Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Krispy Kreme Doughnuts (NYSE:KKD)

Q3 2014 Earnings Call

December 02, 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

Anton Brenner - Roth Capital Partners, LLC, Research Division

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

Nick Setyan - Wedbush Securities Inc., Research Division

Michael Halen - Sidoti & Company, LLC

Alton K. Stump - Northcoast Research

Will Slabaugh - Stephens Inc., Research Division

Operator

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Krispy Kreme Doughnuts, Inc.'s Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. It's now my pleasure to turn the floor over to Anita Booe. Ma'am, the floor is yours.

Anita Booe

Good afternoon, and welcome to the Krispy Kreme Third 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 comments 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 would now like to turn the call over to Jim.

James H. Morgan

Thank you, Anita. Good afternoon, everyone, and thank you for joining us. With each passing quarter, our team is demonstrating continued progress in implementing our strategic objectives and moving closer to unlocking the full potential of the Krispy Kreme brand. Our traction is reflected not only in the ongoing improvement in our financial results but also in how we are positioning ourselves for accelerated growth domestically with our new small factory store model and internationally by signing new franchisees, as well as follow-on development agreements with existing partners. Over time, we expect to match the excitement customers have for our brand, with a worldwide store footprint that better meets the market demand for our delicious one-of-a-kind doughnuts, beverages and complementary products. With that in mind, let me briefly discuss our recent accomplishments.

In terms of our financial results, we grew total revenues by 7% in the third quarter. Operating income rose 27%, and adjusted earnings per share was up 33%. All 4 business segments contributed to the revenue gain, and all 4 segments posted higher operating margins compared to last year. In the Company Stores segment, we reached a new milestone in the third quarter, with Company Stores marking 20 consecutive quarters of rising same-store sales. In our opinion, this is an incredible feat irrespective of underlying macro conditions but even more impressive considering the state of our industry and the economy over the last 5 years. Our record is a testament that we are upholding our mission of creating joyful memories through craveable, unique products, accompanied by an ever improving in-store consumer experience. We drove same-store sales at Company Stores primarily through price, although traffic was also up modestly. This improvement was accomplished despite the fact that we were comping against a 7% traffic gain last year.

Our marketing team is doing an extraordinary job framing our message, with an emphasis on low investment, high return social media and related activities. And our store team members are effectively serving the resulting higher customer traffic. We have continued to focus on both special events like Talk Like a Pirate Day and on everyday doughnut use occasions like after school snacks.

Beverage sales rose 4.2% at established stores led by the coffee category, which was up 15% compared to the year-ago period. We believe our opportunities for further coffee penetration in our stores are considerable and will be aided by Krispy Kreme coffee branding opportunities outside of our 4 walls that I will touch on in a moment.

In the wholesale channel, average weekly sales per door rose in both the grocery mass merchant and convenience store channels. The improvement largely reflects our focus on developing our business with customers who tend to have relatively higher sales per door than our company average.

Continuing with the theme of brand extensions outside of our retail shops, you may have read that we recently introduced our package ground coffee in 40-ounce packages in the select Sam's Club locations throughout the Southeast. This is a test program in about 100 Sam's Club locations. The coffee is roasted and manufactured by a third party. It is a licensing arrangement that provides us with a royalty stream. While the immediate P&L impact should be limited, we see a long-term opportunity to capitalize on the large number of consumers who already brew coffee at home and at work and who would welcome a more convenient way to enjoy Krispy Kreme coffee.

Turning to shop development. You will recall the expansion of our company shop portfolio is primarily focused on small freestanding factory shops. We have opened 7 of these new shops so far, including 2 in the third quarter, both in Metro Atlanta, and plan to open 2 additional shops in the fourth quarter. These small footprint stores are very important to our future growth. We are pleased with the overall results we are seeing since opening our first store in January, with the possible exception of 1 store, where we are already making some adjustments in case the sales levels don't catch up to that of other locations.

We view refining our small shop model as an ongoing process and are continually examining ways to reduce operating costs without sacrificing the consumer experience, as well as ways to lower the investment costs as we gain additional experience building the box. Still, the early results give us confidence in the model, and we are recommending that franchisees include the small factory shops in their development plans.

To that end, we recently announced the signing of a franchise agreement for the development of 4 Krispy Kreme shops in Alaska over the next 3 years. Just a few minutes ago, we announced a 10-store development agreement for portions of Houston with Sun Holdings, with whom we signed a 15-store development agreement for Dallas back in July. We anticipate the announcement of additional development agreement with both existing and new franchisees in the weeks and months ahead.

Domestic Franchise same-store sales rose 10.7% in the third quarter. Generating sales increases of this magnitude surely helps our ongoing efforts to attract interest from qualified franchisees and spur current franchisees to resume their own expansion. We are sticking to our goal of reaching 400 domestic Krispy Kreme stores by January 2017. That said, at this point, it's fair to say that this represents a stretched goal since the new small factory shop model and related Domestic Franchise expansion plans have come together a little slower than we expected when we set the goal of 400 almost 2 years ago. We believe domestic expansion in the next 3 years will have 3 components: company stores, new franchisees and long-time franchisees making further commitments to grow with us. We don't know the exact mix of the ultimate domestic unit growth between company and franchise, but at this stage, we'd estimate that the majority of the domestic unit growth over the next 3 years will be franchise.

Internationally, we opened 24 stores in the third quarter, including our first locations in Russia and Singapore, and also entered into a development agreement in South America for 25 stores in major cities throughout Colombia. We are very optimistic about global franchise expansion, and the resources we have in place are successfully leading these efforts. Our total franchise commitment for additional international development now stands at roughly 350 shops, and we believe our 900-shop goal internationally by January 2017 remains achievable.

To summarize, we are making good on our commitments of, first, growing company same-store sales and generating higher store level profitability in our largest segment despite facing tough comparisons; second, realizing opportunities in the wholesale channel for Krispy Kreme doughnuts and related products and beginning a test of coffee distribution outside of our 4 walls; third, showcasing our confidence in a small factory model by building stores ourselves and working with franchisees on their plans to do the same; and fourth, forging new franchisee relationships with operators around the world who share our passion for the Krispy Kreme brand.

Now, I will 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 about 7% in the quarter to $114 million, as each of our 4 business segments generated top line growth. Operating income rose about 27% to $11.7 million. A $1.7 million unusual gain on the sale of leasehold interests was mostly offset by a $1.5 million lease termination charge related to litigation with a former landlord. Adjusted EPS increased 33% to $0.16 a share from $0.12 last year.

In the Company Stores segment, total on-premises sales rose over 5%. Yet again, the big story was the continued strength in comps, which rose 3.7%, our 20th consecutive quarter of higher same-store sales. Same-store traffic rose 1.1%, while pricing contributed about 3.3%. All other factors were a net minus 0.7%.

As we have moved into the fourth quarter, we continue to see positive comparisons. Comps rose about 1.5% for the 3 weeks ended November 24. We expect to report our 21st consecutive quarter of positive same-store sales when we report our fourth quarter results in March.

In the wholesale channel, third quarter revenues rose 1.3%, driven by higher sales in both the grocery mass merchant and convenient store channels. Average weekly sales per door in the grocery mass merchant channel increased about 10% year-over-year, while the average weekly number of doors served declined about 9%. The decline in grocery mass merchant doors principally reflects the lost doors in Dallas, Wichita and Springfield, the markets we refranchised earlier this year.

In the convenience store channel, average weekly sales per door rose about 4%, and the average weekly number of doors served was up almost 1%. The Company Stores segment posted operating income of $2.6 million, compared to $2 million in the third quarter last year.

Let me take just a moment to update you on financial results at our new small factory shops. To refresh your recollection, last quarter, we shared with you the results for the first of these new factories, which opened in Greenville, South Carolina back in January. If you recall, in the second quarter, that shop had average weekly sales of about $31,000, shop level cash flow after royalties and after a 2% allowance for maintenance CapEx of about $3,400 a week. That cash flow worked out to a 28% cash-on-cash return on investment. I am pleased to report that those numbers were basically unchanged in the third quarter, and that's great news.

Preliminary results are similar for most of the other new shops. The Jacksonville, Florida shop, which opened in May, averaged $55,000 in sales per week in the third quarter. Matthews, North Carolina, which reopened in the new format in July, did $42,000 a week on average in the October quarter. Burlington, North Carolina, which also opened in July, did an average of $43,000 a week in the quarter. There are probably some honeymoon effects still in the Jacksonville and Burlington numbers but probably not in Matthews, which you will recall was a scrape and rebuild on a site we've occupied for years until we bulldozed the old shop in February. Jacksonville was also a scrape and rebuild, but we had not operated a store on the site for over 6 years. We sure are glad we're back.

In the category of really way too early to get a read on are Roswell, Georgia, which opened in September, and averaged $59,000 a week over its first 7 weeks; and Doraville, Georgia, which opened on October 29, and did $34,000 in its first 6 days.

Based on these early results, we expect all these new shops to produce great results. The ROIs will vary among them because the real estate ownership is structured differently. Greenville was a build to suit where we leveraged the real estate costs into the lease, while Matthews and Jacksonville are sites we own. The rest are ground leases where we lease the dirt but paid for the building. But we expect the returns to be just fine, particularly when you remember that the ROI numbers we quote to you have a full 4.5-point royalty baked in. We don't have to pay ourselves a royalty, so our returns are higher.

The one disappointment from a sales view is Farragut, Tennessee outside Knoxville, which, for the quarter, averaged $20,000 a week. We said last quarter that this shop was an outlier. We are reviewing whether we made a sighting mistake here. One thing I will say is that the results are no reflection on our teammates in that shop who are working very hard to produce some great consumer experiences in the shop and don't have anything to do with the new smaller doughnut production line that's in use at Farragut and all the other new factories.

In the Domestic Franchise segment, third quarter revenues rose slightly over 21%. Total sales by domestic franchisees rose about 12.7%. Approximately 4 percentage points of the increase reflects the refranchising in fiscal 2014 of a total of 6 stores in Kansas, Missouri and Texas. There was a very strong 10.7% increase in Domestic Franchise comps.

Domestic Franchise segment operating income rose to $3.2 million. That number includes a $1.7 million gain on the sale of leasehold interests, which is netted in the segment's direct operating expenses. Exclusive of the gain, Domestic Franchise segment operating income improved to $1.5 million from $1.2 million in the third quarter last year. The revenue increase was partially offset by higher costs, including franchise recruiting and support costs. We believe investments in development of current and new franchisees will pay large dividends over the long run.

In the International Franchise segment, revenues increased about 3% to $6.2 million, driven by higher royalty revenues. Sales by International Franchise stores rose about 4%. Changes in the rates of exchange between the U.S. dollar and the foreign currencies in which the company's international franchisees do business, decreased sales by international franchisees measured in U.S. dollars by about $5.8 million in the third quarter of fiscal 2014, compared to last year, and that adversely affected international royalty revenues by about $350,000. Exclusive of the currency effects, sales by international franchisees rose about 10%.

Adjusted to eliminate the effects of changes in foreign exchange rates, same-store sales at International Franchise shops fell 3.1%, reflecting, among other things, honeymoon effects from the substantial number of international openings in recent years, as well as cannibalization as markets develop. This metric got back on an improving track in the third quarter after a little noise in it in the last quarter, and we were glad to see that.

The International Franchise segment generated operating income of $4.4 million compared to $4.3 million in third quarter 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 significant growth internationally, including costs to support openings in new markets. As is the case domestically, we strongly believe these investments are critical to the long-term growth of our business.

In the Supply Chain, revenues, including sales to Company Stores, were $58 million, an increase of about 10%. The Supply Chain generated operating income of $9.1 million in the third quarter compared to $7.3 million in the same period last year.

Turning to general and administrative expenses. Total G&A was $5.7 million, up from $5.1 million last year. A significant component of the increase was costs associated with the new ERP system, which were about $200,000 higher in the quarter than in the third quarter last year. As we first disclosed back in March, these costs were expected.

Moving to the bottom line. Adjusted net income was $11.2 million or $0.16 a share compared to $8.3 million, that's $0.12 a share, in the third quarter last year. Adjusted net income and adjusted EPS, which are non-GAAP measures, reflect income tax expense only to the extent currently payable in cash.

I'd now like to update our full year outlook. Based on year-to-date results and other factors, we are raising the bottom end of our fourth quarter guidance by $0.01 and leaving the top end unchanged. We estimate we'll report between $0.11 and $0.14 in Q4, which would bring the year in at about $0.60 to $0.63 in adjusted EPS. This range, if achieved, would reflect growth up from 28% to 34% compared to last year measured on a 52-week basis.

Turning to next year, we'd like to provide our preliminary thoughts for fiscal '15, and I'll emphasize that this is very preliminary. In terms of operations, we plan to open 10 to 15 Company Stores in fiscal 2015 compared to about 7 this year. At a guess, we'd call capital expenditures in the range of $20 million to $30 million. We expect domestic franchisees to open between 20 and 25 new stores next year compared to between 10 and 15 stores this year. We expect international franchisees to open about 85 new locations, roughly the same as what we expect for this year.

We look for low single-digit organic same-store sales growth in our Company Stores. Strategic price increases would be incremental to that. International franchisee same-store sales will likely remain modestly negative due to the substantial growth in international markets in recent years.

On the commodity cost side, we expect our ingredient cost to be pretty flat to maybe down a little compared to fiscal 2014 levels. Based on these factors, our preliminary guidance for fiscal 2015 adjusted EPS is between $0.71 and $0.76 per share. The foregoing adjusted EPS range reflects estimated adjusted income tax expense of $3 million. As you know, adjusted income tax expense consists solely of taxes currently payable. Because the company has substantial net operating loss carryovers, the amount of taxes payable in cash is expected to remain insignificant for the foreseeable future.

On a GAAP basis, we project fiscal 2015 EPS of between $0.43 and $0.47, which reflects an estimated book income tax rate of 42%. I should emphasize that this is our preliminary thinking, and we'll refine it and expand on it when we release our fourth quarter results in March.

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

James H. Morgan

Thank you, Doug. Before we take your questions, let me leave you with these takeaways: first, our optimism about Krispy Kreme's long-term future continues to grow. We are pleased with how fiscal 2014 is shaping up, and we are moving the brand forward on each of the strategic fronts we've been discussing for the past 5 years. Second, our balance sheet is the strongest it has ever been, with virtually no debt and a substantial cash balance. We will continue to deploy capital to support company and franchise development. But we also have a $50 million share repurchase authorization in place, which represents yet another lever at our disposal to optimize shareholder returns. Finally, our confidence is grounded in the knowledge that we have a talented team at corporate and in our stores and an extremely capable and enthusiastic group of domestic and international franchise partners, who are working every day to spread the joy that is Krispy Kreme.

Thank you for all your time, and we would now like -- we'd now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And it looks like our first question will come from the line of Tony Brenner with Roth Capital Partners.

Anton Brenner - Roth Capital Partners, LLC, Research Division

I have 2 questions. First of all, I wonder if you might explain the disparity in domestic franchisee same-store sales and the Company Stores.

Douglas R. Muir

Sure, Tony. Let me -- I'm glad you asked. Let me share some additional metrics and a couple of thoughts. As I commented for the quarter, the domestic franchisees posted a same-store sales increase of 10.7%. That was absolutely outstanding. That said, there were some individual franchisee performances that were absolutely stunning. There were 7 franchisees that posted comps up 20% or more. The largest member of that group in terms of dollars in the comp computation was up almost 30%. On average, they were up 27%. Now as great as those numbers were, the rest of the pack did really well, too. On average, the remainder of the franchisees were up 7%. We think that's just a wonderful performance. As to what's driving it, we think there are several things. First, franchisee participation in limited time offer programs is up over last year, and it's the highest since Jim and I have been at Krispy Kreme. Same thing for franchisee participation in special events and everyday promotions like Talk Like a Pirate Day and other almost daily efforts to drive doughnut use occasions. But the real driver here, we believe, is outstanding execution by the franchisees and their teams. It's really all about delivering our best-in-the-world doughnuts, beverages and complementary products. The franchisees control quality and delivery of product and the consumer experience that makes Krispy Kreme what it is. We honestly could not be happier with their outstanding success, and we congratulate them all. A couple of comments about the company comp. We reported 3.7% company store comp in the quarter. One never knows the precise effects of cannibalization, but we've got some in a couple of markets as we've opened some new stores. And my math is never perfect, but I think cannibalization probably tagged the company number adversely for about 0.8% in the quarter. We also have some big honeymoon effects going on in Charlotte, where a couple of stores opened really, really big. And you know what happens, when you first come into the comp of Krispy Kreme, it's always negative. I think the honeymoon effects in Charlotte probably hit us for another 0.7. So I can argue that the normalized company comp is more like 5.2. And I do think our comp probably is affected more by cannibalization and honeymoon because our growth is greater as a rule in the franchisees, and the store openings are more concentrated in smaller geographic area. Beyond that, Jim, have you got anything you'd like to add?

James H. Morgan

No, I just think that with Company Stores same-store sales, they're going to probably be a little bit erratic and sometimes get out of synch with the franchisees. Because of what Doug just said, we have -- depending on what we're wrapping around the previous year, what we've closed for remodeling, where we've scraped and rebuilt, where we put a second, third or fourth store into a market we're already in, all of those are factors that affect Company Stores that, at this point in time, are not affecting our franchisees because they're not -- they're just in the early stages of beginning to develop new stores in the markets where they already had stores. So I think that's pretty much it, Tony.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Sorry to catch you by surprise with that question.

James H. Morgan

You can tell Doug was not prepared.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Yes. One other question, if I might. So the external delivery of bagged coffee. Is that going to be limited, aside from Sam's, to the grocery and convenience stores that are your current customers? Or are you going to expand beyond that?

James H. Morgan

Yes. Now the 40-ounce bag, which is what we're doing in the Sam's Club, is obviously only appropriate for larger buyers. But the idea of having coffee in different forms, we have much broader thoughts and aspirations on that.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Beyond your -- beyond Sam's Club or beyond your current customer base for doughnuts?

James H. Morgan

Beyond both. Beyond both.

Operator

And it looks like our next phone question will come from the line of Michael Gallo with Michael Gallo.

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

CL King. Just a couple of questions. Doug, did I hear you right on the guidance for FY '15, that you haven't contemplated any pricing in those numbers? Is that just you've contemplated what you have or you're not contemplating taking any or it's just too early to tell?

Douglas R. Muir

We have not decided on pricing, but that -- there is some -- a little bit of pricing baked into that number, yes. We'll be able to quantify the effect -- kind of a little bit more of what our thoughts are on pricing. But I think as Jim has previously indicated, we expect to take some pricing pretty much every year. How much and when we take it for this year, we haven't decided yet, but yes, there's a little baked in for that.

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

All right. Okay. Can I ask you a question on the international comps? You saw a nice improvement in trend there in constant currency. I was wondering if you can elaborate on what drove that and which -- should be start to expect on a go-forward basis that international comps or comp declines are going to moderate into the low to mid single-digit range from the mid to high single-digit range on a constant currency basis? Or how should we think about that?

James H. Morgan

I think Doug is going to get some numbers on that. Mike, I'll give you my kind of top broader view on that. I think if you look at it year-by-year, the last 3 or 4 years, the trend has really been good. We were mid double digits, I think, just a few years ago trending down and then low double digits and then high single digits. And obviously, this is the best quarter we've had reported on international comps same-store sales in quite a while. So I think the trend, we're happy with the trend, and we'd like to see it continue. Doug, what do you have there?

Douglas R. Muir

Just -- I think Jim is absolutely right. We have -- there's a nifty document out on our website that has got these metrics by quarter going back for as long as we've been reporting. If you draw a line of currency-adjusted comps by quarter, going back about 3.5 or 4 years, what you see is, by and large, a steadily upwardly sloping line. We think the shape -- the direction of that number -- of that line being upwardly sloping, that is improving comps internationally. We think that's going to continue. I mean, there's uncertainty in everything. Year-to-date, currency-adjusted comps are down 6.4 for the quarter. They were down 3.1. But we expect to be kind of approaching that 0 or going positive before too much longer, but I'm not sure I want to put a particular quarter or year on it just yet.

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

I mean, it sounds like, on the trajectory, is it possibly that you could see that at some point next year?

Douglas R. Muir

Is it possible? Yes. Would I want to predict it as likely. I don't have a view on that yet.

James H. Morgan

And Mike, that's why we've -- during these times when the numbers were worse than that, we kept trying to share with everyone that it's the average sales per store is where we really focused there, and the very franchisees that had the worst same-store sales comps were the ones that were renewing their -- signing new franchise agreements for further stores because the raw numbers were very, very good. They just were down dramatically from the astronomical numbers they had for a while. So that's why we try to guide that way. And I think, so far, what we had hoped and believed was going to take place is taking place, and I think it will continue. And is next year possible? Yes. But I think I'm kind of with Doug. I'd rather just let it happen when it happens. As long as the trend continues, we know we'll be there, and that will be fun when we are.

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

Well, we ought to predict that. You can leave that to us. But let me give to you 1 final question, Jim. On the domestic pipeline, I mean, you've now had some of the 110M stores almost a year now. And the base, you seem to be seeing consistent and very good results, very good returns across multiple stores. You seem to be starting to get some traction and starting to sign some development agreements. How should we think about how that's ramping? Obviously, 10% comps and 7 franchise groups comping at 20%, you got to do a lot for franchisee interest. So I was wondering, you have enough data now where you can really show franchisees. Where you really start to see an acceleration in the new unit development. Or is there still more time you have to have more stores open and just a longer data before you kind of reach that?

James H. Morgan

Yes, I think it's a great question. Number one, I will just affirm what you said, that our Head of U.S. development is certainly -- her job has been made easier because of what's taking place. As you know, perspective franchisees call current franchisees to see how the world is going. It's one of the bits of homework they do. So that's going well. I think the interest is high and keen, and I think that it -- without a doubt, I don't think there's anything left to test on the machine, to be honest with you. I mean, I think the model is there. I think the economics are going to get better. I think we can continue to fine-tune both the front-end costs and the cost of operating. I think we can get those better over the coming years, but we don't have anything, at this point, holding us back from recommending to the current and new franchisees that the new smaller model is the way to go. And I think you'll see the recent sign-ups we've had be focused in that direction, both the one announced today and then one announced for Alaska a couple of weeks ago and Dallas prior to that. I think you'll see this being the major production equipment that is put in these stores.

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

And internationally, I mean, you talked about a smaller production machine on a small format box. Is that something you're still evaluating or we still haven't spoken internationally as we go forward?

James H. Morgan

It's still largely, but I do think your assumption based on what we said earlier is correct, that you can pretty well assume that if we can work in a smaller model, that makes a strong replacement for some of the fresh shops in those urban models because of lease costs and other challenges they have there. That certainly would be exciting, and I think that's in our future. I think that's definitely in our future and in our international development future.

Operator

Our next question in queue will come from Nick Setyan with Wedbush Securities.

Nick Setyan - Wedbush Securities Inc., Research Division

Just a quick question on the pricing. Was there a big difference between the franchisee pricing and the company-owned pricing?

Douglas R. Muir

The answer to that is we don't know. We do not have, really, any significant discussion at all with our franchisees about what they sell their products for. We don't ask them to report it to us. We survey them periodically, but there are all sorts of legal implications to do that. We stay away from that. It has been reported that there were -- no franchisee took any pricing this year. I doubt that's true, but I don't know the answer to the question.

Nick Setyan - Wedbush Securities Inc., Research Division

Got it. And then is 3.3% the right number to just model in our Q4 expectations?

Douglas R. Muir

I'm sorry, is what number, please?

Nick Setyan - Wedbush Securities Inc., Research Division

Is that 3.3% pricing, is it safe to assume that Q4 is about that as well or is there any falling off?

Douglas R. Muir

Yes, I think so. Yes. Listen, it kind of depends on how much your sales grow overall because in that number, the effect on comp is not only the pricing on what you sold last year, but it's the pricing on the sales increase for this year. So it does kind of depend with sales growth. But I think that's in the area code. It's been like that number pretty much between 3.3% and 3.8% all year.

Nick Setyan - Wedbush Securities Inc., Research Division

Got it. Got it. Okay. And then on the guidance, I mean, it was very encouraging to see the franchisee development for 2025. Is that a net number or is that a gross number?

Douglas R. Muir

That is a gross number, but I don't think the domestic franchisees have too many more problem children. I don't, and I don't think they do either. I think, by and large, they dealt with problem children. Yes, there are always opportunities in the restaurant business. We have to close the store because it moves away from you. We closed one in Roanoke because it burned down. We haven't been able to build a new one yet. But I don't see a bunch of domestic franchise closures next year.

James H. Morgan

Nick, this is Jim. I agree with that. I think our domestic franchise, the gross and net are going to be neck and neck with each other internationally because of the nature of some of the smaller shops they've got and the shorter leases that, internationally, you'll see in the net number, be difference. But I think, domestically, I agree with Doug. I don't see that. They're pretty much in the same shape we are with Company Stores. The closing is pretty much behind us. So the gross number should pretty much be the net addition.

Nick Setyan - Wedbush Securities Inc., Research Division

Perfect, perfect. Now is it safe to assume that most of those are going to be the smaller format stores?

Douglas R. Muir

All of -- let's talk about the company and domestic separately. We would expect that all of the Company Stores are going to be the new small factory model. Now there may be a one-off exception somewhere, but we have not seen an exception show up in front of real estate committee yet. The franchise -- Domestic Franchise net number, I think, will be a mix, probably weighted toward factories, but I wouldn't want to tell you weighted how much. A hint for you is, I think, in terms of timing, during the year, I suspect the company and the franchisee number domestically are probably back-loaded.

Nick Setyan - Wedbush Securities Inc., Research Division

Got it. Okay. And then just last question on the tax and NOLs. I know it was about $206 million as of the end of last year. Do you have an updated number for the end of the quarter? And as we look at it, just kind of thinking about the very nice trajectory, the profitability, is it -- is sort of FY '17, FY '18 the right time frame to think about when those run out?

Douglas R. Muir

I'm doing this from memory. I'm looking to see if the -- I don't have a 10-K in front of me, sorry, but my recollection is the number was about -- somebody just handed it to me. Thank you. At the end of last year, the federal NOL was about $206 million. Our taxable income and our federal return before the NOL deduction this past year was, I'm doing this from memory, I may be off a few million, call it, $40 million, roughly, taxable income. And, again, that reflects depreciation differences and a bazillion other things. And so I'll leave that with you. You can make your own estimate. Obviously, the faster it runs out, the higher class [indiscernible] we have.

Operator

And it looks like our next question will come from the line of Michael Halen with Sidoti.

Michael Halen - Sidoti & Company, LLC

Can you give us some color on what -- the slowing of customer counts at customer stores in the quarter is? Are you seeing the consumer softening as a reaction, maybe to pricing has been taking or maybe possibly geographic? Which would also explain Company Store underperformance of the franchisees.

Douglas R. Muir

I can't give you much. I'd love to have my loyalty program installed, and I'd have a lot better feel for all of this. Higher traffic contributed 1.1% to the comp in the quarter. The comparable number in the third quarter last year was 7.1. So it was -- I mean, on traffic point of view, it was a tough comp, but I don't think -- I haven't heard anybody around here say that pricing is driving customers away.

James H. Morgan

Only the price has been in effect for so long. Just thinking out loud, Mike, this is Jim, I don't believe that's much of a factor. We're obviously looking at it, too. We've gotten around here. We've gotten used to not overreacting. We certainly manage and look at it in care, but kind of like when we hit 2 quarters in a row with double digits, we were very honest with you. We said we don't have any idea why. But we know that there's a trend there, and the trend is, as Doug said in his comments, we fully expect to have a low-single digit same-store sales increases, plus whatever strategic pricing we have over the coming year. And so that slowdown, we still think we're -- we're still very confident of the fact that we'll be growing those numbers.

Operator

And our next phone question will come from the line of Alton Stump with Northcoast Research.

Alton K. Stump - Northcoast Research

I guess just 2 questions. One, I think back to a question that you responded to earlier, Doug, based on our checks [ph], there has been very little, if any, pricing that had taken to date by franchisees, and so it makes a gap between obviously what was a huge comp number from them versus your comp, even bigger on a transaction basis. Is there any sort of single point or 2 that you can maybe look at or that you can mention that you think is driving that gap? Is it just them knocking the cover off the ball or is there something else going on that might explain why company-owned store comps are so much lower than domestic franchise?

Douglas R. Muir

I talked -- spoke about -- 20 minutes before this call, I got on the phone with the franchisee who has got the comp that is within a smidgen of 30, and I'm not sure he knows. I think he subscribes to the view that execution is key and that particular franchisee happens to be a great operator in terms of customer experience, what the stores look like, what the product looks like. That franchisee was not comping off an easy number, so that's not it. He's just kind of a little dumbfounded, I think, but he was in good company. And there were 6 other people with 20 or more. And so while, certainly, that sets up for them perhaps a tough comp next year, it does indicate the rest of the franchisees doing a 7 was not a shabby number compared to what I read about what other restaurant comp sets [ph] are doing. Again, if you look at -- I don't necessarily believe 20 is an outlier. But if you do believe that and everybody else is doing 7 and I can kind of argue my number, x cannibalism and comp, and honeymooning to a 5, I think we're kind of in the same area code.

James H. Morgan

But, Alton, you're right. If they didn't take pricing, which I truly don't know, and I'm not sure that's true across the board, but if they didn't and we did, then you're right, the gap's a little bit higher than that would indicate. And you can imagine, internally, we do a lot of studying on that, and we're worried about that. We thought we could find some way of expressing that to you. I think it gives us -- [indiscernible] tells us we've got some untapped opportunity here at Company Stores and we'll keep working on them because I think the demand for our products are out there and the brand [indiscernible]. So maybe we just got to tap that opportunity a little bit stronger with our Company Stores.

Alton K. Stump - Northcoast Research

Okay, it makes sense. And then, I guess, a real quick follow-up. On the '14, '15 [ph] store guidance, I was very pleased to see the 20, 25 range in franchise. I think that 10 to 15 [ph] was maybe a little lower than I would have thought. And as a question on that is, obviously, had no debt now on the balance sheet or potentially no debt, certainly generating very solid cash, getting great cash-on-cash return so far. I guess, why not build more company-owned stores next year? Is it just wanting to be conservative? Obviously, you only got a couple of stores that have actually had their honeymoon period that you opened so far. Or is there some other reason why you -- that isn't a 20, 25 number for company-owned as well?

James H. Morgan

A couple of answers on that, Alton. One, keep in mind that if we do 15, we would do the upper end of that. We would be adding about 16% to our store base, which is a pretty big increase in 1 year. Secondly, we don't want to set a number for ourselves or for you that would result in putting pressure on us to open x number of stores and end up choosing secondary locations to force our way in and to meet those numbers. So I think we feel very confident that we can support logistically people-wise, management-wise, real estate-wise, construction-wise and site location-wise a 10 to 15 number, and I think that's reasonable. We're pretty enthused about that, particularly, since this year, we'll probably only end up doing about 7. Doug, is that right? So we got a chance to maybe double that number and, quite frankly, to springboard from that in future years.

Alton K. Stump - Northcoast Research

It makes sense. And then, yes, I think just a quick follow-up to that, that's where I go with this, is it real estate? I just want to make sure that you're getting as many Class A sites as possible. I was thinking it's more about that than sort of the lack of confidence that, given the cash-on-cash return, you've seen so far that there would really be no reason why you couldn't either next year or the year after build a lot more stores than that. Am I correct on that?

Douglas R. Muir

You are absolutely correct. You show us a site, we'll like -- we'll build it. The only thing I would add to Jim's comments is we indicated on the call last quarter that we were looking in some markets that we hadn't talked about. Houston was one of those. So we already control some real estate in Houston, which kind of gets things rather nicely teed up with this afternoon's announcement.

Operator

[Operator Instructions] And it looks like our next question will come from the line of Will Slabaugh with Stephens.

Will Slabaugh - Stephens Inc., Research Division

I wanted to ask about the franchise unit growth for next year. So with the number that you gave us, I assume that, that just incorporates the current franchisee base and those that have been announced, and there's not any in there that have yet to be announced.

Douglas R. Muir

That is correct.

Will Slabaugh - Stephens Inc., Research Division

Okay. And could you remind us also, whenever a franchisee decides he wants to build a store, about how long that takes from that decision to whenever he can open his doors?

Douglas R. Muir

It depends. I think probably 6 months is a good ballpark. It's been known to take longer. As I think we've indicated before, permitting is the bane of your existence in doing restaurants. Some markets are a lot easier to get your permits. And just particularly on signage, it's extremely important. But I think 6 months is a good ballpark from when you pretty well lock down and say, "I'm going to ink a deal." Because then you got to do your environmental, you got to get your permits, then you got to break ground. Actually, building doesn't take that long. It's all the permitting and things like that on the front-end that generally takes the time. Can it be done in less? Yes. Does it sometimes take more? Yes.

Will Slabaugh - Stephens Inc., Research Division

Got it. And just thinking about that domestic pipeline, and I know Patricia has been working hard at this since she's come on board. Can you give us a little more of an update as far as -- obviously, we've been seeing some nice additions here from Alaska and Houston. You mentioned in the coming weeks and months you expect more. So should we expect sort of a similar trend announcements coming up at an increasing pace here in the next couple of months?

Douglas R. Muir

Yes. I don't know that we want to talk about pacing, but do we expect to make some more announcements in the not-too-distant future? The answer is yes.

Will Slabaugh - Stephens Inc., Research Division

Great. And not to dig too much into a 3-week number, but just with regard to what you saw quarter-to-date, and I realize with the company unit growth coming in, that number is going to face some pressure. But is there anything else to call out there with regard to the deceleration that you saw modestly here or to date? And do you think that weather played into that at all, seeing how the South and Southeast compared much, much colder this year versus last year?

Douglas R. Muir

Will, I honestly don't know. I know that 3 weeks does not a quarter make, and I don't really, at this point, read anything into it.

James H. Morgan

We'll be saying the same thing if the number had been astronomical. We said we won't reading anything into that, too.

Operator

And it looks like our next question will come from the line of Michael Gallo with Michael Gallo.

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

Just a follow-up question. Can you update us on beverages, how those did in the quarter?

James H. Morgan

We know that on a year-to-year basis, that the beverages were up over 4%, with coffee up mid-teens.

Douglas R. Muir

Coffee up mid-teens, largely driven by our friend espresso. Specialty beverages was the big winner for the quarter. As a percentage of overall sales, not the best -- we're kind of still stuck about where we were in total, but in the doughnut, business has been great. So we hope to continue to make inroads in beverage over time, but there was certainly not a material change in the trend one way or the other in the quarter. But the espresso sure has taken off.

Operator

[Operator Instructions] And presenters, at this time, I'm showing no additional phone questions in the queue. I'd like to turn the program back over to management for any additional or closing remarks.

Anita Booe

Just thank you very much. We look forward to seeing some of you at the upcoming ICR Xchange Conference. Have a good evening. Good night.

Operator

Thank you, presenters, and thank you, ladies and gentlemen. Again, this does conclude today's call. Thank you for your participation, and have a wonderful day. Attendees, you may now all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Krispy Kreme Doughnuts Management Discusses Q3 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts