James H. Morgan

Sure, Mike, and as you know that's an important part of our future. First part of your question, you know how we have our honeymoon periods on our new shops, and so very hard to tell where it'll settle out, but we could not be more encouraged by what we're seeing right now. So, certainly feel great about it at this point in time. I think we absolutely have current franchisees who will be ready to follow lead on that. As you know we call it the 110M, the new small factory, sooner rather than later. I think we would feel better getting a few more months under our belt, but I think you'll see the current franchisees stepping in on that. And as you know, we're in the early stage of beginning the expansion beyond current franchisees domestically. And I think you'll probably see that as the main model for new franchisees coming on board. So I think you can certainly expect some domestic franchisees to be building small factory stores during the course of this fiscal year.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Second question I have. Jim, when I look at -- you've got some franchisees that still have those off-premises rights, and I know not all of them are reverting back to, I think, about 20 20. Can you talk about any progress in bringing those back earlier? And then also, refresh my memory, that some of those agreements that you had in place had some lower than system average royalty. So is that something you think can happen this year or next year or how quickly you think you can bring that back?

James H. Morgan

Tough to give you a time line on that, but I will say this, we're working actively with those franchisees. And by actively, I'm talking about taking their input, and getting their thoughts and suggestions, and adjusting our thoughts to those. But I think that we will all come to a point where the franchisees, and us as the franchisor, find some win-win combinations and maybe readjust some of those agreements over the next couple of years.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Remind me, Jim, what the royalty rate is on some of those legacy agreements?

Douglas R. Muir

Mike, this is Doug. Most of those legacy agreements provide for an on-premises royalty rate of 3% compared to 4.5%, which is the going rate. Most of them provide for an off-premises royalty of 1%. Most of our new vintage contracts for off-premises have a contractual rate, generally, of 4.5% off-premises but we're currently only charging about 1.5% or 1.75%. And in any case, in that new franchisees group, they don't do much wholesale to begin with.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Right. And how many stores would be kind of covered under this? The legacy agreements where franchisees still have off-premises rights.

Douglas R. Muir

Mike, I don't remember right off hand. But so many people have asked that question. Watch for the K in a couple of weeks and we'll answer that for you.

Operator

And your next question comes from the line of Will Slabaugh with Stephens.

Will Slabaugh - Stephens Inc., Research Division

I just wondered if you could talk just a little bit more about the consumer trends that you saw throughout the quarter. Maybe on a month-to-month basis, if you would. And then appreciate the detail on February and talking about the continued strength there. Just kind of wonder, given the more guarded and real volatile commentary that most of your peers have been giving over the past few months, kind of what you guys have been seeing week to week, and just given your absolute numbers have maintained that high single-digit rate. Didn't know if you'd see more volatility week to week, et cetera, or you're just very pleased with the trend that you are seeing.

Douglas R. Muir

Let me take a shot at it, in terms of breaking down the quarter for you by month. The December was by far the strongest of the quarter. It was in double digits. But I'll just give you the numbers by month and we just won't have a mystery about it. November, the total comp was a plus 6.3%, December was a plus 11.6% and January was a 4.7%. Now before you get carried away, let's talk about December and January. We have a weird calendar this year, as I mentioned earlier. At Krispy Kreme, December fell in January this year -- excuse me, I'm sorry, thank you, Amy. Christmas fell in January this year. That's not on most of your calendars, but it works that way on a Krispy Kreme calendar. Business Christmas week is usually kind of slow. So when you're comparing a December this year, that didn't have Christmas with one last year that did -- so in other words you have to flip-flop due to Christmas, between January and February, so I don't -- excuse me, between December and January, so I don't read much of anything into that. We just gave you the numbers. Traffic count was great in February. Maybe I'll let Jim talk about the longer-range, but so far, I guess our gut is that the expiration of payroll tax holiday and higher gas [indiscernible] hard to see us getting smacked just yet.

James H. Morgan

Will, this is Jim, and I would agree with what Doug said. It feels good out there to us. I mean, we're seeing a continuation of what we saw gradually build and in the course of the most recent fiscal year. And we've got a lot of proactive things taking place and maybe we're getting the payoff from our marketing and operations team working so well together and some of the economies we've developed over the last couple of years. But, as you know, we're not through with those. So the momentum is there for us and we don't see anything changing right now.

Douglas R. Muir

Just a little more color to add. The comps in week 5, which is the first week of our month of March, were plus 9%. And Valentine's Day which, generally is -- I think until our birthday last year, was probably the biggest day of the year. We had the best Valentine's Day ever this year. So customers seem to be enjoying Krispy Kreme as much as ever, despite gas and the expiration of the payroll tax thing.

Will Slabaugh - Stephens Inc., Research Division

Great, that's helpful and all great to hear. So appreciate that. I wonder if you could talk to, a little bit more, about coffee and the progress that you made there inside the stores. And then maybe even more than that, plans that you may have to sell your coffee outside of your stores, potentially bagged coffee in grocery stores or take up opportunities, et cetera, and what you might see with your coffee brand down the road.

James H. Morgan

Will, it's Jim. I'm going to give you kind of a big picture answer on that and let Doug fill in some blanks with maybe even some numbers. As you know, we're still deeply committed and still believe that we are on the right path with it. It continues to gain traction within the stores. And we're going to continue, you'll see us promoting it even more this current year. The specialty coffees seem to have caught on in the wintertime, which is great. And we've got to carry that forward as we get into -- start getting into warmer weather again, with iced coffees and other beverages. But we're on track to see that become a bigger part of our life. And same thing on the off-premises side, we haven't announced anything yet. But we think the brand, and the great coffee that we've come up with, give us an opportunity for not only bagged coffee but maybe some other coffee-type product lines in that distribution channel. And I think you'll be hearing something about that during the course of this year. Let me give it over to Doug and see what he can do to make it more specific.

Douglas R. Muir

Yes, let me run some stats here. And there are hundreds of them around, but just a couple of highlights. And this is on an established-stores basis and that's stores open approximately 2 years. And we do that so you don't get the weirdo honeymoon effects you sometimes do when you do same-store. So looking at established stores, the total beverage unit, this is beverages of all kinds, were up about 10.4% in the quarter versus a year ago, which I thought was pretty good. The broader coffee category, looking just at coffee, not only drip but espresso and iced coffee and anything with the word coffee in it, the total units were up 20% in the fourth quarter over a year ago. And the percentages are still pretty small because the doughnut business is so great, but we think we're making slow but steady progress. We wish it were faster but, yes, not too shabby.

Will Slabaugh - Stephens Inc., Research Division

Got you. That's helpful. And then last question for me is -- I wonder if you could talk a little bit more about incremental margins, how I should think about those for fiscal '14 versus what we saw this year. And you mentioned some of the investments you guys will be making this year. But I wondered, outside of reasons you've called out, your guidance does imply the incremental margins come down a little bit from what we've seen this past year. So wondering, equals -- being more puts and takes at some of those investments you split about a minute ago, maybe you should a little bit more conservative about it possibly.

Douglas R. Muir

Overall, we expect the segment operating margin, in the Company Stores segment -- I mean, hang on, let me look and make sure I quote the correct number for this year. Segment op [indiscernible] percent, that's a 53-week number but I don't think it's a whole lot different if you did it on a 52. We think that number's going to grow [indiscernible] of that baked in. But, yes, I think that number is going widen out, and as the net effect of the pluses and the minuses that I ran through in the script. All in was 2.9%. That's a 53 week number but I don't think it's a whole lot different if we did it on a 52. We think that number is going to grow next year. Is it going to double? Gee, I hope so, but probably not and I don't have a doubling of that baked in. But, yes, I think that number is going to widen out, again, as the net effect of the pluses and minuses that I ran through in the script.

Operator

Your next question comes from the line of Conrad Lyon with B. Riley & Co.

Conrad Lyon - B. Riley Caris, Research Division

My first question is just about that. I know it's hard sometimes, to get the detail behind the sales. But I can see that your transactions obviously grew nicely, customer account I should say, but the average check came down a little bit. Maybe you could just talk about that. Do you see, simply, just more people coming in, maybe buying more traditional glazed doughnuts, things like that?

Douglas R. Muir

You're right. Sometimes it's hard to tell. One thing that I think probably did influence it in the quarter was that we might have gotten just a shade carried away on our couponing. And we did do a fair amount of couponing and that generated a lot of transactions. But I suspect couponing probably was at least a chunk of the reason for the check. We're still looking at the numbers because they're kind of fresh in doing the analytics.

Conrad Lyon - B. Riley Caris, Research Division

Got you, okay. Let me jump into Domestic Franchise growth. Can you give any color about what territories would likely see the most robust growth coming up here the next call it, 12, 24 months?

James H. Morgan

Conrad, it's Jim. Are you talking about within new areas where we already have franchise or are you talking where we see the greatest opportunity for new franchising?

Conrad Lyon - B. Riley Caris, Research Division

Both. I'd just be curious to see. And that's kind of the question. Are we going to see existing franchisees kind of take the load or are we going to see new franchises and kind of see what the expectation is for...

James H. Morgan

Yes, sure. I think as far as this year is concerned, you'll see the majority of the concurrent franchisees. We hope to be not too far away from announcing the beginning of new franchisees. We've had a new Development VP, Patricia Perry, on board for a few months now, and she's working hard and we've gotten the infrastructure in place. But the majority of them this year will be concurrent franchisees. And then beginning next year and beyond, you should see a good blend with how we think of venture and the new franchisees taking up a bigger part of the load.

Conrad Lyon - B. Riley Caris, Research Division

Got you, okay. And that brings me to my other question. You did a nice job at ICR, detailing out your expectations for unit growth going out to fiscal '17. So it certainly looks like as though you expect a nice acceleration in domestic growth going out. Is that going to be predicated on, obviously -- are there new arrangements that you had planned to sign to achieve those numbers going forward?

James H. Morgan

Yes, 3 components. It is the new franchisees coming in and the units we think they'll be building, it's the current franchisees and the fact we think the 110M is going to increase the potential, the number of units that they might want to build. And then, quite frankly, it's predicated upon, I think, a higher growth rate in the number of company stores that we do over the next few years. So it's all 3 of those.

Conrad Lyon - B. Riley Caris, Research Division

Okay. Different question. Balance sheet. Stockpiling a nice level of cash here, and any sense what might happen with that cash as you move forward?

James H. Morgan

Well, the last thing I just said is part of it. It gives us the opportunity to accelerate growth in company stores and we will certainly be doing that. As you know, there's a lag time on that, with getting the right real estate and some other processes that go through that. So I think that will be a part of it. I think we've been open in saying that we think there are ways to maybe make going into the Krispy Kreme franchisee business more economical for our potential franchisees or our current franchisees. So we've got ways of maybe helping them on, who knows, maybe a lease program on equipment as supposed to upfront full cash. So a couple of things like that and, quite frankly, we're going to have the shareholder in mind. And we're going to use that cash however we think is going to provide the greatest return for shareholders, and as you know, there are a couple of other vehicles. But we think the best way, initially, to do is through the internal use and getting a real return on it internally. So that's where our first choice would be.

Operator

Your next question comes from the line of Nick Setyan with Wedbush Securities.

Nick Setyan - Wedbush Securities Inc., Research Division

On the guidance for meeting your growth next year, is that going to be mostly the newer, the smaller format, 110M stores?

Douglas R. Muir

Yes, sure. I think there's one tunnel oven that's leftover real estate from an earlier commitment. But, yes, it's the free-standing small factory with the 110M is the thing we are absolutely going to be concentrating on this year, and probably into next year.

James H. Morgan

And that's within the Company Stores segment. And with the Domestic group, this year, probably more satellites than there are those. But then, probably in the ensuing years, you'll see the same trend with them that Doug just expressed for the company stores.

Nick Setyan - Wedbush Securities Inc., Research Division

Okay. And how should we think about the quarterly cadence of the openings there?

Douglas R. Muir

Wow. It's hard enough for us to figure out a year. But, let me see here. If I look at -- internally, they're pretty even on the company, based upon the forecast. Again, forecasts are hard because the wildcard in real estate is the permitting. That's what can set you back weeks if you get in a contest with the local, what, presenting and regulatory guy. They are not -- domestically, they are not noticeably front-loaded or backloaded. Internationally looks to me like they're a little backloaded.

Nick Setyan - Wedbush Securities Inc., Research Division

Got it. And then in terms of the guidance, you mentioned the comp guidance did not include the price increase of 3% in March. Does the EPS and profitability guidance, does that include the price increase?

Douglas R. Muir

Yes, sir.

Nick Setyan - Wedbush Securities Inc., Research Division

Okay. But does it include the wholesale price increase?

James H. Morgan

Yes.

Nick Setyan - Wedbush Securities Inc., Research Division

Okay, it includes both of those. Got it. In terms of the shelf life...

Douglas R. Muir

I'm sorry, the only thing I would add to that, Nick, is remember the wholesale pricing isn't going to come, in all likely, till at least the third quarter. So the retail pricing is a lot bigger lift than anything that comes in wholesale, just because of the way the calendar works and when the rollout comes.

Nick Setyan - Wedbush Securities Inc., Research Division

Got it, got it. On the wholesale side again, I know we've talked about possibly having a mix that could increase the shelf life. Are we anywhere close to that this year possibly?

James H. Morgan

One thing. Nick, it's Jim. And I'm learning a lot about R&D in my time here, and it's kind of like those authorities in our towns that Doug just mentioned it, you bet on a timeline and it doesn't always come through. So our group is working real hard. I think it's easy to say we're much further along on that than we were months ago, but we don't have a set time that we want you to expect that at this point in time.

Nick Setyan - Wedbush Securities Inc., Research Division

Got it. And then just finally, when we do look out to those 1,300 stores in 2017, maybe you could just kind of give us a breakdown of how many of those you think will be company, how many of those you think will be domestic franchisees and how many you think will be international or just percentage perhaps?

James H. Morgan

Yes, that's interesting. Nobody has ever asked us to break down on the 400. The 900 should be international. So that part's easy. We're close to almost 100 company stores now and about 140 something are domestic franchisee. So, the next 160, I would think, by the time we get to that time frame, and this is a wild guess, but I would think those 160 will probably be, 3 to 1, franchisees. That's good a guess as I can make at this point in time, but please put it down as a guess.

Operator

Your next question comes from the line of Alton Stump with Longbow Research.

Alton K. Stump - Longbow Research LLC

Just on the comp guidance front, and I might have misheard this. But I think you mentioned, Doug, that you think you're going to see low single-digit comp sales in your domestic company-owned stores. Is that just volume that you're talking about or does that include the pricing?

Douglas R. Muir

X pricing, let me go -- I'm going to give you a wide range just because this is all really prognostication. But x pricing, if we came in somewhere, all in, in the 2 to 5 range, before pricing, we expect to be a number you can see. Okay? A 1 would not be a win in our point of view. And my guess on pricing, pricing would probably add a couple of points. So, all in, if you came in, in the maybe, the 4 to 7, but this is probably the toughest estimate we make. But that's kind of a order of magnitude that we hope to achieve.

Alton K. Stump - Longbow Research LLC

Actually make sense. And then I guess just as a follow-up to that, I think you mentioned that you expect there'll be modest EBIT margin improvement in the Company Stores segment. If you're beginning [ph] to start those comp sales and you're continuing to open up as more profitable and however smaller locations with satellite stores, I would think that there'd be more upside than just modest. Or is it just a matter of what spending that you have in place for [indiscernible], that you want to be cautious heading into the year, to not get too over exuberant?

Douglas R. Muir

Well, we never try to be overly exuberant. I'll tell you one thing. Opening a factory store is a different beast than opening up a tunnel oven or hot shop. It is a full production line. It's a bigger crew. It's a whole lot more training. And as I indicated, $100,000 a pop front-end loss is not at all unusual. I mean, I'm delighted to do it because I think we're going to make a ton of money, but there is some pain upfront. So in the business that only has about a 3% operating margin, if you were to end up incurring, conceivably, $600,000 or $1 million of front-end losses, I'd be tickled pink. The more I can open this year, the happier I'll be, but they'll probably cost me $100,000 a piece against current earnings. I'll say, I'll do that all day long. But it does put some pressure on margins.

Alton K. Stump - Longbow Research LLC

Okay, great. And then I guess just the last question is -- I think you're 1 of like the 2 quick service restaurant companies to actually report accelerating same-store sales growth here of late. And I think you talked back, if you go back to first half of most recent fiscal year, that you had some holiday promotions. Or I think, with the anniversary promotion, it worked well. But you haven't had that, yet you still, even without those, continue to post some awfully nice acceleration on the comp front. Is there any certain, maybe 1 or 2, factors that you can point to that is driving that? Is it just a matter of your new message, is it starting to stick home with consumers or is it something else going on in your view?

James H. Morgan

Alton, it is a great question. And we talk about it, as you can imagine here, a pretty good bit. I think that those events you talked about, you're right, we haven't had one recently but they certainly drove presence of mind. We were so visible, in social media in particular, as a result of those, and therefore, the halo effect was clear for weeks. But I think maybe return visits are still taking place because people were kind of reminded of what takes place when you go to Krispy Kreme. So I think it's that and I think it's the things we talked about. Just the extraordinary job that our marketing group is doing, extraordinary job that our operations group is going in bringing all that together, and some of the atmosphere we're creating in our shops and the more attractive shops. I think it's a little bit of all of those. And we think there's still some more of those type of things to do. So, we believe that the momentum's there, but we think it's up to us to keep it going and we think we got some more things that can encourage that momentum to remain.

Douglas R. Muir

I mean, the only thing I would add to that is -- I mean, let's be clear, comps and comparisons across-the-board are going to be tougher. We had a great year with great operating margin improvement in the stores and some jaw-drop comps. We've said, all along, that we think that's driven by marketing and by better execution in the stores and by store remodels. We've said we think there's mileage to go on all of those and we're not done yet, and we are going to go after it.

James H. Morgan

Keep in mind, we've also got the doughnut use occasions that we're just beginning to penetrate. We don't really have a broad day-part penetration. I mean, the great thing about what we're working on, Alton, is that we're trying to be patient, we're trying to just bite off one bite at a time, but the opportunities we see, to keep that momentum going internally and have that halo effect remain, are great. So we're just going to keep kind of going after them 1 or 2 at a time and see if we can't keep it moving.

Operator

No further questions at this time. I would now like to turn the call over to Ms. Anita Booe for closing remarks.

Anita Booe

Thank you, everyone, for your time. And just as a reminder, we will be presenting at the ROTH Investor Conference on Monday, March 18th 10 a.m. Pacific Time. Thank you and have a great evening.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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