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Krispy Kreme Doughnuts (NYSE:KKD)

Q2 2014 Earnings Call

August 29, 2013 4:30 pm ET

Executives

Anita Booe - Director of Investor Relations

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

Will Slabaugh - Stephens Inc., Research Division

Anton Brenner - Roth Capital Partners, LLC, Research Division

Alton Stump

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

Michael Halen - Sidoti & Company, LLC

Jeffrey F. Omohundro - Davenport & Company, LLC, Research Division

Nick Setyan - Wedbush Securities Inc., Research Division

Conrad Lyon - B. Riley Caris, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Krispy Kreme Doughnuts Earnings Conference Call. My name is Crystal, and I will be your coordinator for today. [Operator Instructions] I would now turn the presentation over to your host for today's conference, Ms. Anita Booe. Please proceed, sir -- ma'am.

Anita Booe

Good afternoon, and welcome to the Krispy Kreme Second 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, Chairman, President and Chief Executive Officer; and Doug Muir, Executive Vice President and Chief Financial Officer.

Some of the segments on today's call will include 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, risks 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. The second quarter showed continued progress at Krispy Kreme, marked by ongoing substantial gains in domestic same-store sales, continued traction in company store operating income and significant improvement in our bottom line. We continue to be enthusiastic about the remainder of the year, and the financial performance and strategic progress we have made thus far, we believe, justifies our enthusiasm. I would like to briefly review highlights from our P&L before moving to our ongoing initiatives that we believe will continue to unlock the full potential of our brand.

Quarterly revenues increased 10%, with roughly double-digit contributions from 3 of our 4 segments. Most notably, Company Stores have now generated 19 consecutive quarters of same-store sales increases, including a 10% gain in the second quarter. This track record is even more impressive when considering that many of our QSR peers have experienced a noticeable slowdown in comp sales and traffic over the past several months.

The overwhelming majority of the increase was driven by higher customer counts, with only 3.8% from pricing. The uniqueness and credibility of our products are what continue to make Krispy Kreme the go-to destination for consumers looking to treat themselves, and they certainly did so in the second quarter.

We do believe the cooler, wet weather compared to last year may have put some wind at our back during the period, but weather certainly was not the driving force behind another period of outstanding same-store sales gains. Rather, the driving forces continue to be inspired marketing and continuously improving in-store execution.

In terms of our beverage category, total sales at established stores were up 6% versus the year-ago period. We are seeing a shift in our beverage mix towards coffee, which accounted for 45% of our beverage sales mix, up over 5 points from last year. Further, total coffee category sales were up 19%, driven by a 156% increase in higher price espresso-based beverage sales.

With this shift towards coffee, we did see a decline in our frozen chillers versus the year-ago period. We believe this was a function of our marketing focus on coffee, coupled with the cooler weather experienced in many of our markets this summer.

Overall, we believe we are making steady progress in the beverage category and remain encouraged, as Krispy Kreme guests continue to respond positively to our coffee message that encourages them to trade up into our specialty coffees.

In the wholesale channel, average weekly sales per door for grocery, mass merchant and convenient stores increased, as customers found more occasions to consume Krispy Kreme products outside of our retail stores, even as they purchase more doughnuts at our shops.

From a profitability standpoint, consolidated operating income rose 15%, while adjusted net income grew 17% on just a 10% increase in revenues. As good as that was, our year-over-year performance was actually better than it appeared. The net of unusual charges and credits for the quarter cost us about $0.01 per adjusted share. Add to that a $0.02 adverse swing in gains and losses on agricultural derivatives, and it was really a very remarkable quarter.

Doug will review the details in a minute, but before he does, I'd like to discuss how we executed on our strategies during the quarter to move our business forward.

First, we are growing sales and profits within our company store segment and view promoting new doughnut use occasions as key to growing same-store sales. We know that if we give our customers an excuse to visit our stores, they will respond.

During the quarter, we celebrated National Doughnut Day on June 7, while on July 13, we marked our 76th birthday by offering a dozen original glazed doughnuts for $0.76 with the purchase of 1 dozen original glazed at the regular price. To be honest, we were concerned about lapping our 75th birthday, given the outstanding sales performance during that milestone celebration last year, but we're pleased that our comps were up in July, despite that difficult comparison.

We are continuing to drive sales by innovating with LTOs and are currently pitching new caramel chocolate cake, chocolate caramel pretzel and dark chocolate caramel doughnuts, paired with a hot or iced caramel mocha in our shops. Chocolate and caramel are a classic reward-yourself combination and have proven to be irresistible to our customers.

Social media also plays a critical role in how we interact with our customers and build relationships with them. As many of you know, we are active across Facebook, Twitter and other social media platforms. And, of course, we have our own Hot Light smartphone app. Between the smartphone app and our website, there have been more than 97 million searches for Krispy Kreme locations since rolling out the app less than 2 years ago. The interest that we've garnered within the social media realm is simply incredible and demonstrates how a 76-year-old brand can seamlessly transition into the internet age.

Our marketing team is doing an extraordinary job in driving traffic to our shops, and our operations team has made significant strides in enhancing the in-shop experience, while improving store-level execution.

While we are pleased with the progress we've made in improving our profitability, we believe that there are substantial ongoing opportunities to continue improving comps and to generate higher margins from our incremental sales.

With respect to our company shop portfolio, we remain focused on developing small freestanding factory shops that have the full doughnut-making capability of traditional stores, but are substantially smaller, less costly and simpler to operate than our traditional doughnut factories. In the second quarter, we opened a 2,400-square foot location with a drive-through in both Burlington, North Carolina and Jacksonville, Florida and reopened Matthews, New Carolina with a similar store format. We currently have 5 freestanding small factory stores in operation, with plans to open 4 or 5 more by yearend.

Our goal for these new small shops is to achieve at least a 20% cash-on-cash return on investment at a weekly sales volume as low as $20,000. An even better result would be for average weekly sales at these shops to equal the roughly $35,000 our traditional freestanding stores generate, since cash-on-cash returns at that sales level could then run well into the 30% range or even higher.

These ROI numbers reflect a 4.5% royalty. At our company shops, we do even better since we don't have to pay a royalty to our sales.

These small footprint stores are very important to our future growth, and we are pleased with the results we are seeing from them so far. Their numbers give us confidence in the model, and we are now recommending franchisees include small factory shops in their development plans. And we expect 1 or more domestic franchisees to commit to building them in the not-too-distant future. These smaller stores greatly enhance our long-term global expansion potential.

Now in the Domestic Franchise business, comps of 11.5% were even stronger than at the Company Stores. We believe this kind of sustained comp performance is likely to help us attract interest from potential new franchisees and greatly aid our Domestic Franchise marketing efforts. As mentioned earlier, we are very optimistic about global franchise expansion and have now in place the resources needed to lead and support these efforts.

During the second quarter, we delivered on our commitment to relaunch Domestic Franchise expansion by executing a 15-store development agreement for Dallas, with an outstanding multi-concept operator, Sun Holdings. We intend to build on that and anticipate signing additional domestic franchise agreements in coming quarters to move us toward our goal of having 400 domestic shops by January 2017.

Moving over to international, we opened 19 international stores in the second quarter and announced that we have reached an agreement in principle with our South Korean franchisee for 60 new Krispy Kreme franchise shops over the next 5 years, along with plans to remodel more than half of their 73 existing Krispy Kreme shops. It is very gratifying when we can build on existing relationships to continue our exciting growth around the world.

Our total franchise commitment for international development now stands at roughly 350 shops. We are very comfortable with our goal of having 900 international shops in operation by the end of January 2017, through a combination of development in both new and existing markets.

To summarize, I think we delivered on some very important commitments in the second quarter, including the following: one, increasing same-store sales in spite of tougher comparisons; two, demonstrating that highly successful multi-concept U.S. franchise operators will find value in the new Krispy Kreme business model and add our brand to their portfolios; three, the opening of additional new small format, freestanding factory shops, and now recommending this format to our franchisees; four, delivering strong year-over-year earnings growth; and five, continuing to strengthen our balance sheet and demonstrating our commitment to enhancing shareholder returns.

Now I'll turn the call over to Doug to review our financials in greater detail.

Douglas R. Muir

Good afternoon, and thank you for joining us. Total revenues increased 10% in the quarter to $113 million, while consolidated operating income rose 15% to $11 million. Adjusted EPS rose 17% to $0.14 from $0.12 last year. There was some noise in the numbers, and I'll try to call out the major items as I go along.

In the Company Stores segment, total on-premises sales rose 14%. As in recent quarters, that was a function of great comps and the higher number of store operating weeks. The big story yet again was the continued strength in comps, which rose 10%, our 19th consecutive quarter of higher same-store sales. Same-store traffic rose 8%, and that increased the comps for the quarter by about 6.8%, and pricing contributed another 3.8%. All other factors were a net minus 0.6%.

The toughest comparison of the quarter was the period around our 76th birthday on July 13. You may remember that our comps were up 20% last year in the 2-week period surrounding that Friday in July, which was the biggest single day of sales in Krispy Kreme history.

For the two-week period surrounding July 13 this year, our comps were down about 2%. The lesson we learned was that you don't get nearly the lift from the promotion when you run it on a Saturday that you do on a Friday, and that cost us in terms of ingredient and labor efficiency. We've made a note on that for next year. Nevertheless, the team did a really great job in preparing for and executing this extremely challenging event. These data also give you some insight into how strong traffic gains were in the other 11 weeks of the quarter.

In the wholesale channel, second quarter revenues rose about 5%, driven by higher sales in both the g/mass and convenience store channels. Average weekly sales per door in both channels combined rose about 8% year-over-year, while the average weekly number of doors served declined about 5.4% in the g/mass channel and rose slightly in the convenience store channel. About half the g store decline was due to refranchising. We actually gained a few doors in the convenience store channel despite the refranchisings.

The Company Stores segment posted operating income of $1.8 million compared to $338,000 in the second quarter last year. We continue to be really pleased with the improvement in the profitability of this segment, and we think we have lots of opportunities for continued gains in profitability. There were, however, a number of factors that affected comparisons, and I'll try to touch on some of the bigger ones.

As Jim mentioned, during the second quarter, we refranchised the Dallas market. The transactions included the sale of 3 existing company shops and the execution of a development agreement for an additional 15 Krispy Kreme shops in the market over the next 5 years. We realized a gain of about $880,000 on the refranchising transaction, and that amount is included in the Company Stores segment's results for the second quarter.

This refranchising, like the similar one in Kansas and Missouri in the first quarter, will obviously affect revenue comparisons going forward. But over the long term, refranchising should improve our operating margin and give us a more manageable footprint of Company Stores.

As we have done in the past, we'll try to very clearly quantify the effects on revenue in our filings going forward. For those of you who are maintaining models, we gave you in the press release the recent revenue numbers for Dallas, so you can make adjustments and not have to wait for the 10-Q for that information.

Next, as we shared with you back in March, when we presented our initial earnings guidance for the year, we are being adversely affected by planned store closings while we remodel some of our locations. For example, the scrape and rebuild of our Matthews, North Carolina shop alone penalized profits by $300,000 compared to last year.

We also experienced about $400,000 in unexpected health care cost increases and also incurred legal costs of about $285,000 in connection with the trial of a long-running lawsuit. We are not calling the unexpected health care cost increase a trend just yet, and we hope to conclude the litigation I mentioned in the not-too-distant future.

In the Domestic Franchise segment, second quarter revenues rose slightly over 15%. Total sales by domestic franchisees rose 13.1%, of which about 2.7 percentage points reflects the refranchising of a total of 6 stores in Kansas, Missouri and Texas. There was a very strong 11.5% increase in domestic franchise comps. We think it's great that the success our company shops are experiencing on the comp front is also being experienced by our domestic franchisees.

The revenue increase was partially offset by higher costs, including franchise recruiting and support costs. We think investments in development of franchisees will pay very large dividends for us over the long term. Notwithstanding those investments, operating income in the segment rose to $1.5 million from $1.3 million last year.

Over in the International Franchise segment, revenues increased about 5% to $6.1 million, while sales by International Franchise stores rose about 0.5%. A strengthening of the U.S. dollar compared to the second quarter last year reduced international franchisees sales, measured in U.S. dollars, by approximately $4.8 million, and that adversely affected royalty revenues by almost $300,000. Exclusive of the currency effects, sales by international franchisees rose about 5%.

As noted in the press release, International Franchise revenue for the quarter included about $320,000 of royalties collected in the second quarter, related to franchisees sales in prior periods, which had not previously been recorded due to uncertainty surrounding their collection.

Adjusted to eliminate the effects of changes in foreign exchange rates, same-store sales at International Franchise shops fell about 8.6%. That number was slightly worse than the last quarter and counter to the generally improving trend that we've been seeing for several years. A few things happened that we think may have affected the number in the second quarter.

First, of our 546 international shops, about 180 are in predominantly Muslim countries where Ramadan is observed. This year, 28 days of Ramadan fell in the second quarter compared to 11 days last year. Sales slow down due to the fasting associated with this holiday, and that appeared to show up in the comps for the quarter.

Second, there was a major heat wave in the U.K. in July, and there was a pronounced downturn in comps when the hot weather arrived.

Finally, another factor that appears to have had an effect is renewed store development in Mexico. Our franchisee in Mexico started building again 2 years ago, and 33 of their 100 stores have opened in the last 18 months, which appears to have introduced some cannibalization effects.

The International Franchise segment generated operating income of $4.2 million, flat with last year. We're incurring higher personnel and other costs as we continue to add resources to support what we believe will be many years of continued significant growth internationally, including cost to support openings in new markets. As is the case with the domestic franchise business, we believe investments to attract and support franchisees will pay dividends over the long term.

In the Supply Chain, revenues including sales to Company Stores were $57 million, an increase of 11%. The Supply Chain generated operating income of $9 million in the second quarter compared to $8.4 million in the same period of last year. The improvement was more dramatic than it appeared, because the Supply Chain's results of operations for the second quarter last year included gains on agricultural derivatives of about $1.1 million, while this year's results reflect derivative losses of about $400,000.

Turning to general and administrative expenses. Total G&A was $5.7 million, up from $4.8 million last year. This year's G&A included a few unusual items. First, the increase in health care costs I mentioned a moment ago was not limited to the stores segment. Those costs included in G&A also rose about $200,000 year-over-year.

Second, we incurred about $240,000 of costs associated with our ongoing management succession planning activities. I can't really label those costs as non-recurring, but I will tell you that the run rate on those costs is nowhere near $240,000 a quarter.

Third, our incentive compensation costs were up about $250,000 in the quarter compared to last year. We hope that cost, at least within reason, is recurring because it's a function of our results so far this year being better than we expected.

Notwithstanding these items, we achieved a 10% revenue gain and a 17% increase in adjusted net income on a 30-basis point rise in G&A as a percentage of revenues.

Moving to the bottom line, adjusted net income was $9.6 million or $0.14 a share, compared to $8.2 million, $0.12 a share, in the second 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. In the second quarter of fiscal 2014, adjusted EPS also excludes a charge of $1 million for the refinancing of the company's credit facilities and the retirement of the remaining balance of our term loan.

The refinancing and the retirement of the term loan are expected to result in a decrease in interest expense of about $1 million in the first 12 months following the transaction. The $1 million noncash charge consisted of the writeoff of the deferred financing costs related to the term loan and the termination of a related interest rate hedge.

We think that adjusted net income is 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 insignificant for the foreseeable future.

Let me take a minute to speak to the GAAP basis tax provision in the quarter. The effective book tax rate of 49% was much higher than we expected. That rate reflects a $685,000 noncash charge due to a prospective change in the North Carolina corporate tax rate enacted by the legislature during the second quarter. That added about 7 points to the tax rate in the quarter, and we expect to go back to a more normalized tax rate in the third quarter. This charge affected GAAP net income but had no effect on adjusted net income.

With that overview of the second quarter, let's look ahead to the balance of the year. I would note that while we did not have particularly easy comparisons in the first half, the comparisons are even more challenging as the year goes on. That said, based on our second quarter results and our current expectations, we are reaffirming our full year guidance of adjusted net income of between $42 million and $45 million or from $0.59 to $0.63 a share, and our guess is, we'll likely wind up at the high end of that range. If achieved, our guidance would represent an increase in adjusted EPS of from 26% to 34% compared to the $0.47 a share we reported on a 52-week basis last year.

One last thought -- this is about next year. It appears that the requirement to offer new health care benefits under the Affordable Care Act is going to be delayed a year until January of 2015. We do not expect the delay will have any significant earnings upside for us next year. Our plan from the beginning has been to mitigate the cost of ACA implementation with reductions to other expenses to offset the cost of this new regulation.

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

James H. Morgan

Thank you, Doug. And now I'd like to conclude with the following thoughts. We are now at the midpoint of fiscal 2014, and we are increasingly enthusiastic about our results for the year, notwithstanding the tough comparisons that Doug mentioned that lie ahead. Our domestic same-store sales are industry leading; we are increasing customer counts despite a tepid consumer spending environment; we are growing operating income and adjusted EPS at a rate greater than sales; and we are expanding our company and franchise store development pipeline.

In addition to these operating results, our strong cash flow generation, disciplined approach to growth and clean balance sheet, all of these combined influenced the Board of Directors' decision to authorize a stock buyback of up to $50 million. While we will always seek to deploy cash to invest in our growth plans, we will also look to complement that usage by returning capital to shareholders in a tax efficient manner. This is all part of our intent to optimize returns.

Of course, all of these accomplishments and our confidence in future successes are only possible when coupled by a talented and passionate team. I also want to welcome our new Domestic Franchise partner and express my appreciation to my fellow Krispy Kreme team members and to all of our franchisees for their commitment and outstanding work, creating these special experiences and these joyful memories for our guests and customers each and every day throughout the world.

In conclusion, our optimism about Krispy Kreme's long-term future continues to grow.

Operator, we're now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Will Slabaugh with Stephens.

Will Slabaugh - Stephens Inc., Research Division

Wanted to ask you about trends just to start off. Obviously, another banner quarter for you guys on the top line. I wonder if you could talk just a little bit more about what you saw month-to-month and then into August, if you would, and then sort of how you lapped over some of those really successful promotions last year. I know you mentioned the 76th anniversary, but I know you had some others in there as well, which -- it sounds like you went over pretty well this year.

Douglas R. Muir

Yes, let me break it down for you by month, Will. In the month of May, comps rose 12.4%; in the month of June, they rose 9.5%; and in the month of July, they were up 8.5%, again, despite actually being down in the couple of weeks surrounding the birthday. That was incredibly tough comparison, and we're just really pleased -- we're pleased to kind of break even on that compared to having the biggest day we ever had last year. So that's kind of how the progression went. As you know, the comps really start to get tough -- the comparisons, that is, in the month of July, and they held up really well. August, I only have 3 weeks of data, and it's a mixed bag. I don't want to get in the habit of giving you weekly data, but I will this time only, just because it's -- I don't know quite what to make of it because it's so fresh. First week of August, we were up about 5% in comps; second week of August, we were up about 12%; and the week that ended Sunday, we were flat. And I honestly don't know what to make of that. That happens now and then. But to answer your question, for 3 weeks, we're up 5.7%, but it was very, very choppy. But I've seen choppy data from week to week before, so I don't really know what to read into it, if anything at this stage.

Will Slabaugh - Stephens Inc., Research Division

That's helpful. And then, I also wanted to ask, just a clarification question, the $0.03 you called out in the press release, which included, I think, $0.01 of unusual items and then $0.02 on losses from derivative positions, that was not included or added back, I should say, to the adjusted EPS number of $0.14, is that correct?

Douglas R. Muir

No, sir. That was not adjusted for. It's reflected in the comparison. So the adjusted EPS comparison, we're suggesting to you, is $0.03 better than it printed.

Will Slabaugh - Stephens Inc., Research Division

Okay, okay. Got you. And then just one quick one, if I could, on domestic franchising, just any sort of anecdotal update there as far as conversations you guys have been having.

James H. Morgan

Will, it's Jim. I think that the easiest thing to say and the one that might help you most is, we are engaged on more than 1 front with some potential franchisees, each of whom are multi-unit operators that seem to be very attracted to the brand. So that's why we were comfortable in saying that we expect to have some news coming out of that over the coming months, and I think it will be with people that people would be impressed with, and I think it will indicate that our desire to regrow the domestic side is underway.

Operator

Our next question comes from the line of Tony Brenner with Roth Capital Partners.

Anton Brenner - Roth Capital Partners, LLC, Research Division

I was going to ask, given that it's been 2 years since you first indicated you were going to expand domestically, why it's been so deliberate. But I guess you just sort of answered that, Jim. And the implication I gather is that within a short time, there'll be more than 1 new franchise territory being announced, is that reasonable?

James H. Morgan

Yes, it's a [indiscernible] one. Tony, let me just remind one thing, and -- because this was an important part of the reason we were deliberate. We really didn't -- number one, we have some other things to accomplish, but among the most important of those was getting the small store model down to the point that our conviction was this was a strongly -- a strong improvement on the economic model for our potential franchisees, as well as current. And so the fact that we're ready to encourage new franchisees to go to these small factory stores, and Doug's got some number to share at some point possibly, but -- that we know they can get better returns at lower revenue volumes on smaller capital output and smaller -- lower operating costs. That had a lot to do with that timing, that's why we didn't hire our new VP of Domestic Development until January, February of this year. And of course, it took her about 6 months to kind of get into Krispy Kreme and learn it and travel, et cetera. So we're on schedule.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Okay. Then let me turn to your international expansion because I think over at least a similar time period, you've been talking about establishing an infrastructure in Continental Europe and eliminating some of those all-white areas in Latin America as well, and so far, the only thing new in either of those areas in terms of new territories is Moscow, as far as I can tell. What kind of timeline might there be in growing out those areas?

James H. Morgan

I'll tell you what, I would be disappointed -- number one, you're right that -- so Moscow represents our third European. As you know, we did go into Scotland, which technically is European, but -- a few months ago. But I think Latin America...

Anton Brenner - Roth Capital Partners, LLC, Research Division

That's not Continental Europe, is it?

James H. Morgan

No, it's not. I just said it's technically Europe. I was just trying to claim credit for a new country we went in that was just across a little water from them. But the Latin America, I think, is something that you'll see progress on in the not-too-distant future.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Okay, very good. And last question, I know for a very long time that as you've grown in double digits internationally, you've had honeymoon periods, you've had cannibalization as stores go up. But I wonder if you can segregate some markets and indicate if there are markets where you've got very strong comps and maybe more specifically, which markets that are growing rapidly or undermining that comp store count?

Douglas R. Muir

Yes, Tony, this is Doug. I can appreciate the potential usefulness of that data. Let me just take that up with the international guys just to -- we would certainly be willing to consider doing that. I just don't want to commit to doing anything without talking to Jeff Welch and -- so he can have a chance to make sure we take the franchisee temperature on that, given that generally, 1 country equals 1 franchisee, and by giving you data about a country, we'd be giving you data about a specific franchisee. So that's my only reservation, but we'll have that discussion internally.

Operator

Our next question comes from the line of Alton Stump with Northcoast Research.

Alton Stump

Well, I think you kind of walked me into this question, Jim, just a few minutes ago, but if you could give any data as to how the smaller store models that have been opened since the end of last year, how they're doing so far, if you have any kind of weekly sales number?

James H. Morgan

Yes, I'm going to let Doug take that. We've got -- I think we've got some information he can share with you.

Douglas R. Muir

Alton, glad you asked. As we indicated earlier, we have 5 of the new freestanding small factory shops currently in operation. The oldest of them is in Greenville, South Carolina. That shop opened January 22 this year. So it only has just over 6 month of history. By the way, it was the second shop in the Greenville market. Now typical of Krispy Kreme, and I'm revisiting some numbers from last quarter just to get it in context, the shop opened with very high weekly sales levels. The store did $68,000 a week in January; $55,000 a week in February; $43,000 a week in March, and $36,000 a week in April. As we expected, sales levels are settling in as the honeymoon effects wear off and seasonal effects come into play. In May, the shop did $31,000 a week; it did $33,000 a week in June; and $30,000 a week in July. We are very pleased with these numbers, especially since the second quarter historically experiences a sales slow down as the weather changes. Now let's talk a bit, a little bit about the store. We did this store with a developer on a build-to-suit basis. Our investment in this store is about $590,000. The components of that are: $425,000 for FF&E, that's furniture, fixtures and equipment, including the fixtures, the POS equipment and all the doughnut-making equipment; and about $165,000 related to the building. Most of that $165,000 for the building was for what we call tenant-supplied items that we buy because we can frequently get a better deal in bulk than our contractor can, on things like the HVAC, the drainage systems, the electrical panels and things like that. The landlord supplied the land, the building shell, the upfit and everything else. And the cost of all of that is baked into the rent. Now assuming the franchisee built this store, their investment would be $50,000 higher than mine, and that represents the initial franchise fee. So the franchisee's investment in this store would be a total of about $640,000. The average weekly 4-wall cash flow on this store was about $3,400 in the second quarter. That cash flow reflects our standard 4.5-point royalty, and it also has deducted 2% of sales for maintenance CapEx. That cash flow annualizes to $177,000. And that works out to a 28% cash-on-cash return on investment. As many of you on the sell side have noted, this company store does better than that because we're not burdened with a royalty, and we have the advantage of profit upstream in the supply chain on the next and the other stuff that you -- takes to run a Krispy Kreme store. That, in our minds, is a pretty good outcome. Let's talk about the rest of them. We opened similar shops in Knoxville in April; in Jacksonville, Florida in May; and in Burlington, North Carolina in July. Now Knoxville didn't open nearly as strongly as did Greenville. But Jacksonville opened far, far stronger than Greenville. Burlington has only had a month, but that month also was stronger than Greenville. The last store we opened was in Matthews, North Carolina in July, and that one's a new box on a piece of land that's had a Krispy Kreme on it for years. So we think Matthews is going to do just fine, as the -- historically, the site has been great for us, and that store has been well operated for as long as I've been at Krispy Kreme, in terms of its operating margins and so forth, and probably long before that. So that's where we stand. Early results are very good, with the possible exception of Knoxville, and we're making some adjustments there in case the sales levels don't catch up to those we're seeing at the other locations. And I should add that we're continuing to refine our operating model for those smaller shops to continue to reduce the operating costs without sacrificing the consumer experience and to reduce the cost of the shop itself, as we gain additional experience building that box. So that's my update. Does that help?

Alton Stump

Yes,it does. I guess a real quick follow-up to that, Doug, as you look at that $31,000 in May and $33,000 in June, $30,000 July, it's obviously, as you mentioned, the non-peak summer season, is that similar to your smaller factory stores that you've got, that had a $33,000, $34,000, or average, if I recall...

Douglas R. Muir

.

Our average freestanding Krispy Kreme, and that's a traditional Krispy Kreme, the ones that are -- that tend to be bigger, they do about, on average, about $35,000 retail last year. So what I am seeing so far in these things, and again, particularly for the ones except Greenville, it's really early, I'm beginning to think that these things, in terms of revenue, because it may perform like big shops, even at only 2,300 feet. I mean, they've got the visibility, they've got the signage, we're very encouraged by what we see so far, let me just put it that way.

James H. Morgan

So Alton, I think in specific -- what I think you're asking, that -- I don't have in front of me what the average summer revenues are on those big stores that do $35,000. It's certainly lower than the $35,000, so -- I think they're not far apart, if they're apart, they've got to be very, very close. And I'm going to take advantage, if you don't mind Alton, because with -- on your time, I'm going -- let me just share something that I think might be helpful to you and others that are still on the line. It might help you to know how we see the quarter internally, because you can tell, it beat our expectations, and I know that might not be the case across the board. But the -- obviously, the 10% same-store sales speak for themselves. But the July quarter is historically the lowest quarter in Krispy Kreme, always. And in fact, it's been 10 years since Krispy Kreme earned as much as we earned this quarter in the July quarter, and we did that in spite of continuing to make good investments in people and planning for the future, as well as the noise that we talked about. We cleaned up the balance sheet, paid off the debt, authorized share repurchase. We're now are saying, we are committed to this new model you just asked about, we think we are now poised, globally, to take this new and more efficient and better economically -- better economics on this model forward. And we've begun the new Domestic Franchise development that we've been committed to and been talking about, and it's underway. So that's the way we see the quarter. Other people may see it differently, but internally, that's the way we're looking at it, and that's probably why we feel pretty doggone good about it.

Alton Stump

Makes sense. And then, I just -- one last follow-up, and then I'll hop back in the queue. I would assume with those type of numbers that you're seeing so far from these new facilities, that you've got franchisees that are pretty eager to open up stores. A, is that, is it accurate? And, b, how soon do they want to start opening them? Now, next month, full year '15? Any color that you can give me there?

James H. Morgan

I don't have -- can't give you numbers or a specific date, but I can tell you that you're right, and that will probably be accentuated when we are able to share a little bit of it to the degree we can, at our domestic conference, which is coming up within a month or so. So I think you can assume that both, not only with the new franchisees being pretty excited about this, but the current franchisees will be looking to develop over the coming quarters.

Operator

Our next question comes from the line of Michael Gallo with CL King.

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

The question I have is on -- when we look at the returns that you're getting on -- potentially going to get here on the company, 110M stores, factoring in the supply chain profit, it looks to us like you can add something in the neighborhood of $0.5 million per new unit for every unit that you open, factoring it all in. So I was wondering, given those returns, which certainly on the investment, phenomenal, why not dramatically accelerate the number of Company Stores you're opening? They certainly have the balance sheet that you can open a significant number of them. And you certainly have plenty of white space, even in the core markets, where you want to focus on, where you could easily, say, double your company store footprint, and I think conversely, probably, close to double your EBITDA. So I was wondering if you could just give us some thoughts on the Company Stores, given what you're seeing, and the ability to accelerate that footprint?

James H. Morgan

Mike, you could be in our meeting with that summary. I mean, I think we see it identically the way you do. Without not going in -- without being promissory in a way that I, maybe I feel -- I would say that real estate is one of the challenges. And we have hired 2 new people in the real estate within the last, I'm looking at Doug, 3 months, Doug? Within the last 3 months, to get that more ready and get that a little bit beefed up. So I think our plan is that the pace of new store development, the company store markets will pick up. And I think you'll see that take place and continue for the next several years, I would think. Doug, anything to add to that?

Douglas R. Muir

One thing I would add, and I'm not going to tell you what markets, but we have expended the geography we are looking at to include places whose names have not been mentioned on these calls. And I'm just not going to tell you where they are, because I got enough perkish comments already. But, I mean, we are fairly well down the road in a number of cities that do not contain Krispy Kremes today.

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

Great. And like I said, you certainly have the cash you could put them up pretty deftly. So just seeing that -- I don't know, given the kind of return metrics we're talking about, including the Supply Chain, I think of north of 50%, at those kinds of volumes, it would just -- seem to me that, that's a great use of your cash, would be able to accelerate that?

Douglas R. Muir

It's an outstanding use, and the only thing that you have to keep in mind in all of this is, you don't want to -- you've really got to be careful in the real estate that you select, so we're not willing to compromise on that, because that gets you in trouble. The other trick is, I'll tell you, it is harder to recruit and staff a Krispy Kreme than it is to build one. The operating model is a little bit different from burgers, and we definitely do not want to outstrip our ability to attract, develop and train the right people we need, both in the stores and in regional management to operate these things really well.

Operator

Our next question comes from the line of Michael Halen with Sidoti.

Michael Halen - Sidoti & Company, LLC

Can you tell us how long stores are closed for remodeling?

Douglas R. Muir

It depends. For -- Knoxville, for example, our major producing store in Knoxville is -- the entire production area has been ripped out of the store. We did not actually close the store, however. It is still running, we are bringing doughnuts into Knoxville because of its importance from the commissary in Concorde, as well as from stores in Tennessee. That's one of those other kind of non-recurring costs I mentioned in the quarter that has cost us, as we kept Knoxville open. Matthews was a scrape and rebuild. The first tool we got out was the bulldozer, and that store was bulldozed in January, or early February, and it reopened on like July 19 or something. So it all depends on the magnitude of the remodel and whether bulldozers are involved. The relatively minor ones -- hopefully, you're not down in the retail area more than 3 or 4 weeks. But you can get into others that are definitely a bigger deal, so it's really just fact dependent.

Michael Halen - Sidoti & Company, LLC

Okay, and do you expect any further losses on derivatives?

Douglas R. Muir

Yes. I just don't know when and how much, but I also expect the gains, and that's just the nature of the beast in hedging.

James H. Morgan

Michael, it's Jim. The way we approached that is, we -- when we can take a position that allows us to lock in the commodity to price that I know, that we know, works for our franchisees and for us. So we don't really gain that very much, we're not trying to be traders or be overly cute. And so the good news is, is when we take a loss in a commodity position, it means that the price of that commodity's going down, which means we're going to be buying it cheaper. I know this sounds crazy, but there's good news in that, as you look down the road.

Michael Halen - Sidoti & Company, LLC

Oh, well yes. Obviously, as it starts to roll off.

James H. Morgan

Right, exactly.

Douglas R. Muir

Forward, yes.

Michael Halen - Sidoti & Company, LLC

Can you talk about, I guess, where the losses came from, specifically, and I guess how much coverage you have, and how far out it is for the most part?

Douglas R. Muir

Most of our hedging positions tend to be fairly short. We're in the futures markets, generally. I would think it's generally unusual for us to have futures positions to out more than about 6 months or so, we can relay in contracts more or less consistent with our purchasing needs. We are seldom 100% hedged, which is why Jim indicated that, when you're not fully hedged, a loss on your derivatives is actually a good thing. Sure there is the exception under -- and that's not done in the futures market, that's actually been done under a long term contract with a supplier, and we're out in the, I'm looking at Jim, well into calendar '15, on that?

James H. Morgan

Yes. Calendar '15.

Douglas R. Muir

Most other things, we tend to be 4 to 7 months out, depending on kind of our view of the world.

Operator

Our next question comes from the line of Jeff Omohundro with [indiscernible].

Jeffrey F. Omohundro - Davenport & Company, LLC, Research Division

It's Davenport. Just a question on the -- another question on the franchise development side. Just -- what's your sense of financing the bank market to support unit growth on franchise openings? And then, in addition to that, with your $60 million in cash position and the improvement in balance sheet metrics, how are you thinking about utilization of cash beyond the share buyback? There was some talk about possible pickup in store development. What other uses of cash are high priority for you?

Douglas R. Muir

Hey Jeff, yes, my sense is, the state of financing for franchisee development kind of depends on who you are in the franchise world. Very large, highly successful people, I would cite our earning franchisees on holdings, has been the kind of person that I would expect, doesn't have a lot of trouble getting banked. I suspect more geographically concentrated, smaller franchisees, it's probably, it's a little bit more of a challenge, and probably a little bit more costly. But my sense is, the money is out there, and particularly when I think we're at the point now, we can generate what appear to be some pretty strong economic returns on the investments. In terms of other uses for cash, Jim I know will weigh in, will want to weigh in on this -- we have discussed and will be rolling out an equipment-financing program for franchisees that would be associated with new development agreements. We said we have cash on our balance sheet that we could deploy, and we would like to do that to foster further franchise growth. So we'll be showing that to franchisees in the near term, a package that I think they will find very competitive for equipment financing versus what is in the market. As Jim indicated, obviously, our first choice, given the ROIs we think we can get, would be to pick up the pace of company store investment. And that could mean, and probably does mean, more geography than we have discussed in detail so far. And as I indicated, we do have real estate professionals working in markets whose names I don't think have been mentioned on conference calls, and we're probably not quite ready to mention just yet.

Jeffrey F. Omohundro - Davenport & Company, LLC, Research Division

And then, the health care cost increases that were mentioned, is that establishing a new trend, or were those really unusual in the period?

Douglas R. Muir

There's some of each. We, based upon what our providers and health care providers, we're largely on a self-insured plan, but the folks at Cigna and their associates, give us some claims estimate each year based upon the number of people we employ and what the demographics of our employee group is. We expected health care costs to be up on a per capita basis year-over-year. They had been up more than we expected. I was looking at some details this morning, which showed the number of claims incurred year-to-date that exceed $25,000, cumulative, per individual. Our stock loss is obviously much higher than that. There's a lot more of them. Of claims north of $25,000 the first 6 months than there was last year. Again, I don't know if that's a trend yet. There is some variability. And when you want a self-insured plan, the variability is yours. If you don't want that variability, you buy commercial insurance, but we think that's more costly in the long-term. So we're going to keep an eye on it. Some increases were expected, some were not. We'll keep you posted, but we don't see a trend just yet. I have seen this kind of variability in our numbers before. Was there a second part to the question that I missed?

James H. Morgan

Yes, there was at least 1 unusual one in there, but you never know when that's going to happen again.

Douglas R. Muir

You never know.

Operator

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

Nick Setyan - Wedbush Securities Inc., Research Division

It's Nick Setyan from Wedbush Securities. Just a few questions here, quickly. What has commodity inflation been, year-to-date? And then, as you kind of do look out, Doug, to next year, given sort of where the pricing is, what is your expectation looking out?

Douglas R. Muir

Nick, yes, this year so far, commodity inflation has been very modest. We didn't really think it would be too terribly big this year, and it's been a little less than we projected. Jim is more, a better soothsayer of the future, because I'm not a very good one. I'll let him speak to the future.

James H. Morgan

Like he said, we don't try to play games with it, but we -- this year's been approximately a little softer than we thought that it would be. There's been movement, depending on global events and global weather, and all that, which you would obviously expect, Nick. But I don't think right now, we have been doing some forward purchasing within the last month or so on a couple of the commodities, particularly I think wheat, and I think that's sort of the course of action that we're taking right now. Some of the prices look a little bit more pig than what we thought we've got than we look at this point in time. So we don't -- right now, we don't see any factors that have us very alarmed about inflation or I call strangleholds to commodities over the coming -- next few quarters.

Nick Setyan - Wedbush Securities Inc., Research Division

Got it. And then, in light of, sort of the health care costs, with ObamaCare and so on, I think your comments were that you don't expect any kind of alleviation next year. Maybe you can contextualize that by giving us your historical, maybe labor inflation and then what you expect going forward, within the context of the sort of rising health care costs?

Douglas R. Muir

Well, here's where we stand on trying to estimate the cost of inflammation -- of implementation of ACA. We've already incurred some costs. As you know, under law now, you're required to provide dependent coverage for your -- your covered employees' dependents up to age 26, that's cost us a little money. And then there's some other things like that. You're required to cover your annual physical without any copay. There's some new things that have cost some money. It's hasn't been onerous. I still don't, to this day, know what the cost of the big ObamaCare increase is going to be, in which we are going to be required to provide health care to full-time employees, however that ultimately is defined. A couple of the reasons I don't know the number. Here are a couple of big ones. Number one is, I'm beginning to get a handle on what the probable cost of the plan that the model requires me to offer will be. I can kind of figure out what the premium can be under the law. What I have just no idea about is, after we make the plan available, when we're required to do so, I don't know how many people are going to sign up, and that is a huge variable. As you know, the penalties to individuals for failing to get health insurance basically are nonexistent, in the early years. I don't know what my sign-up rate is going to be. The number we have officially put out, and it's about a year old now, is that we thought, in the worst case, unmitigated, without taking any of the offsetting actions that Jim mentioned, that we would intend to take to offset the cost of this new coverage, worst case number we thought was $5 million a year. We also said at that time, and this is still my story, and I'm more confident now than I was a year ago, that I think that number will be less than that. And again, subject to knowing how many people are going to sign up, I think it's probably going to be substantially less than that. And again, I think it -- my sense is, it's going to be well within our ability to mitigate it through other cost increases -- excuse me, other cost reductions. Some of them may not be pleasant, but I think, my sense of it right now is we're going to be able to deal with it.

Nick Setyan - Wedbush Securities Inc., Research Division

Got it. And then, with respect to the POS rollout that you guys talked about as part of the increase in investments this year, what's the -- in terms of the rollout phase, are you guys close to done? Are you guys done? Has it still not maybe been rolled out? Can you guys just update us on that?

Douglas R. Muir

I don't have exact statistics in front of me, but the rollout is proceeding in a very organized fashion across all of the Company Stores. We expect to have all of the Company Stores with the new software this year. We, if I'm not mistaken, have begun installing the new software in franchise locations. My last indication, and this data's a little old, but that as many as 60 or so of the 150 or so Domestic Franchise locations -- franchisees that held up their hand and said, "I want the new hardware and I want the new software." So we're clearly working to get that implemented as fast as we can in franchise locations. It was well tested on the front end. And so far, that's been remarkably glitch-free. One thing I would add is, the software that is going in this year is really like-for-like in terms of its capability. The really -- part of the software that could be business changing, and business transformational, for example, pay-by-phone, or loyalty programs and other -- really, things that can really drive the business, those will not -- some of those haven't even -- are only now being white-boarded, would not be implemented into the software until '14 at the earliest. Hopefully not -- hopefully in calendar '14. But we really wouldn't get any uptick from them probably until '15, until we begin to get this new data and make use of it. But I can tell you, the marketing people are really excited about the potential of that.

Nick Setyan - Wedbush Securities Inc., Research Division

Right, I mean, the loyalty program's probably one of the easier ways to remind people to come back to Krispy Kreme.

James H. Morgan

Oh, gosh, yes.

Douglas R. Muir

Absolutely. Absolutely.

Nick Setyan - Wedbush Securities Inc., Research Division

Okay, just one last question, and this is probably for Jim. Is the magnitude of the Dallas franchise agreement, I mean, is that about right? Or should we expect even bigger ones? Because when we kind of think about that 400 target in 2017, it implies something like 30 franchise additions a year or so, for the next 3 years. So can you maybe just kind of talk about the pipeline, in terms of what you're seeing in terms of the franchisee additions there, a little bit, please?

James H. Morgan

Yes, and I think that is probably about the magnitude that you'll see from the initial one. Some of them will be a smaller market, some might even be larger, that was the beginning in Dallas. Obviously, if you know Dallas, you know Dallas can eventually take many more than 15 Krispy Kremes. I think the one thing that's out there is, with the new model, is that you'll see current franchisees who have not expanded in a long time begin to expand. So part of that 400 number is going to come from current franchisees, part of it's going to come from Company Stores, and acceleration were going to do in those, and then the third part would be from the new franchisees, such as our new Dallas one and others that I think we'll announce over the coming quarters. So it's going to be a combination of all 3 sources. I think the -- it will probably be a building thing, in other words, that -- rather than being, as you said, 30 a year, it will probably have -- the last year of that time period we gave you going to '17 will probably be the year that has the greatest number of those being built. That'd be my guess.

Operator

Our last question comes from the line of Conrad Lyon.

Conrad Lyon - B. Riley Caris, Research Division

I'll try to be brief here. A few questions, and boy, a lot of data there, Doug, so I appreciate it. Doug, might you have the store level margin for the quarter, and might -- maybe what it would've been, x kind of the items, if not, I can get it offline, but I'm just curious, because that might help.

Douglas R. Muir

Conrad, since it's a public call, I'll be glad to give it to you. I don't know if I can do it, out the items, but just as it's been in print, in the 10-Q, hang on. Just got to find the right page. Let me ask a helper here -- make sure I got the right page here. Okay, just -- I've got more than one -- I got an open stores version, just want to make sure I gave you the all-in. The store operating income, in the Company Stores segment for the quarter, was $6,425,000. That compares to $4,383,000 last year. That does have in it -- let's see, that does have in it the Dallas gain that has the effects of the store closures that I discussed, like Matthews being debt and -- as well as Knoxville and all that. It's got the health care in it. It does not have the cost of litigating with our former landlord in it. That's it. Take notes -- you ought to be able to get there.

Conrad Lyon - B. Riley Caris, Research Division

Question for Jim. More high level. Early on the call, you said the goal is to provide strong earnings growth. Would you mind characterizing that, maybe give a range of what you'd that would be, annually, going forward?

James H. Morgan

Yes. I'm sort of been on record, Conrad, so I'll try to say it carefully, but given nothing to make it interesting, okay? I think we are set -- what we're trying to do, what we've been trying to do the last several years, is continually make the investments, even at the expense of a couple of pennies each quarter, maybe -- continually make the investments in people and in plant and in the future, that we're setting this company up for -- I'm going to say, double-digit bottom line growth for many years to come. And certainly, I would be disappointed if that double digit is 10%, okay? So something better than that. And I think we are set up for that. I think we've got years of that type performance in front of us if we just stay smart and continue to execute, and quite frankly, keep things at the right pace. I mean, like we had a great question about -- a good question that challenged about why we're not in Continental Europe to speak of yet, but the one reason we held back on that is, Continental Europe has been a disaster, and the consumers there are hurting, and the countries are -- half the countries we dealt with 12 months ago were going bankrupt. So we're trying to be smart in what we do, so that we go in, in a time where our franchisees have the greatest potential to be successful. Now the economies are getting better, we've got the new equipment, the new model for the store, and so it's time to accelerate growth domestically and internationally, and I think those are the kind of things we're trying to do, to keep that kind of double-digit bottom line growth going for a long time to come.

Conrad Lyon - B. Riley Caris, Research Division

Okay. Next question, kind of going back on the kind of the growth, especially domestically. Is -- my perception is that, eventually, you'd have to go into bigger markets with bigger rents. Is there a rent as a percent of sales threshold that you would say, I can't do it, call it 8%, 10%? And this is a kind of the add-on to the question, would you then ever consider buying franchisees?

Douglas R. Muir

I think long term, Conrad, that the answer to the first question may depend on how successful we are in driving comps, about how successful we are -- ultimately are in beverage, which is a tremendous upside opportunity. And so I don't really know what the answer to that question is over the long term, and I wouldn't want to slap a particular estimate on it right now, because I don't know how those things are going to play out, except I'm sure that I think they will play out over the long term. Would we consider buying franchisees? Yes, we would never say never. I would point out that Krispy Kreme has, in the past, made some decisions in that regard that didn't turn out too well, and Jim is not just really cautious...

James H. Morgan

What we did do, is we did do Augusta, Georgia. That was a franchised territory that we bought within the last year, and we feel really good about that. So we all -- we're aware of the sort of checkered past, and how that did once. But we think, being astute, and being careful, that -- yes, I think the answer would be, I gave Doug, the answer would be yes on that, we'd be careful and cautious, but then, I think the answer is yes.

Douglas R. Muir

One more thing to add to that theory is that, while thinking about rents, Conrad, talk to the international guys, Krispy Kreme is principally an urban model, internationally, you think Sydney, you think Tokyo, places like that, rents are higher there. And that's another reason you need to have a good arsenal of smaller boxes and think about what the box needs to be in those urban, pedestrian-rich environments, a number of guys internationally seem to have done really, really well with figuring that out, and at the appropriate time, we'll be doing it -- what I was doing, trying to learn as much as -- from franchisees, as they learn from us.

Conrad Lyon - B. Riley Caris, Research Division

Right, right, okay. Last question, let's talk about Hostess. My theory, it's certainly -- partial theory, but after listening to some of the big wholesalers out there talk about the benefit that they have had with Hostess being out of the marketplace, just curious if you think you've had a material benefit. It certainly appears that -- to be the case, more on the wholesale side, but perhaps awareness has been just driven higher and higher with an x in the marketplace, and maybe helping even on -- you guys on the retail side. And now that they're back in the marketplace, do you think, maybe any of the choppiness as related to that?

Douglas R. Muir

Here's my story on Hostess, and I talked to Brad Wallet [ph] within an hour before we came in here, because I knew -- I figured this was coming. Hostess, for us, Hostess' exit from the market temporarily, probably did drive up our snack bag business, crullers, mini doughnuts and things like that. That business, if you look at the period before -- while Hostess was still in stores, that represented about 3% of our wholesale volume. In the 6 months just ended, snack bags represented 6% of our wholesale volume. I don't think all of that doubling of the snack bags has to do with Hostess, because we haven't exactly been idle, and we have introduced a number of new snack bag products in the past year, including ones that have -- I think been particularly good for us are the mini crullers, that have come in lemon, strawberry, pumpkin spice is coming in to it at mini crullers, so I don't know how much of that 3% pickup is due to Hostess, but half maybe. I'm just pulling that out of the air. I can tell you, Hostess has been back in the market 3 weeks, about, roughly by our count, and our snack bag business is up pretty significantly compared to the 26 weeks before they came back in the market. So I don't think it was a big deal, personally.

Operator

With no further questions, I would now like to turn the call back over to Ms. Anita Booe.

Anita Booe

Thank you very much, everyone. Just a reminder, we will be presenting at the CL King Investor Conference on September 11 at 10:00 a.m. Thank you for your time. Have a great night.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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