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Krispy Kreme Doughnuts (NYSE:KKD)

Q1 2014 Earnings Call

May 30, 2013 4:30 pm ET

Executives

Anita Booe

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

Conrad Lyon - B. Riley Caris, Research Division

Nick Setyan - Wedbush Securities Inc., Research Division

Will Slabaugh - Stephens Inc., Research Division

Michael Halen - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2013 Krispy Kreme Doughnuts Earnings Conference Call.

My name is Philip and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Anita Booe. Please proceed, ma'am.

Anita Booe

Good afternoon, and welcome to the Krispy Kreme First Quarter Conference Call. My name is Anita Booe and I am 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 2013.

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

James H. Morgan

Thank you, Anita and good afternoon, everyone. We are pleased to have begun this new fiscal year with very strong first quarter and we look forward to what we believe will be an exciting and successful year for Krispy Kreme.

As stated in our earnings release this afternoon, revenues for the quarter increased over 11% as we experienced top line growth across all 4 segments. Most notably, we delivered our 18th consecutive quarter of increased same-store sales at Company Stores, which rose an astounding 11.4%. This performance, which we believe significantly outpaces the industry, was driven primarily by higher customer counts, with only approximately 3% resulting from pricing.

We are certainly proud of our team for their contributions to our same-store sales gain and we are appreciative of our guests and customers for making Krispy Kreme their destination of choice. However, we do urge you not to extrapolate this quarter's same-store sales through the balance of the year, given the tougher comparisons we will face over the next 3 quarters. Although we do expect to have continued gains in same-store sales, we do not expect double-digit gains for the balance of the year.

In the wholesale channel, average weekly sales per door for both grocers/mass merchants and convenience stores also increased significantly, as our customers found more occasions to consume Krispy Kreme products outside of our retail stores. In terms of profitability, we posted a 40% increase in operating income with improvements in 3 of our 4 business segments, including significant traction in Company Stores, while adjusted net income rose 37%. We also generated nearly 40% growth in operating cash flow, which we view as a key barometer of business model strength.

In assessing our first quarter results and our updated outlook for fiscal 2014, the overriding theme we hope to impress upon you is the following: We have now raised the bar on our earnings performance and we believe we have embarked on a long-term pay up, which will be one of ongoing and sustainable growth for many years to come. Doug will provide additional commentary on these subjects shortly, but first, I would like to review our strategic roadmap, as well as provide an update on our plans for the year.

At existing Company Stores, we intend to continue to leveraging our brand's differentiation in order to grow sales and profits in 5 ways: First, we will promote new doughnut-use occasions throughout the day and night. Second, we seek to own the doughnut category by maximizing dozens and innovating with limited time offers, as well as adding new flavors and shapes. 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 to improve shop atmosphere and team member hospitality.

For the quarter just ended, we celebrated Valentine's Day, honored Everyday Superheroes and kicked off summer Key Lime treats paired with new frozen beverages. Our success in these endeavors is evident by our aforementioned double-digit increase in same-store sales, as guests responded favorably to our product, limited time offers, enhanced store-level execution and local and social media marketing. In addition, we are pushing ahead with our Company Store development model of building small, freestanding factory stops that have the full doughnut-making capability of traditional stores, but are substantially smaller than a traditional doughnut factory. These small factories serve retail guests only and do not participate in wholesale distribution. In the quarter, we opened a 2,300 square foot freestanding factory shop in Knoxville, Tennessee area, while another small factory shop opened this week in Jacksonville, Florida. We now have 3 of these new freestanding small factory stores and anticipate opening 7 or 8 more before the end of the year. While it is still early in the process, we are optimistic that we can achieve at least a 20% cash-on-cash return with average weekly sales in the $20,000 area, a sales number significantly less than our current average for freestanding retail-only factory shops.

We are projecting that existing domestic franchisees will open 10 or more new units this year. With the ongoing expansion of both the Company and Domestic franchise units, our recent announcement of newly-added resources to lead our Domestic Franchise expansion efforts and anticipation of signing additional franchise commitments in the not-too-distant future, we believe our objective of having over 400 domestic shops by January 2017 remains very feasible.

To complement these domestic development goals, we look to have 900 international shops in operation by the end of January 2017, through a combination of development in existing markets and the entering of new markets such as Taiwan and Moscow, among others. We have approximately 360 shops in the international pipeline and we continue to work on opportunities in Europe and Central and South America.

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

Douglas R. Muir

Good afternoon and thanks for joining us. Total revenues increased 11% in the quarter to $121 million. Consolidated operating income rose 40% to $15 million, while adjusted earnings per share rose 37% to $0.20 from $0.14 last year.

In the Company Stores segment, total on-premises sales rose about 15%. That's a function of great comps and a higher number of store operating weeks. The big story, once again, was the continued strength in comps, which rose 11.4%, our 18th consecutive quarter of higher same-store sales.

Same-store traffic count rose over 10%, which increased comps in the quarter by about 8.7%, and pricing contributed another 3 points. All other factors were a net minus 0.3%.

As we move into the second quarter, we continue to see positive comparisons. Comps rose about 11% for the first 3 weeks of May, which ended last Sunday. In the wholesale channel, first quarter revenues rose 8.6%, driven by higher sales in both the grocery/mass merchant and convenience stores channels. Average weekly sales per door in both channels combined rose approximately 12% year-over-year, while the average weekly number of doors served declined about 4%. The Company Stores segment posted operating income of $5.3 million compared to $2.9 million in the first quarter last year.

We continue to be really pleased with the improvement in the profitability of this segment and continue to believe there is opportunity for continued gains in profitability in the quarters and years ahead.

In the Domestic Franchise segment, first quarter revenues rose about 9%. Royalties were up about 12%, consistent with the rise in domestic franchisee sales, including a strong 11.3% increase in Domestic Franchise comps. We think it's great that the success of our company shops that they are experiencing on the comp front is being mirrored in the Domestic Franchise community.

The royalty increase was partially offset by lower initial franchise fees.

From a profit viewpoint, the revenue increase was offset by higher costs, including costs we are incurring as we begin to engage in active recruiting of domestic franchisees for the first time in years. Investments in development of current and new franchisees are ones we think will pay off over the long run. Operating income on the segment was $1.4 million compared to $1.6 million last year.

Over in the International Franchise segment, revenues increased 7% to $6.4 million. Sales by International Franchise stores rose about 5%. Changes in foreign exchange rates, principally the yen, have adversely affected international franchisee sales measured in US dollars. Changes in exchange rates compared to last year's first quarter reduced international franchisees sales by about $3.7 million, which adversely affected royalty revenues by approximately $220,000.

Adjusted to eliminate the effects of changes in foreign exchange rates, same-store sales at International Franchise shops fell 7.3%, reflecting, among other things, honeymoon effects from the substantial number of international store openings in recent years, as well as cannibalization as markets develop. The International Franchise segment generated operating income of $4.5 million, flat with last year. The quarter's results reflect a provision of $120,000 for potentially uncollectible accounts. More significantly, we're 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, including costs to support openings in new markets. As is the case with domestic franchisees, we believe investments to attract new franchisees and to support both current and future franchisees are among the wisest uses of our resources and that those investments will pay dividends over the long term.

In the supply chain, revenues, including sales to Company Stores were $60 million, an increase of about 11%. The supply chain generated operating income of $10.2 million in the first quarter compared to $8.5 million in the same period last year. Lower provisions for potentially uncollectible accounts and for slow-moving inventories, positive mark-to-market adjustments on derivative positions and economies of scale contributed to the margin improvement.

Turning to general and administrative expenses, total G&A was $6.1 million, down from $6.5 million last year. Last year's G&A included about $600,000 of share-based compensation expense related to an executive officer reaching retirement eligibility in the first quarter last year. That decrease was partially offset by higher incentive compensation provisions related to corporate employees.

Adjusted net income was $14.1 million, $0.20 a share, compared to $10.3 million or $0.14 a share in the first quarter last year. Adjusted net income and adjusted EPS, which are non-GAAP measures, reflect the income tax expense only to the extent currently payable in cash. We think that's the most appropriate 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 relatively insignificant for the foreseeable future.

There was 1 unusual tax item in the quarter. Both adjusted net income and GAAP net income include an out-of-period charge of about $600,000, or almost $0.01 a share, to correct accruals related to uncertain tax positions.

Our results for the first quarter significantly exceeded our expectations. That is great. But I note that in recent years, the first quarter has been the strongest quarter of our year. I'd also note that while we did not have particularly easy comparisons in the quarter, the comparisons are even more challenging as the year goes on. Among other things, we will be comping against some very strong sales numbers over the next 3 quarters. That said, based on our first quarter results and our current expectations, we are raising our fiscal 2014 adjusted net income guidance to between $42 million and $45 million, or from $0.59 million to $0.63 per share. That compares to our prior guidance of adjusted net income of $37 million to $40 million, or $0.53 to $0.57 per share. If achieved, our updated guidance would represent an increase in adjusted EPS, up from 26% to 34%, compared to the $0.47 a share we posted on a 52-week basis in fiscal 2013.

And with that, I'll turn the call back over to Jim for concluding comments.

James H. Morgan

Thank you, Doug. Before we begin our Q&A, I want to leave you with the following thoughts. We are off to a great start in fiscal 2014 with very positive domestic same-store sales, increased customer count to Company Stores, improved international same-store sales, a growing franchise pipeline, significantly improved operating margins and exceptional free cash flow.

As you know, we view Krispy Kreme as both an extraordinary company and an incredible brand, with significant opportunities in the marketplace. We are committed to executing with excellence and realizing our vision, and in doing so, generating strong financial results for our shareholders. We are obviously pleased with what we accomplished in the first quarter, not only in terms of the 3-month period itself, but more importantly, based upon how those results affirm our belief that we can generate sustainable earnings growth over the long term. The most exciting part of the Krispy Kreme story may very well be the myriad of opportunities for growth in products, day parts and store count that we have not yet begun to seize. To that end, we look forward to providing updates on the business as we move through the remainder of this year and beyond.

In closing, I do want to thank the Krispy Kreme community of team members and franchisees, as well as our guests and customers. This most recent quarter serves as a tribute to each and every individual involved with Krispy Kreme. We are both proud of and grateful to each one of you. To our shareholders, I want to reiterate our commitment to enhancing the long-term value of your investment in our company.

We will be hosting our Annual Meeting in Winston-Salem on June 18. We invite all our shareholders to attend. But if you are unable to do so, we do ask that you please vote your shares by proxy. There are important items on the ballot and it is important that your shares be represented at the meeting.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

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

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

Just a question on -- can you give us any update on where -- how things are going with the beverage strategy? What you saw in terms of coffee transactions? What you saw with the -- some of the lattes or some of the other offerings and just beverages in general? Whether you're seeing that gain momentum or whether it's just the core doughnut is still so strong that it's hard to tell.

James H. Morgan

I think the answer is yes and yes. The numbers that I can share with you that will help you a little bit there, I think, is the total beverage units were up about a little over 5% versus a year ago. Sales were up more than that, closer to 16%. I think that does reflect -- a portion of that reflects the fact that the lattes and some of the higher-priced coffee derivative drinks were picking up pace there. As far as trying to determine whether we're on track with our own hope for progress there, doughnut sales were so doggone strong that we're not really sure of that yet. We know that we're selling more units. We know that the beverage sales are up. But on a proportionate basis, probably not up as much as we would've liked to have had them.

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

Okay, great. Second question, Jim. Cash is obviously building up in the balance sheet and it seems as it continues to build up faster than you can spend it. So are you starting to get the read on the new 110M model factory stores. It would seem that the returns there should be pretty good. Should we look to see an expansion of company unit stores, or you think you'll look to keep the mix of franchise similar to where it is now. And also if you can update us on how the initial test is going and where you stand in terms of getting interest from franchisees to start to develop the concept domestically again.

James H. Morgan

Mike, certainly, the 110M and those 3 stores that have it now in our system are very important -- are very important to our future growth, but I think your assumption is correct. Let me just say, in a generic sense, that at this point, even though it's early, and I just want to caution you, it's early, I think saying that we are pleased with the early returns on those stores, would be an accurate thing to say. And if we continue to feel that way, then obviously, that model would be the one that we accelerate Company Store growth through. As I said in my comments, we'll probably do another 7 of those in the coming year. And yes, I do believe franchisees have shown genuine interest in that and we've been holding them back a little bit. By holding back, we want to be sure that we've got the model that can perform the way that we believe it should. And so I think you'll see, over the coming next couple of years, particularly within domestic franchisees, the 110M becoming a very important part of the expansion there.

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

Will you just hold it back until you get more data or is there something else you're looking for there?

James H. Morgan

No, it's purely a matter of just get our company to the point that is -- that we got -- trying to make sure we discount the surge that we have when you open a new store and that we get into a routine. And now, we're coming into the summer quarters, which that will give us some good things to look at too. Nothing beyond that, though.

Douglas R. Muir

Yes, but there's a lot of noise in the numbers, Mike. I mean, for example, the only store that has had any appreciable length of operation is Greenville, South Carolina, that opened in January. It did an average of $68,000 a week in January, so that's clearly honeymooning. In February, it did about $55,000 a week. In March, it did $43,000, and in April, it did about $36,000. So we're seeing the curve look pretty much like we would expect it to look. At $36,000 a week, that store's build-to-suit and that store's putting out a cash-on-cash return in the 30% or better range at that kind of sales volume, which I think is consistent with what we've seen and expected to see. But it's still early. We'll update you on that next quarter and share what we see with the additional stores that we've opened. But we're very encouraged, as Jim indicated, so far, but it's still early.

Operator

And your next question comes from the line of Conrad Lyon from B. Riley.

Conrad Lyon - B. Riley Caris, Research Division

Probably a question for Doug. It's a question about the guidance. Can you talk about how much of the guidance lift was a result of the out-performance in the prior quarter and how much is related to better expectations going forward?

Douglas R. Muir

Yes. I think our -- the midpoint of our guidance, I think, is up about $0.06 a share from where we were. A little bit -- it's -- call it 50-50, roughly. The comparisons are going to be tougher in the second half -- or the second -- I should say, I'm sorry, the last 3 quarters. We're very optimistic about our prospects for the balance of the year, but I don't expect to have $0.20 versus $0.14 for 3 more straight quarters. The comparisons are going to be tougher, but we think they'll be great quarters.

Conrad Lyon - B. Riley Caris, Research Division

Got you. And if I could dig a little deeper, I think last quarter, you indicated that traffic was up strong in February, then you had a nice start to March. Obviously, it looks like that momentum continued throughout the remainder of the quarter. Are you seeing that same type of momentum going into the new quarter here?

Douglas R. Muir

Yes, pretty much. We've only got 3 weeks worth of data, but I think we did about 11.4% for the first quarter and comps for -- through the 3 weeks were 11%. We haven't messed with pricing, so yes, the traffic counts continue to be very, very strong.

Conrad Lyon - B. Riley Caris, Research Division

Got you. And this leads to my final question. So in my opinion, it looks like you also might be taking share from somebody. I mean, if that's the case, do you think you are, in fact, taking share from other folks out there, especially given your price point relative to other more expensive indulgences, call it cupcakes or what have you?

James H. Morgan

I mean, that's a good question. We're sort of laughing at ourselves here, definitely not the question. We're not sure about that. I think more of it -- I think that could be some. I think more of it may be that we're doing a better job, and when people come in, they're having a better experience. And I wouldn't be surprised if we've narrowed down that once every 30-day average that we had in our customers for years and our guests, to something less than that, that we might just be getting people slightly more frequent and people just got us a little more front of mind, if that makes sense. It's a difficult thing for us to try to measure, the taking of market share, and that's just something we don't really have a metric on.

Operator

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

Nick Setyan - Wedbush Securities Inc., Research Division

A quick question around the franchise development. I think you guys said, you expect at least 10 more units this year, and that you are in conversations, it sounds like, with some more new franchisees. I was hoping maybe to get some updates around timing of possible entrance into the system of new franchisees and how confident you are on that 10-unit addition this year on the franchisee side. I'm not sure if you guys broke out in the press release how many were added this quarter. That would be great if you guys could also give us some color around that.

James H. Morgan

Nick, I'll see if I can answer part of that. You were fading out on us just a little bit, but let me get started on the answer. Yes, we -- I think we were actually expecting to be able to share some news on Domestic Franchise development over the coming weeks and months, and the answer is, yes, we do. There's a lot going on in the background there and we certainly think we'll have things coming to fruition and we think there'll be news on that in the not-too-distant future as the beginning of what we hope will be ongoing domestic development for the first time in 10 years, as you know. I think Doug may have some thoughts on the couple of other parts of your question.

Douglas R. Muir

Yes, Nick, of the total openings, only 1 of them in the quarter was domestic. There was 1 domestic opening and 27 international. I think the number of 10 is still in the ballpark. I would not expect it, based on what I know now, to go any higher than that. But I think 10 is a potentially doable number.

Nick Setyan - Wedbush Securities Inc., Research Division

Okay, great. And the other question is on the supply chain margins, part of the upside this quarter was company operating profit, obviously, given the great comp, and part of it was also the supply chain profitability. Is that something that we should continue to expect going forward? Are there things that are -- that you guys are doing that are permanent that we should think about with regard to the operating margin there? My impression was that, that operating margin was probably going to stay around flat to maybe even go down a little bit as you share sort of more of the economics with the franchisees to make it more...

Douglas R. Muir

If you reconcile and try and do an exercise and look at the rise, the percentage increase in operating profit at the supply chain versus the revenue increase, there's a couple hundred thousand dollars delta in dollars between the 2 periods in terms of mark-to-market on derivative positions. That will recur, I just don't know when and in which direction it will be, because we do have some volatility anytime you've got open derivatives positions. Hang on. Let me look in -- for another number and I may be able to tell you a little bit more. Equipment reserves were probably favorable by roughly $250,000. That's not necessarily a recurring item. And we had lower bad debt expense in the quarter versus a year ago. So to answer your question, is no. I don't think an appreciable hunk of that is something that you should expect in the run rate. And our overall guidance that we expected, operating margin in the segment this year to be relatively flat with last year. I think that's still kind of overall what our expectation is.

Operator

[Operator Instructions] And next question comes from the line of Will Slabaugh from Stephens.

Will Slabaugh - Stephens Inc., Research Division

I apologize for the background noise here. I wanted to ask you a little bit more about the smaller-format stores. And you mentioned previously that you would assume, even if you were to do something in the range of the low-$20,000 a week, you would want to be able to put up a 20% return on that. I just wanted to ask it a little bit of a different way. Assuming that these newer stores do end up in that sort of $34,000 a week range, did I hear you right that, that would be roughly a 30% cash-on-cash return? Is that about the right number to think about?

Douglas R. Muir

Absolutely, Will. I think if these new, small retail boxes have AUVs of, call it -- I think our average Krispy Kreme freestanding retail-only store does about $34,000, $35,000 a week of retail sales. If these new small boxes do that, I'm -- I mean nothing is certain in life, but I'm about as confident as I can be that these boxes will put up cash-on-cash returns well into 30%, if done on a build-to-suit basis, at that kind of revenue number.

Will Slabaugh - Stephens Inc., Research Division

And then I want to follow-up too on sort of Patricia's role in this. So she's come on as VP of Franchising. And you gave us -- and I said it sounds like there are some talks in the works there. Any more color on her day-to-day and what those talks have been like?

James H. Morgan

Yes, Will, this is Jim. I think the good news is, I'm not sure I've had anybody come on board with any company that I've been with that had to start off running and has been running faster than Patricia's been running since she got here, and that's for all positive reasons. But we -- she was very conscientious about it, and we were conscientious along with her, getting to know Krispy Kreme first and making sure she got her feet on the ground and got a foundation laid of knowledge. I mean, Patricia did everything from working the shops to riding in our wholesale trucks. So -- but her day-to-day, there's a lot of context. She's in communication with a good number of people. There was sort of a backlog of interest, and she's been doing a lot of screening and meeting and traveling. And like I said, I think we're going to enjoy seeing some of the things she brings to us, to all of us, over the coming weeks and months.

Will Slabaugh - Stephens Inc., Research Division

Great. And last question for me, and this is one I'm sure you've heard quite a bit. But typically, it sounds like when people ask you why such strength in your same-store sales growth, you point to both the marketing initiatives, the high quality of the stores, that you've been remodeling stores and keeping them in better condition, and then some of the other things. I wondered if, given that you're already lapping over some of the marketing initiatives from last year so strongly, such as we're seeing in the most recent month and the quarter-to-date period, does that lead you to believe that maybe there's something else going on here and does your answer change there whenever someones asks you why the strength of same-store sales?

James H. Morgan

Yes. I'll try to summarize what I think are the primary factors in that. I still feel strongly that it's the combination of an extraordinary marketing team who was able to drive traffic to our shops, and the amazing improvement and commitment to operations, and therefore, having shops that can execute on that traffic when it's driven to them. That's macro, I know. But I really do think that's it. And I think on top of that, that we spent, as you know, the better part of the last 5 years, building the foundation that would facilitate that success, and I think that foundation that we sort of raised the bar on ourselves and I think we just got sort of a different beginning point for. And I think the front of mind has been created and the experience is taking place in those shops, and the tremendous use of social media are all combined, and we get little spurts of increase when we do a particular event or a particular [indiscernible] or certain occasion. But by and large, I think we've raised the bar on the norm through a combination of those.

Operator

[Operator Instructions] And your next question comes from the line of Michael Halen from Sidoti.

Michael Halen - Sidoti & Company, LLC

Just quickly, can you talk about the guest increase and guest check average, and how much of that was pricing versus mix?

Douglas R. Muir

Yes. Hang on, let me just get the page in front of me. Overall, pricing was about 3% in the quarter. So the average guest check in the first quarter last year was $7.14. And just doing simple math, if you multiply $7.14 by 103%, you would -- that would suggest that the average check in the first quarter this year would've been $7.35. It actually came in at $7.33, and I don't know what the $0.02 in mix is.

Operator

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

Nick Setyan - Wedbush Securities Inc., Research Division

Just one follow-up question. You guys in the past, when you talk about cash-on-cash return, you talk from the franchisee perspective, so minus royalty fee, minus the supply chain costs. The 30% we're talking about, that's still from the franchisee perspective, correct?

Douglas R. Muir

Yes, sir. That has a 4.5 point royalty baked into it and it has 2% maintenance CapEx baked into it. So yes. If I achieve that result, I do a lot better because I don't have the royalty.

Nick Setyan - Wedbush Securities Inc., Research Division

So is it safe to say that the company cash-on-cash returns are maybe even north of 50% on these things?

Douglas R. Muir

Well, it's -- I've got somebody exactly working on the math on that for me, but they are -- building more stores, if they produce this kind of result, produces a really great return on shareholder money, if you ask me. I don't think there's any doubt about it.

Nick Setyan - Wedbush Securities Inc., Research Division

So I mean, would it make more sense then maybe just to forget the whole franchisee model and just focus on the company development, given the fact that you're getting cash-on-cash returns on some of these new stores that are north of some of the coffee names out there, even north of the some of top-performing, industry-leading restaurants out there.

James H. Morgan

Nick, it's Jim. I think that -- I still believe the franchisee model is the right model for us long-term, but I also think, to give you a little hybrid answer, that with what we're seeing and the early experience on the 110M, that accelerating Company Store growth into new territories is also going to be an essential part of the growth plan.

Operator

Ladies and gentlemen, this will conclude today's question-and-answer session and I would now like to turn the call back over to the Anita Booe for closing remarks.

Anita Booe

All right. Thank you guys so much. Have a great evening. Talk to you soon.

Operator

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

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