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Krispy Kreme Doughnuts, Inc. (NYSE:KKD)

F4Q 2014 Earnings Conference Call

March 12, 2014 4:30 PM ET

Executives

Anita Booe - Director, IR

James Morgan - Chairman, President and CEO

Douglas Muir - EVP, Treasurer and CFO

Analysts

Will Slabaugh - Stephens Inc.

Michael Gallo - C.L. King

Michael Halen - Sidoti and Company

Colin Radke - Wedbush Securities

Alton Stump - Longbow Research

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2014 Krispy Kreme Doughnuts Incorporated Earnings Conference Call. At this time all participant's are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions]. As a reminder, today's conference is being recorded.

I would now like to turn the call over to Anita Booe.

Anita Booe

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

Some of the information in today's press release and statements on today's call includes forward-looking statements that reflect our expectations or beliefs about the future; including, but not limited to, our expectations and beliefs regarding financial performance. We cannot assure you that we will achieve or realize these expectations. Like any such statements, they are subject to a number of factors, 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 Morgan

Thank you, Anita, and good afternoon everyone. We appreciate you joining us.

Let's begin this afternoon with a brief look back at fiscal 2014 and the fourth quarter, before turning the discussion to our ongoing brand building initiatives. Afterwards, Doug will review our financial results in greater detail, and update our guidance for next year.

Looking back to the recently completed fiscal year, we passed the $1 billion milestone in system-wide sales, while on the comparable 52-week basis, our revenue increased 7.9% to $460 million. Company same store sales rose 6.7%, on top of a 5.5% gain in fiscal 2013, and reflected our fifth consecutive year of positive same store sales trends.

Similar to last year, the sales increase was driven by higher customer traffic. Wholesale sales grew 3% on a 52-week basis, driven by an increase in weekly -- achieving [ph] average weekly sales per door. Company stores operating income on a 52-week basis increased 37% to $11.3 million. Our system-wide store count was 11% to 828 shops in operation at year end, making Krispy Kreme one of the fastest growing chains within the QSR industry. Together with our franchise partners, we entered a net 80 Krispy Kreme stores worldwide. Franchisees increased their development commitments to a total of 500 stores at year end, bringing us closer to our goal of 1,300 system wide stores by 2017.

Notably, we opened seven small freestanding companies factory shops in fiscal 2014, and that includes the scrape and rebuild on the existing side. We also expect that both we and our domestic franchise partners will be opening more of these small factory shops in fiscal 2015.

Domestically, our franchise partners generated same store sales growth of 9.9% on top of the 6.8% increase in fiscal 2013; while our international franchise business continued to be less influenced by growth inspired cannibalization and honeymoon effects, with the currency adjusted same store sales decline of 5.6% compared to an 8.1% decrease in fiscal 2013.

From a profit standpoint, operating income on a 52-week basis rose 38% to $46.6 million, and adjusted net income increased 31% to $43.2 million. We had a cash balance at year end of more than $55 million, despite having repurchased over $20 million of our common stock this past year.

Finally, our board of directors have increased the size of our current share repurchase authorization, from $50 million to $80 million. To-date, we have repurchased approximately 1.6 million shares for a total of $29.8 million, including $9 million of purchases since the end of the fourth quarter. Our average cost to-date is $18.45.

Turning to the fourth quarter now; in the fourth quarter, we grew adjusted earnings per share 33% on a 13-week basis. Excluding the effects of refranchisings, revenues rose 5.5%. At company stores, same store sales rose 1.6%, despite the negative effect of adverse weather, and a tough 7.5% comparison than last year. This enabled us to extend our track record of same store sales gains to 21 consecutive quarters. Even more impressive, domestic franchise same store sales grew 6.2%. On a currency adjusted basis, international franchise same store sales were down only 3.4%.

We remain very proud of our five year track record of same store sales growth at company stores, which has been driven by traffic and is among the strongest in our industry. Our improved marketing has helped us guard our top of mind awareness through branded social media networks, our eClub subscribers, our Hot Light smartphone app, and traditional local relationship marketing.

But it does not stop there. Our efforts also focus on product innovation, that keeps the openings [ph] fresh and on providing an outstanding consumer experience, with every visit to our shop.

Most importantly, our market resource indicate a hidden demand driver, is our customer's emotional attachment to our doughnuts. In fact, consumers tell us that they are open to enjoying Krispy Kreme at any time, day or night, and simply need us to help them find more opportunity to create jolting memory, from occasions that are already in their lives. We intend to do just that.

While Krispy Kreme is best known for delicious craveable doughnuts, we expect our enhanced coffee and beverage lineup to become a bigger draw at our stores, as we expand our beverage licensing opportunities, to build top of line, quality awareness, beyond our jobs.

Last month, we made consuming our Krispy Kreme coffee beverages even more convenient, by beginning introduction of ready-to-drink bottles of our original Glazed Iced Coffee and Krispy Kreme Mocha Iced Coffee, at over 900 Walmart stores. This is an addition to the test introduction of packaged Krispy Kreme brown coffee and 40 ounce bags at about 100 Sam's Club locations throughout the southeast. Both, the ready-to-drink beverages and packaged coffee are being manufactured and distributed under third party licensing agreements.

We also announced a multiyear partnership with Keurig Green Mountain to bring Krispy Kreme's signature coffee to the Keurig brewing system at the end of calendar 2014. This fall, Krispy Kreme K-Cup will be available at grocery and vineyard store and big box outlets throughout the U.S., as well as at Krispy Kreme shops, and online. We view all of these actions as part of the long term opportunity, to serve what we believe is the large number of consumers who would welcome the chance to enjoy Krispy Kreme coffee and beverages, even when they are not in our of our shops.

The potential points of distribution for the [indiscernible] with a number of domestic Krispy Kreme shops and can therefore, serve as a catalyst for the growth of our brand, and for additional sales in our retail stores. We are also seeing significant interest in licensing opportunities for other Krispy Kreme branded products from a variety of potential partners.

Turning to development, we opened our eighth company freestanding small factory store in the fourth quarter. Our domestic franchise partners opened 11 shops last year, while our international franchisees opened a net 65 new shops. For the quarter, we ended a net total of 16 locations system-wide.

We entered Taiwan with a new franchise partner, where we opened the first of 10 planned Krispy Kreme shops, and also, opened our first shops in Singapore and Moscow. We also broadened our reach within India to the North India market, with an initial shop in Delhi, the first of 35 stores initially planned in that market. On Mainland China, we signed a 23 store development agreement with the Guangdong province, which is the largest consumer market in China.

We remain very optimistic about global franchise expansion, and recently recruited Dan Beem, a talented veteran with 20 years of experience in the restaurant industry, to join us as President of International. Dan's extensive restaurant experience and superb international track record, makes him an obvious fit to lead our ongoing international expansion and development efforts. Our total franchise commitment for additional international development now stands at almost 400 shops, and we believe our goal of 900 shops internationally by January 2017 remains achievable.

Closer to home, in the fourth quarter, we signed a development agreement with a longstanding franchisee, Great Circle Family Foods, to about 20 new doughnut shops in Southern California. Great Circle has been a part of the Krispy Kreme family since 1998, and with 11 stores currently in operation in Southern California, is our third largest domestic franchisee by store count. The planned shops are expected to feature our new small factory designs, including a Drive Thru and our famous Hot Light.

We also signed new agreements with two other existing franchisees for a total of another six new shops, and our new franchisee in Dallas, signed an initial development agreement for 10 new shops in Houston. Finally, we signed a new franchisee in Alaska, we plan to open four shops in Anchorage and in the Matanuska Valley.

As we have shared with you before, we view the smaller store format as critical to our growth opportunity. The early results from eight stores that have been open since January 2013 give us confidence in the model, and we are pleased that franchisees are now making small factory shops a part of their development plans for fiscal 2015. Of the 30 to 40 planned domestic store openings in fiscal 2015, we expect more than half will be small factory shops.

Summing up, we grew same store sales despite tough comparisons and weather challenges. We are demonstrating progress, in ensuring that our coffee can be purchased and enjoyed beyond the four walls of our stores. We are gearing up for an even more exciting year of domestic development, anchored by the small factory shop model. And finally, our international franchise business is growing through new and deeper relationships, and we are spreading Krispy Kreme to new countries, and further penetrating existing markets.

All of these lines point to both a bright future, and through ongoing strong financial performance by brand.

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

Douglas Muir

Good afternoon and thanks for joining us. You may remember that last year was a 53-week year, and last year's fourth quarter had 14 weeks. To facilitate comparisons, we are excluding the extra week from last year's results.

So the following comments compare the 13 weeks ended February 2, 2014, to the 13 weeks ended January 27, 2013. Total revenues increased 3.3% in the quarter to $113 million. As Jim noted, excluding the effects of refranchisings, revenues rose 5.5%. Consolidated operating income rose 27% to $9.1 million, and adjusted net income rose 37% to $8.3 million, while adjusted earnings per share gained 33% to $0.12 from $0.09 last year.

Now let's turn to the 13 week comparisons by business segment. In the company stores segment, total revenues declined 1.1% to $74 million. The decline was driven entirely by refranchising six stores, which cost us about $4 million of sales compared to the fourth quarter last year. Exclusive of the effects of refranchisings, company stores revenues actually increased 4.3% for the quarter.

Total on premises sales increased slightly from last year. Again, the refranchsing effects for the comparison. Despite the impact of unusually severe weather, we completed our 21st consecutive quarter of higher same store sales, which rose 1.6%. A slight decline in traffic adversely affected comps by four-tenths of 1%, all of which we attribute to the weather.

Pricing contributed 3.7%, which was partially offset by a lower average check. We saw an increase in transactions in the afternoon day part, which we think is indicative of some success in developing additional use occasions in consumers minds, and getting them to come to Krispy Kreme for new snacking occasions. That is exactly what we are trying to accomplish, fully recognizing that the average check at this time of day is lower than in the morning or evening, and therefore, continued growth in the state part will likely draw down the overall average check.

In the wholesale channel, fourth quarter sales fell 2.3%, driven principally by the effects of refranchisings. Average weekly sales per door in grocery and mass merchants, increased 3.4%, while doors declined 6.4%. In the C-Store Channel, average weekly sales per door were down 2.8%, while the average weekly number of doors served was flat. The big driver of the decline in average doors was the refranchisings in Kansas, Missouri, and Texas.

The Company Stores segment posted operating income of $1.6 million compared to $3 million in the fourth quarter last year. Several items gave rise to the decline.

First, we saw a rise in coupon and other promotional incentive redemption rates, and the average incentive was richer than last year. The aggregate dollar value of coupons and other incentives was about $1.1 million greater than last year. Those incentives, together with a higher marketing spend and the negative effects of bad weather, adversely affected operating margins and profit.

We can't do much about the weather, but we have made the necessary course corrections in other areas, while continuing to invest for the long term in building the Krispy Kreme brand. Fundamentally, we believe the long term trend of improving margins in the Company Stores segment is intact, and we expect further margin improvement in fiscal 2015.

Let me take just a moment to update you on the financial results at our new freestanding small factory shops. To-date, we have opened eight of the new small shops, including one in Richmond in the fourth quarter. Looking at the revenues for those eight locations, two of them appear to be home runs, four more are above our expectations, and two are not doing as well as we planned. On balance though, we are very pleased with our results thus far.

In the domestic franchise segment, fourth quarter revenues rose about 25% to $3.1 million. Higher royalties from a 14% increase in sales, of which about 4% reflects the six refranchised stores, accounted for a majority of the revenue increase. Segment operating income was $2 million, compared to $1.3 million last year.

In the International Franchise segment, revenues increased about 4% to almost $7 million. Sales by international franchise shops rose 10%. Changes in the rate of exchange between the U.S. dollar and the currencies in which our international franchisees do business, decreased sales in U.S. dollars by about $7 million in the fourth quarter, compared to the fourth quarter last year, and that adversely affected royalty revenues in the international franchise segment by about $400,000.

Exclusive of currency effects, same store sales at international franchise shops fell a modest 3.4%, reflecting among other banks, honeymoon effects from a substantial number of international store openings in recent years, as well as some cannibalization, not unexpected, as markets develop.

The International Franchise segment generated operating income of $4.8 million compared to $4 million in the fourth quarter last year. The improvement principally reflects, aside from revenues, lower share based compensation and a reduction in trademark protection costs.

In the supply chain, sales, including sales to company stores, were $56 million, an increase of about 6%. The supply chain generated operating income of $8.6 million in the fourth quarter, compared to $7.5 million in the same period last year. Economies of scale accounted for the bulk of the margin again.

Turning to G&A expenses; total G&A was $7.7 million, a decline from $8.4 million last year. G&A as a percentage of revenues fell to 6.8% from 7.7%. The decline in spending reflects lower incentive compensation costs and the reduction in legal costs compared to the prior year. In addition, G&A expenses in the fourth quarter last year, included a charge of $225,000 for the settlement of nuisance litigation.

Implementation of the new ERP system generated incremental G&A costs of about $400,000 in the fourth quarter, and that was about the same as the fourth quarter last year, when we were finalizing selection of the software.

Adjusted net income was $8.3 million or $0.12 a share, compared to $6.1 million or $0.09 a share in the fourth quarter last year. Adjusted net income and adjusted EPS, which are non-GAAP measures, reflect income taxes only to the extent currently payable in cash.

Now let's turn to our fiscal 2015 outlook; in terms of overall system-wide net unit growth, we expect this year to be similar to the almost 11% expansion we saw in fiscal 2014. We expect to open between 10 and 15 small freestanding company factory shops. We estimate the domestic franchisees will open between 20 and 25 new shops, including a mix of both small factory and satellite locations. We forecast that international franchisees will open approximately 85 new locations. Allowing for normal shop closings through the system, we project an increase in the system-wide store count of close to 100 shops this year.

In terms of comp, our goal is to achieve modest organic same store sales growth in our company shops in fiscal 2015, driven by traffic, with pricing adding about 2% to that. We are shooting for that growth, even though we are up against an outstanding same store sale performance in fiscal 2014, in which company comps rose 6.7 and traffic rose 4%, and that 4% was against a 6% traffic gain the year before.

Turning to Wholesale; we expect sales to be up slightly. On the commodity cost side, we expect our ingredient costs to be relatively flat compared to fiscal 2014 levels. We forecast that International Franchise same store sales will continue the improving trend in recent years. We think we are getting very close to seeing currency adjusted international comps in positive territory, notwithstanding the drag that system growth can put on that metric.

In terms of operating margins, we look for margin expansion in the company store segment. Operating margin in company stores rose over 80 basis points in fiscal 2014 compared to fiscal 2013, and we are projecting we will have a bigger improvement this year.

In Domestic Franchise, if you take out the $1.7 million unusual gain we had in the third quarter, our operating margin last year was about 54%. We expect to do better than that this year.

In International Franchise, we expect an operating margin similar to this year's roughly 70%. In the Supply Chain, we expect slightly wider margins, as fixed costs become less significant on a growing revenue base.

On the G&A line, we expect costs as a percentage of revenues to remain flat. Costs associated with implementing the new ERP system, as well as the ongoing operating costs associated with it, are expected to total about $2.8 million this year, and that's up from $800,000 in fiscal 2014. Depreciation, likely in the range of $13 million to $15 million, and we currently expect this year's CapEx will be in the range of $30 million to $35 million.

We expect the GAAP effective tax rate in fiscal 2015 to be about 40%. In terms of current or cash basis income tax expense, which is all we take into account in computing adjusted earnings per share, we expect a number of roughly $3 million.

As we look ahead to our next quarterly report, I would just note that the first quarter is also likely to show some adverse weather effects. In February, the blizzard on the East Coast hit us particularly hard two days before Valentine's Day, historically one of our busiest weeks of the year, and much of North Carolina was hit by a major icestorm last week.

Nevertheless, we continue to expect fiscal 2015 adjusted net income will be in the range of $51 million to $55 million. We now expect adjusted EPS will range from $0.73 to $0.79 a share. This represents an increase of between $0.02 and $0.03 per share from our December guidance. The change reflects a 2 million share decline in the forecasted number of diluted shares outstanding to 70 million shares, which includes the effect of share repurchases we have made through today, under our share repurchase authorization. If achieved, this forecast would yield year-over-year growth in adjusted earnings per share of between 20% and 30%.

One last note, beginning in fiscal 2015, we plan to revise our computation of same store sales, to more accurately reflect comparable store sales performance. Under the new methodology, shops will be included in the same store sales computation, after 18 months of operation, compared to 13 months under the current methodology. The [indiscernible] Krispy Kreme shops typically open with an extended honeymoon period of elevated sales levels. Under the current methodology, most shops will report negative comparisons, as they enter the same store sales metric, at week 57.

Deferring stores entry into the same stores sales metric until week 79 is expected to result in a more meaningful measurement of comparable sales, because in most cases, substantially all of the honeymoon sales period will no longer be reflected in the metric.

Also, this change aligns our computation, with that of similar restaurant concepts. We plan to provide quarterly tables for the same store sales calculation for domestic, company stores, and international franchise shops for fiscal 2012 through fiscal 2014, using the new methodology, prior to release of our results in the first quarter of fiscal 2015.

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

James Morgan

Thank you, Doug. Let me leave you with a final thought before we take your questions. We demonstrated considerable progress in implementing our strategic objectives in fiscal 2014, and we intend to continue executing on our plans, as we strive to unlock Krispy Kreme's full potential. We are accelerating our growth domestically, with the small factory store model, that is now being emblazed by our franchisees, and which we believe is a positive factor in attracting new domestic franchisees.

Internationally, we are recruiting new franchisees, as well as signing follow-on agreements with existing partners. We are also capitalizing on opportunities for Krispy Kreme beverages, by providing customers more ways to enjoy our coffee, whether it'd be [indiscernible] ready-to-drink, or later this year in the popular single serve format.

Our strong, virtually debt-free balance sheet, along with healthy and growing cash flow, is a significant advantage in creating shareholder value. We will deploy capital to fund new company stores, and to support our franchisees. We expect to complement these efforts, by acting on our $80 million stock repurchase authorization as conditions permit, to optimize shareholder returns, just as we have done these past two years. I am gratified to be surrounded by an exceptional group of people at our headquarters, our shops, our factories, and within our franchise partnerships, all of whom have worked tirelessly to spread the joy that is Krispy Kreme, to our customers worldwide.

Krispy Kreme has the unique opportunity for sustainable growth for many years to come, and we continue to believe that our long term shareholders will be well rewarded by that growth.

Thank you to each of you for your time today, and operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Will Slabaugh from Stephens Inc.

Will Slabaugh - Stephens Inc.

Congrats on the quarter.

James Morgan

Thank you, Will.

Will Slabaugh - Stephens Inc.

I guess talking here, I know Doug was speaking to weather a little bit and quarter-to-date, I don't know how much detail you want to give, but just wondering if you could -- if you wanted to talk about it, kind of how you are seeing trends currently?

James Morgan

[Indiscernible].

Will Slabaugh - Stephens Inc.

Yes sir, it is.

James Morgan

I thought I was picking up your voice, okay, sorry, we thought we weren't coming on. We kind of shared with you what happened in the fourth quarter. It's so early in this quarter to get very dependent on that. I mean, it certainly affected us negatively, but I will tell you the truth, we rallied and as you could tell, we are not overdampening our enthusiasm for the remainder of the year as a result of it.

Will Slabaugh - Stephens Inc.

Fair enough. Fair enough. Switching gears, seeing that share repurchases, impressive share repurchase that showed in the quarter, and then obviously year-to-date. Just wondering, moving forward, I know the increased $80 million, how should we start thinking about that moving forward, even throughout the cadence of this year and into 2015, calendar 2015?

James Morgan

I think you should have seen that the board will continue to prudently use that as [indiscernible] provide shareholder return, and we [indiscernible] to shareholders for their blatant account [ph]. The cash flow is going to be there. We would never do that at the expense of going internally, build new stores and assisting our franchisees. We are just so fortunate right now, that we can do both. So I think, that's the way you should probably approach it.

Will Slabaugh - Stephens Inc.

Great. And last one for me, domestic pipeline, impressive. Seeing all the franchisees signing letters of intent and really ramping up, just wondering if you could give us an update, kind of on their progression of building out the 20 to 25 and how comfortable you are with next year's pipeline as well?

James Morgan

I think I am talking general terms on that. I think we have been pleased beyond words that the interest there is in becoming a domestic franchise partner with the Krispy Kreme, like our head of development, Patricia Perry has had her hands full, for the year, that she has been here, and we don't see any reason that that progress and those type announcements should be interrupted over the coming quarters and years.

Will Slabaugh - Stephens Inc.

Great. Congrats again, and have a great evening.

James Morgan

Thank you very much. You too.

Operator

The next question comes from Michael Gallo from C.L. King.

Michael Gallo - C.L. King

Hi, it's C.L. King. How are you doing?

James Morgan

Hey Mike.

Michael Gallo - C.L. King

I just want to dig along the company store margins. Obviously, they were impacted in the quarter. I think you noted some higher couponing, promotions, obviously had to deal with the weather. So [indiscernible] some of the changes that you have made, how you have a handle on that? Obviously you talked about, I think over 80 basis points expansion of those margins this year? Thank you.

James Morgan

Well, let me just talk on the weather. As you know, we don't do so much about and we [indiscernible] that's how the company goes and I think we handled it pretty well on the promotions and discounting. One thing we learned during that quarter, Mike, is that the -- I guess kind of come at the same pace, our traditional guests, our core guests, and we are not sure if all [indiscernible] increase the traffic from them. I think it might have increased the price they pay for the average doughnut they bought from us, but so much traffic that would come in anywhere. So what we think, all of us are going to sort of continuing to play it [indiscernible] on purpose for Krispy Kreme. We found out pretty clear, that they are not a big driver in our business, and therefore we have kind of gone back to focus on the goal of satisfying our existing guests, driving new guests, based upon what we -- based on what they really want, which I the hospitality, the hot original Glazed, the LTOs, the new exciting specialty doughnuts, and the ongoing communication we give them through social media and other manner. So that's sort of the changes we have made in the last month or two.

Douglas Muir

Mike, the only thing I would add to that, is if you want to rank order the three things we cited, higher incentives and discounting is by far the largest item in terms of effect on profit. The higher marketing spend, which I think is needed and is good for the long term, and something we view as strategically important. Whilst the second thing, if you just look at absolute effect on profit, looking solely at this quarter, that was the number two item. Weather was within third place in terms of significance to the fourth quarter.

Michael Gallo - C.L. King

I guess just in terms of just the marketing, doesn't that kind of dovetail a little with the weather? You are spending a lot of money on marketing, but you got storms and other things that impacts people's ability to go, or are you kind of highlighting marketing separately?

James Morgan

No, they are obviously tying in. I mean, they are obviously tying -- marketing cannot have a stronger effect, when people can't get out of the house, and that's what I think you are saying, and you're exactly right about that. So I think there is a direct tie there. But I think we have also learned something in our marketing efforts specifically, that we would have learned even without the bad weather, and that is that -- that this kind of portion of marketing is not really a prime driver of our core customer drive shops, and we are kind of excited about learning that, because we got the avenue there that I think opened up to us to bring them in, in greater numbers and keep them happy. So they are almost like, that was a good discovery during the quarter.

Michael Gallo - C.L. King

Great. And then just question on -- update on the beverage program. Obviously, you are starting to look at the Krispy Kreme beverages in the grocery channel. But I know there was a lot of choppiness around weather, but could you update us on how beverages did in the quarter? Whether you continued to see good same store uptake in growth in coffee, and coffee related products, and then, how we should think about some of these licensing arrangements going forward, or is it just too small, too early to tell? Thank you.

James Morgan

Mike, I will start on that. Doug might have some additional comments. First, in the stores, we have been pretty open on this about the last couple of quarters, and that the progress -- we made such progress on doughnuts, it has been tougher to keep up and get ahead of the numbers with our coffee and our beverages. We are happy with and pleased with them, but we are not yet pleased and satisfied with the revenues we are getting there, and we still see that as a huge opportunity.

We are not discouraged, as that makes sense, but they are not leading the pack in terms of the growth of their numbers, which we are a little bit disappointed in. We do think that this is probably more or less downhill. Coffee is such a convenient item, and when you have already got 250 stores in the whole nation, we are not convenient for the coffee drinkers. So if we can get them accustomed to drinking our coffee at home, we think it will become a bigger part of their life when they visit our stores. So we have kind of decided that in that area, [indiscernible], maybe the tail is supposed to wag the dog there, and by getting it clinical and very visible and could end up being thousands of locations, that may increase the awareness and success in the 250 plus locations.

Douglas Muir

I think Jim hit the nail on the head. The impact financially of licensing in the short term is probably a small item. Over the long term, it can certainly be a very significant item, but the real pay off, particularly when it comes to coffee, is putting the product for our consumers -- customers who buy coffee to build -- drive usage and affinity for our products.

Michael Gallo - C.L. King

Okay. And just in terms of the units, just as a follow-up to that. I mean, what do you see in terms of same store coffee units or coffee related units? I know what the weather, not sure how meaningful the numbers become, but any guide you can give, that would be helpful?

James Morgan

I don't have any stats in front of me. I am sorry.

Michael Gallo - C.L. King

Okay. Thank you.

Operator

The next question comes from Michael Halen from Sidoti.

Michael Halen - Sidoti and Company

Good afternoon. What are you expecting in terms of commodity inflation for fiscal 2015?

Douglas Muir

Flat to may be down slightly.

Michael Halen - Sidoti and Company

And what about foreign exchange?

Douglas Muir

Your guess is as good as mine. Although a weak dollar generally doesn't seem to be on the cards, based on what I rate. I hope that worst of the damage is behind us though.

Michael Halen - Sidoti and Company

Okay. Thanks. And does the share repurchase program expire?

Douglas Muir

No.

Michael Halen - Sidoti and Company

No. Okay. So I guess, just trying to get a feel for how quickly or so you're going to buy back the shares? Is there a minimum level of cash may be that you're comfortable with having on the balance sheet?

Douglas Muir

Yes, but it’s a lot lower, where I am today, I can tell you that. Our cash flow generation is so strong these days, that its nice to be in a position where we can really make the investments we need to in our business, and if conditions are right, do other things to improve shareholder return with some of that cash that we are generating on our business.

Michael Halen - Sidoti and Company

Would a regular quarterly dividend be on the table as well?

Douglas Muir

Never say never, I would certainly not look for that any time in the near future.

Michael Halen - Sidoti and Company

Okay. And I guess is there any additional data that may be you are willing to share with us, in terms of the performance of the small format shops?

Douglas Muir

No. I mean really, the data so far are pretty much unchanged. These stores do 30,000 a week. They will generate wonderful returns, and we put lots of stuff in the public domain on that. Remember, our average Krispy Kreme does -- a freestanding store does about 35,000 a week. So you get in the high 20s to 30, you are going to be doing great on these. Our threshold is we think we have got to show franchisees a 20% cash-on-cash return on investment. I think we have shown in public numbers, that a 30,000 a week and a build to suit real estate structure, you get cash-on-cash returns of closer to 30%.

Looking at what we do on the shops we build, when we don't have a 4.5 point royalty in there, and we have the profit from the supply chain. At 30,000 a week, the return on invested capital is absolutely astounding, if it's a company [indiscernible] shop at 30,000 a week.

Michael Halen - Sidoti and Company

Yeah. That was a no-brainer. All right, great. Do you make any progress in terms of renegotiating the domestic franchise royalty rate in fiscal 2014?

Douglas Muir

Its not our intention to renegotiate the rate in terms of it going higher any sooner than it is scheduled to, contractually. We do have ongoing fruitful and positive discussions with virtually all of the domestic franchisees about redoing those April 2020 agreements, and we expect, hopefully to accomplish something on that before the year is out.

Michael Halen - Sidoti and Company

Okay. Great. Thank you very much.

James Morgan

Thank you, Mike.

Operator

The next question comes from Nick Setyan from Wedbush Securities.

Colin Radke - Wedbush Securities

Hi, this is Colin Radke in for Nick.

James Morgan

Hey Colin.

Colin Radke - Wedbush Securities

With regards to the change in the same store sales reporting methodology, can you break out what that would have been for Q4 after the change?

Douglas Muir

Yes. And I am doing this from memory. It is not particularly dramatic in the company store segment. Its like less than a point in company stores, for the fourth quarter, as I remember. As I remember the effect of the domestic franchisees is very similar. The bigger effect is in the international franchise segment, because their honeymoons tend to be longer, and as a rule, a lot -- and that's the right word. The elevated sales level is often very-very much higher internationally than it is domestically. So the effect on comp of skipping out week 57 through 78 is most dramatic on international franchise comps.

Colin Radke - Wedbush Securities

Got it. And then you guys have been very specific in the past in your promotional days, like National Doughnut Day or Talk Like A Pirate day? I was wondering if you had any plans for adding promotional days, and maybe more generally, what we can expect from promotional calendar in the coming months?

James Morgan

Conrad, its Jim. [Indiscernible] you asked that. I would be surprised that there are not one or two additional promotional days like that, that we find that really fit our brand, and sort of the fun that we like to have within on days like that. So the marketing team I think has got a couple of more in mind, as well as continuing the ones we have done in the past, and continuing to make them even more fun for our guests going forward. We don't want to become dependent upon those, we think they should be sort of the gravy, and therefore, we are really also very focused on the everyday occasion, and some times even more so than the other special occasions. But we think, a blend of those two, is probably much what you will see during the coming year and probably years to come.

Colin Radke - Wedbush Securities

Got it. So just to confirm, you guys, do you know when to disclose the quarter-to-date comp this quarter, or any other commentary there?

Douglas Muir

Honestly, we decided that we made a mistake and have been making a mistake to get two and three and four week snapshots early in the quarter, particularly, when you got this much noise going on in the business with the weather, and we are just not doing that anymore. Sorry.

Colin Radke - Wedbush Securities

Got it. Thanks a lot.

Operator

The next question comes from Alton Stump from Longbow Research.

Alton Stump - Longbow Research

Thank you. Good afternoon and of course congrats on the quarterly result and full year.

James Morgan

Thank you, Alton.

Alton Stump - Longbow Research

I guess, I just had two quick questions. First off, I had mentioned like the new deal at California for 20 stores, can you shed some light as to what the timeframe is on those 20 planned built?

Douglas Muir

I think it is unlikely Alton that, I mean, things could change, but we are not factoring on any of those going up necessarily this year. Well they just sign the agreement, you got to get some lead time for real estate.

Alton Stump - Longbow Research

Sure. Just to [indiscernible], I think if I recall, it was 23, 24 stores in California have, probably last 10-Q filing. It’s a pretty big number. I'd assume that would imply that we are still seeing very good trends, West Coast in particular?

Douglas Muir

Comps are stellar on the West Coast, yes.

James Morgan

Alton this is Jim, I think your assumption on that is -- [indiscernible] correct, and the assumption is correct.

Alton Stump - Longbow Research

Great. Thank you. And then somewhat quick other question and I think that you touched on, how the eight stores are doing, are they new model, and I think you mentioned that there was a few home runs for doing [indiscernible]. Eight of those. But just maybe with the four stores, I know in the past are doing as they are expected. I mean, as 30,000 per week sales for 135, any color on how they are doing?

James Morgan

Generally, they were low 30s. This generally low 30s, 30, 31, 32, for those four in the middle is about where we are.

Alton Stump - Longbow Research

Okay. And then focusing on that topic, I think you mentioned how great the margins are, does it hit the supply chain? I mean is it possible that you -- I guess returns are [indiscernible] 40% on that kind of sales number going forward?

Douglas Muir

I tend to look at operating margins in the supply chain looking at total sales, because the profit in that business is drawn not only from the franchisees, but also from the company store segment. The company stores is half in sales, so I think right now the operating margin in the supply chain, if you use the gross sales number including our company is 16 or 17. That may widen out a little, but I don't look for a big widening in that margin or in that business. Our objective is to grow profit in that business, based on volume, not on margin.

Alton Stump - Longbow Research

Okay but then, on the cash front though, is it possible to make it to 40% on the [indiscernible], its running at over 30,000 a week in sales?

Douglas Muir

I am sorry, I didn't quite understand the question. Yes, it is absolutely possible. Just to make sure I understand the question. The question is if I look at a cash-on-cash return, its on Krispy Kreme, and [indiscernible] store of the small factory, and it does 30,000 a week, and I consider the fact that I don't pay a 4.5 point royalty, and that I make a little bit of money up in the supply chain. Yes. Cash on cash returns can get far beyond 40%.

Alton Stump - Longbow Research

Okay great. Thanks so much guys. Appreciate it.

James Morgan

Thanks Alton.

Operator

I am showing no further questions. At this time, I would like to turn the call back over to Anita Booe.

Anita Booe

Thank you for your time and have a good evening.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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