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Krispy Kreme Doughnuts Inc. (NYSE:KKD) posted third quarter 2012 earnings of 7 cents per share, beating the Zacks Consensus Estimate by a penny. Quarterly earnings more than doubled from the year-ago level of 3 cents a share.

Total revenue climbed 9.4% year over year to $98.7 million in the quarter. Within segments, company store revenues jumped 9.8% year over year to $61.6 million, Domestic franchise revenue grew 14.1% to $2.3 million, International franchise revenue escalated 22.4% to $5.4 million, driven by higher royalty revenues, and KK Supply Chain revenues (including sales to company stores) increased 11.7% to $50.3 million, largely driven by price inflation across all major product categories.

Same-store sales at company stores rose 4.0%, reflecting the twelfth consecutive quarter of comps growth. Domestic franchise same-store sales grew 7.9%, but International franchise same-store sales fell 8.5%.

Direct operating expense, as a percentage of total revenue, declined 70 basis points to 87.7% and general and administrative expenses dropped 30 basis points to 5.0%. As a result, operating income shot up 36.6% to $5.6 million. Interest expense also fell due to lower debt as well as refinancing of credit facility.

KK Supply Chain raised selling prices to counter higher input costs, leading to a decline in operating margin in the third quarter of fiscal 2012 compared with the year-ago quarter.

Store Update

During the quarter, Krispy Kreme opened 22 franchise stores and one company-owned stores and closed 14 franchised stores. At the end of the quarter, the company had 89 company stores and 589 franchise stores.

Financial Position

Krispy Kreme ended third quarter 2012 with cash and cash equivalents of $37.6 million and shareholders’ equity of $102.4 million. As of October 30, 2011, long-term debt less current maturities was $25.3 million versus $32.9 million as of January 30, 2011.

Outlook

The company raised its fiscal 2012 outlook for operating income in the range of $24 to $26 million (earlier $22 to $24 million).

For 2013, operating income has been guided to a range of $29 million to $33 million inclusive of impairment and lease termination costs. Earnings are estimated to remain between 35 cents and 41 cents.

In 2013, the company anticipates opening 5 to 10 company stores, 10 to 15 domestic franchise stores and more than 60 international franchise stores.

Our Take

We heard a clear positive tone from Krispy Kreme’s third-quarter earnings, echoed by the increased guidance, consistent growth in company same-store sales efficient cost-containment efforts and stable financials. The year 2012 has so far been solid for Krispy Kreme.

The company also remains committed to expanding its business in both international and domestic markets. According to management, the company’s overseas expansion is expected to be more in 2013 than in 2012.

On the flip side, the company's effective income tax rate for years after fiscal 2012 will rise substantially.

Furthermore, prices of agricultural and other commodities will remain volatile, as expected. Krispy Kreme is resorting to all possible measures like reduction in consumption of certain key ingredients to weather this pressure.

Krispy Kreme, which competes with the likes of Red Robin Gourmet Burgers Inc. (NASDAQ:RRGB) and Papa John's International Inc. (NASDAQ:PZZA), currently retains a Zacks #3 Rank that translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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Source: Krispy Kreme Beats, Raises Outlook