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Krispy Kreme Doughnuts, Inc (NYSE:KKD)

F2Q13 Earnings Call

August 22, 2012 4:30 pm ET

Executives

Anita Booe - Director of Investor Relations

James Morgan - Chairman of the Board, President, Chief Executive Officer

Douglas Muir - Chief Financial Officer, Executive Vice President

Analysts

Michael Gallo - CL King

Will Slabaugh - Stephens Inc.

Tony Brenner - Roth Capital Partners

Conrad Lyon - B. Riley & Company

Nick Setyan - Wedbush Securities

Howard Rosencrans - Value Advisory

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2013 Krispy Kreme Doughnuts Incorporated earnings conference call. My name is Chris and I will be your conference moderator for today. Presently, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

At this time, I will now like turn the conference over to your presenter for today. Ms. Anita Booe, you may proceed.

Anita Booe

Good afternoon, and welcome to the Krispy Kreme second quarter conference call. My name is Anita Booe and I am the Director of Investor Relations. On the call with me today are Jim Morgan, 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 fiscal 2012. Please note that all of our SEC filings can be found on our website www.krispykreme.com.

I would now like to turn the call over to Jim.

James Morgan

Thank you, Anita, and good afternoon everyone. We had an excellent second quarter and appreciate the opportunity to talk through our results as well as discuss our long term vision for the brand and the company.

Operating income grew an impressive 87% as all of our business segments delivered improved performances while adjusted earnings per share doubled from $0.06 to $0.12 on a 4.3% increase in revenues. Revenues were aided by a 5.4% increase in same store sales at company stores, the 15th consecutive quarterly increase.

Substantially all of our top line growth was driven by higher traffic from our quarterly marketing promotions including National Doughnut Day in June and our 75th birthday celebrations in July. We had no benefit of pricing in the second quarter comps.

We have said since last fall that we thought we could achieve comp store growth even without pricing and this quarter's results suggest that belief was well founded. We think that continued comp improvement is possible but we would encourage you not to assume it is going to be this strong for the rest of the year. For now, we are maintaining low single digit guidance for company same store sales which is more in line with out year-to-date results.

In the wholesale channel, we posted an increase in average weekly sales per door and declines in average number of doors in both of our wholesale channels. Weekly sales per door in both channels benefitted principally from higher volume. While door declines reflect customer store closures and product offering decisions, as well as ongoing route rationalization.

We are certainly pleased with our second quarter results and we remain energized by the task ahead of us given what we view as a significant untapped opportunity for Krispy Kreme. With that in mind, let's now talk about our commitment to the initiatives that we believe will substantially increase revenues, improve margins and expand the Krispy Kreme domestic and international franchise system while growing shareholder value over the long term.

We have recently completed significant nationwide domestic consumer research which confirmed several findings.

First, we have a great deal of untapped potential for doughnuts and sugar remained close to that core offering.

Second, we have unique opportunity to create more doughnut use occasions as consumers tell us that they just need more excuses to eat Krispy Kreme doughnuts.

Third, consumers are willing to eat doughnuts anytime during the day or night.

Fourth, we are viewed as a special brand that gives an equally special reward.

Fifth, we are considered an American classic and they continue to love the Krispy Kreme brand whether they are active users, lapse users or non users.

Sixth, guests enjoy Krispy Kreme's entire sensory experience including the smell, Doughnut Theatre, the paper hats and everything that happens in our shops as well as the anticipation of going and the memory of the visit itself.

Seventh, hot doughnuts remain one of the most important brand energizers.

Therefore our immediate focus in our domestic shops is building on our core doughnut offerings continuing to enhance the doughnut experience and creating more doughnut use occasions. Examples of this are the second quarter execution of National Doughnut Day and the 75th birthday celebration both of which generated significant traffic in addition to simple daily use occasions like after school and late night doughnut runs.

The research said more customers will buy more doughnuts if we give them an excuse and opportunity to do so and those second quarter promotions suggest the research is accurate. We believe we can drive incremental doughnut use occasions like these without complicating store operations and without any additional store investments.

The research also showed that the domestic menu needs to stay close to the core doughnut offering and that consideration would be factored into our thinking on product introductions for the near term. One additional benefit of this strategy is that it allows us to continue to strengthen the operational foundation of our stores, a strengthening that will greatly facilitate any future broadening of our menu.

On a related note, consumers view our beverage program as complimentary to our doughnuts and we have therefore continued to focus on building top of mind awareness for drip coffee, ice coffees, specialty coffee, frozen chillers and our new iced tea. As we previously indicated, new drip coffees represent the first step in a continuing revitalization of our overall beverage program and we continue to expect that program will contribute measurably to long term traffic and sales gains.

We see this as a tremendous opportunity and are leveraging our local marketing, marketing promotions, public relations, social media marketing and in store programs to grow beverage sales traffic and profitability. We do not view the program as a short term catalyst but rather as a platform that we can build upon for the long term.

Turning to development, we continue to build small factory shops and opened a company small factory store with full doughnut making capability in Greater Charlotte, North Carolina this quarter. As we continue to deliver strong financial results and prove the small shop model we believe or individual store economics will become an increasingly attractive reason for potential partners to join our system.

With only 141 domestic franchise locations, we clearly have lots of runway to grow the domestic franchise base and believe strongly that we can do so in a disciplined and sustained manner to the benefit of our shareholders. We are actively looking for a Vice President of Franchise Development to spearhead our efforts but we are taking the time to find the right candidate. Although we are not waiting on this hire to begin conversations with new domestic franchisees, as you can appreciate, having someone in that role on a full time basis should greatly accelerate the process.

So far this year, we have announced two new international franchise development agreements for India and one for Russia and we anticipate announcing additional new international developments, agreements before the year is out. Our international pipeline is now approximately 390 shops and we had 24 openings in the second quarter. All of these actions will bring us closer to the goal of 900 international store locations before the end of fiscal 2017.

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

Douglas Muir

Thank you, Jim, and good afternoon. Total revenues increased 4% in the quarter to $102 million as each of our four business units generated top line growth. Consolidated operating income rose 87% to $9 million, while adjusted earnings per share were $0.12, compared to $0.06 last year. In the company store segment, revenues increased almost 5% to $69 million.

Same-store sales and international franchise stores fell 10%, reflecting among other things, honeymoon effects from the substantial number of international store openings in recent years as well as cannibalization as markets develop. The international franchise segment generated operating income of $4.2 million, up from $3.4 million in the second quarter last year.

Over in the supply chain, revenues, including intercompany sales, were $52 million, an increase of 2%. The supply chain generated operating income of $8.4 million in the second quarter, compared to $7.7 million in the same period last year. This year's results reflect favorably mark-to-market adjustments on agricultural derivatives of about $1.1 million.

Looking forward, we have purchased all of our flour and shortening requirements for the balance of the year and currently expect doughnut mixes and shortening pricing to the stores to be down slightly in the second half of the year compared to the first half. As previously disclosed, we have purchased sugar well into fiscal 2015 at prices only slightly higher than we are paying today.

As you know, commodity markets have been volatile lately and the effects of the drought have been significant on many products. We currently are purchasing flour and shortening for the first and second quarters of next year. Based on current market forward prices, we expect our cost of flour and shortening next year to rise modestly compared to fiscal 2013 levels.

I should emphasize though that next year is a long way off and much can change in volatile times. Except for sugar, we have not purchased a significant portion of next year's need and we are therefore looking to lock in attractive pricing for next year whenever we can.

Turning to general and administrative expenses, we were pleased that G&A declined 30 basis points to 4.7% of revenues. Our continuing goal is to leverage costs and operate efficiently as we grow the business. Our total debt stood at $26 million at the end of the quarter, down $1 million from this time last year. We had $41 million of cash on the balance sheet even after completing the $20 million share repurchase during the quarter.

Adjusted net income was $8.2 million, that’s $0.12 a share, compared to $4.2 million or $0.06 a share in the second quarter last year. Adjusted net income and adjusted EPS reflect income tax expense only to the extent payable in cash and in the second quarter of last year, exclude the after tax gain on the sale of our 30% equity interest in KK Mexico.

With that overview of the second quarter, let's look ahead to the balance of the year. We are reaffirming our annual outlook for fiscal 2013, although we now believe we will likely be at the high end of our guidance range. We expect 2013 operating income of between $29 million and $33 million, compared to $25.6 million last year.

We estimate fiscal 2013 adjusted EPS which again includes income tax expense only to the extent expected to be currently payable of between $0.36 and $0.42. That compares to $0.31 last year. Fiscal 2012 adjusted EPS, that $0.31 I mentioned also excludes a gain of $0.06 per share from the sale of KK Mexico.

Because we have substantial net operating loss carryovers, the amount of tax as payable in cash is expected to remain insignificant for the foreseeable future. Given that we will not be paying much in the way of cash taxes for some time to come, we consider adjusted earnings per share to be the best way to measure our performance. It is the metric we are using internally to gauge our progress in creating shareholder value and we would encourage you to do the same.

Toward that end, to aid in the math, we will be posting up on the website this evening or in the morning the adjusted EPS calculations by quarter and year-to-date for not only this year which are in the press release but also for last year to make your life simpler.

Finally, please note that the expected EPS range for fiscal 2013 is a penny per share higher than our previous guidance and that change reflects the completion of the $20 million share repurchase.

With that, I will turn the call back over to Jim.

James Morgan

Thank you, Doug. Before we do begin the Q&A period, I would like to leave you with the following thoughts. We clearly had a strong quarter with marked improvement in revenues and adjusted earnings per share and we believe we are on track for a solid second half of the year. Our fiscal 2013 operating income is looking increasingly likely to be at the upper end of our expected range. Our strong P&L performance which is supported by equally strong balance sheet is the result of a focus on our core business.

We have achieved much without transformational domestic menu expansion or new domestic franchise agreements. In our estimation, this simply points to years and years of growth ahead of us as we layer in those opportunities on top of an already successful enterprise.

Our approach to execution is centered in maintaining a long term view and not a quarter-to-quarter focus, sticking with our plan and not getting ahead of what we know we can accomplish with excellence. We do believe that we have laid a foundation that should lead to many years of growth and we look forward to the opportunities that lie ahead.

Thank you for joining us this afternoon. Please note that everyone in the Krispy Kreme Doughnuts family, team members and franchisees alike remain passionate about our efforts to continually strengthen our brand, our guest experience and our natural performance with the ultimate goal of rewarding our shareholders over the long term.

With that I will now ask Anita to introduce the Q&A period.

Anita Booe

Thank you, Jim. As a reminder, a replay of today's call and a transcript will be available in the IR section of our website at www.krispykreme.com.

With that, Chris, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Michael Gallo with CL King. You may proceed.

Michael Gallo - CL King

Couple of questions. Jim, how much did the beverage initiatives help the guest counts in the quarter or if you can give an update eon that?

James Morgan

Doug has got some little bit of stats on that. So I will let him fill in.

Douglas Muir

Yes, let me just give you some overall statistics on that. If you look at total beverage unit volume and this is an established stores and that for us are stores that have been open at least two years and this includes all the beverage we sold including stuff sold at a discount but it didn’t include stuff that we gave away for sampling.

So with all that caveat in the second quarter, our beverage unit volume on an established store basis which is a comp was up about 7.6% year-over-year. Looking at drip coffee only, the comparable measure was up about 5.4% year-over-year. So we think we are making some headway and for some color on some more of that, I will let Jim speak to that.

Michael Gallo - CL King

Was that units that you just gave there, Doug?

Douglas Muir

Yes, that’s units. Sales of cups of coffee and beverage and chillers and yes, that’s units.

James Morgan

Mike, the only color I would add to that is that we feel pretty good about that. That was over the summer months and so we will be getting into a much higher. The coffee portion of our beverage program should get stronger as you know we only started doing the coffee related products in the fall rollout. So we think that’s a pretty good beginning to what we intend to have a good three year goal we have shared with you and we think we are on the line.

Michael Gallo - CL King

Okay, great. Second question I have Jim, 15 straight quarters of positive comps. Yet we really haven’t seen the domestic franchise unit growth kick in. Do you think that with the new 110M that obviously you have got 40% smaller footprint, the combination of that and the improved volumes, we start to see this catalyze into faster unit development?

James Morgan

Yes, I do. I think that without going into a lot of details that I should go into we have developed keen interest from our current franchisees on the 110M as I see the rollout capital required just to get started and also what appears to be the improved economics, I think its also going to make this extremely more attractive as we begin to increase our development in the U.S. in particular and it wouldn’t surprise me if it also ends up being picked up and having an effect on the international expansion too.

So I think the answer is yes across the board.

Michael Gallo - CL King

So it sounds like you think you will have some stuff in hand by the end of the year and simply start to see some stores opening at a more accelerated pace next year?

James Morgan

If I had to respond, I think I said earlier, I will be disappointed if that’s not the case. That’s probably the best way to put it, so I guess I am saying that’s what I would expect.

Operator

Our next question comes from the line of Will Slabaugh with Stephens Inc. You may proceed.

Will Slabaugh - Stephens Inc.

Thanks, guys, and congrats on the quarter. Wondered if you could talk just quickly about pricing? Clearly you didn’t need it this quarter with the strong traffic trends you guys showed, but just curious on your thinking about that over the longer term just given the volatility, Doug, that you mentioned in the commodity environment and how you think about just layering on some sort of defensive pricing as we go forward in the back half of this year and then in the next year?

James Morgan

Well, you will probably hear more about that from us somewhere down the road but I think that the best way to answer that will be to tell you we are thinking the way you just implied and that is that we certainly see that as an element of our ongoing decision making. We have not made that decision at this point in time but I think we are not going to allow ourselves to get into a multi year hold where commodities have come up and grab this and we sit idly by and not make changes.

So we want to balance that with being sure that if we do increase prices that we are increasing value to our guest and customers at the same time and I think the two are compatible. So that’s sort of the way we are thinking right now.

Will Slabaugh - Stephens Inc.

Got you, and then thinking about this from a cost standpoint, clearly all your costs came in below where I had them modeled. Wondering where you are from a cost saving standpoint and then across the P&L within the restaurant just wondering how you are seeing those different line items, rethink this opportunity or it pleases where you are now and think you are in a good spot to grow and leverage from here of just how do you see the P&L?

James Morgan

Well, I will let Doug answer that more specifically. I will tell you how I feel generically on it. I am pleased that we are where we are now. I certainly did not think that we have those costs at the level that they ultimately should be. So whether it is materials, or whether its labor, which of course are the two major ones, I think there is still some work to be done and still some room to improve. Doug, you may have something you want to add to add?

Douglas Muir

Yes, I think there is evidence in the quarter in particular on the labor line that we are gaining on that. I think I would share Jim's view that we certainly don’t think we have gotten all that there is to get out of that line but I will be candid. We are trying to be cautious about it because the Krispy Kreme experience is a really important thing to consumers and we have got to do this very, very thoughtfully so as not to damage one of the most exciting things and reasons that people come to Krispy Kreme.

But we think there is more to that. We are not there yet.

Will Slabaugh - Stephens Inc.

Got you, and then just last one from me. I am wondering, to the extent that you wanted to comments month-to-month how trends went. I know clearly, the 75th anniversary and the Doughnut Day helped out a lot. Just wondering how those trends moved throughout the quarter to the extent that you would be able to comment.

Douglas Muir

Sure, I can say anything on a public call, so long as it's true. Yes, if you look at the total comp for the quarter, it was up plus 5.4% at company stores. In the month of May, we were down 0.6%. In June we were up 8% and in July we were up 8.4%. I would note that on a same store basis, customer count was up all three months of the quarter but it was up big in June and July.

I candidly was astounded at the 75th birthday traffic. It just shows consumers love Krispy Kreme and consumers love a compelling value.

James Morgan

Well, I will add, on the May thing, it is interesting. We try not to and I hope we never use excuses. As a matter of fact, we feel like we control our own destiny but one thing that I have learned the four years I have been and that is whenever hot weather first comes in to the Southeast, it does affect us. It doesn’t affect us throughout the summer, it's just that first couple of weeks. In this year, that came in May. To the degree that affected us is, so many moving parts, it is hard to tell but I absolutely think that was a factor in the slower start.

Operator

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

Tony Brenner - Roth Capital Partners

Thank you very much. Jim, I know you have not historically broken out the relative profitability of your retail store business and your wholesale store business, but certainly, historically that wholesale business has been a big drag on profits. Yet for the past couple of years at least we have seen the number of doors decreasing while sales per door in both segments of that have increased pretty dramatically which I presume is helping that profitability. I wonder if you could give some sense of where that business is in terms of a bottom line? Is it profitable? Is it still growing on the bottom line?

James Morgan

Your assumption that that’s a dramatic and significant improvement that we are pleased with is correct. I will let Doug address the more specific part.

Douglas Muir

Ye, Tony, we don’t measure the relative profitability of those two businesses regularly in any kind of way, even for management purposes. The businesses in many respects are so intertwined that it's an exercise in cost allocation that doesn’t accomplish a lot. My sense of it though is, if you look at comp things like contribution margin that you can look at, I think the off premises wholesale business is a stronger business today than it was three years ago. I think we have made a lot of progress in it.

We have contracted doors, much of it of our own doing, because it is a tough low margin business and you have to be careful that you don’t chase sales for sales sake and not make any money at it. The overall profitability of off premises distribution is clearly less at the store level than the restaurant business but I would just ask that everybody keep in mind that if you look back upstream into the supply chain, $1 of sales into the wholesale channel generates a lot more sales of mix and shortening upstream in the supply chain and that evens out that equation to a pretty decent extent, I think.

It is definitely a business that generates a bunch of cash and we would in far worse shape without it.

Tony Brenner - Roth Capital Partners

Related to that, one of the reasons that profitability has been is less is the one day shelf life and the 30% returns that you historically have gotten and Jim, I know you have been talking for some time about looking for a way to expand the shelf life as a means to cutting down that rate of returns and I am wondering if there is any progress at all on that front?

James Morgan

Yes, and Tony, as you know, there are several ways to address that. One is just o getting the sales up on the longer shelf life products without losing sales in the yeast and as you know, the yeast products are the ones that have a short shelf life. So that’s one that we are having some success with particularly in areas such as the fried pies where the numbers are beginning to get measurable and significant to us.

Second way to do it is to, on the doughnut side, to sell less yeast and worry less about the yeast which is about, I am looking at Dough, that’s 70% to 80% of the wholesale sales.

Third is to find a way to extend the shelf life of the yeast itself.

So we are working on one and three.

Tony Brenner - Roth Capital Partners

Well, that was my question. Number three, specifically. What kind of progress have you made on extending life of those particular products?

James Morgan

I think the best answer is, we have made progress. We don’t have it out in the system at this point in time but we have made progress.

Tony Brenner - Roth Capital Partners

To the point where there is actually an item you can test and see if it works.

James Morgan

Tony, I don’t think we want to get that granular just yet but stay tuned.

Tony Brenner - Roth Capital Partners

Stay tuned, okay, I will. Thank you.

Operator

Our next question comes from the line of Conrad Lyon with B. Riley & Company. You may proceed.

Conrad Lyon - B. Riley & Company

Good afternoon, everybody, and nice results. Maybe a question for Doug. Do you happen to have the beverage sales as a percent of sales for the quarter?

Douglas Muir

I don’t have down to the decimal place, Conrad, but I can tell you that percentage wise there has not been any tremendous movement in the quarter. Beverage in total is still running around in the 12%, 13% range. Part of that has been, sales of doughnuts have been pretty good. In fact, we are actively thinking about what better metrics can we give you guys to help you judge our progress on this because I would hate for success in doughnuts to dilute the progress that we will be showing in beverage.

Conrad Lyon - B. Riley & Company

Sure, on that theme with the doughnuts, I think Jim had mentioned about giving reasons to come into the store without complicating store ops. Does that imply that we will see more creativity with doughnuts going forward here?

James Morgan

I think that is a fair assumption. I hope you have seen that, again, the last couple of years with the more innovative, I think, and more exciting LTOs that we have been doing, but I think you are exactly right. I think it probably means we will continue to be more innovative with the doughnut products and sales and more innovative with the experiences that we present with those doughnuts and probably the events that may surround them.

We only have a birthday once a year but there are other events and other times. So it's both what we can do during the day and what we can do on specific days and we will do that through I think being more innovative with the doughnut product itself.

Conrad Lyon - B. Riley & Company

Any color on how LTOs shape up as a percent of the comp? Is it typically pretty meaningful?

James Morgan

Truthfully, it's really not but let me tell you there is button there that is very real. The excitement and energy and visibility that it provides, the buzz that we get from the social media program, what happens in our shops. So we really realize we cannot measure success of an LTO by the sales of the LTO itself. It tends to generate greater sales over a while just because of the way it energizes and increases the awareness of our brand with the consumer.

Conrad Lyon - B. Riley & Company

Let me shift gears. You talked a little bit about the 110M earlier. Have you set a price for the franchisees yet?

James Morgan

Here is how it is. The 110M is going to price out at about $160,000 and let me be clear what's in that. That is not only the machine itself, but that is also the barrel mixers and the hoist and all of that frontend of the equipment line. All of that kind off gear, it is equipment we buy and resell. Just so we can be a one stop shop.

The comparable number for new 270 line which historically was the workhorse line was about $300,000. So basically, the 110M end of the system price is at about half of historical price of a 270.

Conrad Lyon - B. Riley & Company

Sort of carrying that theme forward, the early stores, or not so early but the small factory stores, are you seeing weekly sales averages to like, need some improvements?

James Morgan

Specifically the 110M stores?

Conrad Lyon - B. Riley & Company

Yes, exactly.

James Morgan

I can't tell at this point if they look any different from a sales point of view than any other store. Where they seem to be different is the pleasure that the operators seem to express about the machine itself and the constituent product it produces and how simple it is to run.

Conrad Lyon - B. Riley & Company

Got you, okay.

James Morgan

The whole idea was that what machine we make to doughnut on is totally invisible to consumers. Of course our hope is that if we can keep the sales where they are doing at the factory stores and then grow them all together with the lower frontend cost, and the simplicity of somewhat simpler operation, then the profitability goes up measurably and that’s the goal on that.

We are thrilled with sales being where they are, being equal and competitive with the previous factory stores.

Operator

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

Nick Setyan - Wedbush Securities

It was great to see that the transactions gains came without too much pressure on the average check. Are there any learnings from the promotional activities period that could be carried forward and applied to future quarters such as, buy a dozen and get a dozen free on a particular holiday, let's say that can sustain this transaction growth momentum?

Then just maybe comment on whether some of the 75th anniversary momentum has continued in August?

James Morgan

I will answer quickly and Doug might answer specifically. I think, Nick, that seeing what happened on, both the National Doughnut Day and the birthday and other events where we have done certain things everyday has us thinking a lot about presentation and placing and packaging and combinations. Instead of nothing definite right now but, as you know, we are a dozens business and if we can do something that encourages more dozens to be bought and more multiple dozens to be bought within reason, that’s something that we want to address and think about.

So it is stirring our imagination might be a good way to put it.

Nick Setyan - Wedbush Securities

Okay, and then just would you comment whether some of that momentum has carried over into August?

Douglas Muir

Yes. Let me do that in a little bit of a broader context. National Doughnut Day was the first Friday in June. When we went back and looked at the comps by week in the quarter, it wasn’t just one day that blew the doors off. There was a distinct two week window basically on either side of that Friday where the comps were distinctly higher than trend for the quarter.

National Doughnut Day seemed to have a leg definitely the week following the event. Maybe a little in the following week but the effect was more pronounced at our 75th birthday. There was really about a three week period that was off trend.

Now that is higher than trends as around the birthday celebrations starting the week of that celebration and culminating on that Friday, the 13th. This was our 75th birthday. The momentum did not abate significantly the following week. It abated a little in the following third week but the third week was still way above trend.

So basically, it looks like the birthday hoopla or momentum or enthusiasm or whatever continued to carry through July and it looks like, so far into early August as well. Maybe marketing wasn’t surprised about that but I was. I was very pleasantly surprised.

James Morgan

Nick, it's Jim. I will add to that and this, what I am saying, pertains to both company stores and our franchisees. I think that we are both very excited about what our operators were able to do and what they were able to do with the efforts of our marketing group because there is no question that the marketing promotions, the public relations that came out of it and the social media marketing all had carryover effect that kept a buzz about the brand and the products for longer than maybe we would have thought it would.

So that’s the part of the learning and was referring to, we have learned a lot from those two events and from previous events and I think we are going to have a lot of fun over the coming months and quarters.

Operator

(Operator Instructions) Our next comes from the line of [Reed Carl with Carl Capital]. You may proceed.

Unidentified Analyst

Just a two part question on coffee or beverages. Number one, I know you do sampling when consumers enter the stores. Can you just explain if, let's say, three out of your ten customers entering the store taste your coffee and only one of ten actually purchase coffee, have you been able to get any feedback on why it is that only a small fraction of the consumers who taste the coffee decide to purchase it?

Is taste an issue? Or what are the other reasons why they are deciding not to go from just tasting to actually purchasing the coffee?

James Morgan

We are at a very early stage of that. The one thing I can say is that we are not getting anything but positive feedback on the taste and quality of coffee. So we are digging in to see what does that mean. Thus far, the only definitive thing that we have gotten is that we have got the right coffee for our guest and customer base. So now we have got to decide, how do we make it more alluring.

We know we are fighting one battle. One battle we are fighting is the lack of convenience. We have only got a limited number of locations in the U.S. and in that people, coffee is an item of convenience. It is not really a destination item for most consumers. So our first job is to make sure that consumers that are coming to us anyway get attached and attracted to our coffee and then we will move it from there.

So we are working on that but don’t really have the answers yet.

Unidentified Analyst

Okay, and then when, customers checking out at the cash register, I am assuming that your employees have been directed to ask the customer if they would like to have a coffee and I guess the proportion that says yes, please, get me a coffee is relatively low and I am just trying to understand why is it when people are reminded to drink a coffee, they in most cases decide not to?

James Morgan

Yes, you are correct. If our staff are doing what we believe they are doing and we think they are, that either when you are placing your order or when you are getting to the cash register or both but one or the other, they are being presented with an opportunity for one of our beverages, in particular, coffee. In the summer months, that was blended in with also our chillers and some other, new iced tea. So the coffee effort was somewhat diluted the past three months by other beverage offerings, but I think we will know more a little bit later.

By a little bit later, I mean, come mid-Winter, we all will have a pretty good feel for how that’s going and what the challenges are. Not discouraged at this point in time. Trying to learn at this point in time.

Operator

Our next question comes from the line of Howard Rosencrans with Value Advisory. You may proceed.

Howard Rosencrans - Value Advisory

In terms of the momentum or the 75th which is clearly a big driver and the Doughnut Day stuff, can we create new events or whatever you want to call them more regularly and do you think they will continue to have the punch or what is your plan in that regard?

James Morgan

The research that I referred to in my comments, Howard, states clearly that we should be able to do that, meaning that the consumer, our guests and consumers are out there waiting for us to do that. So our very clear answer is, we think, not only additional events but we think different reasons to come throughout the day. So we think that's two great opportunities and we are very, very focused on that and have been ever since this research came in and has been validated during this summer.

Howard Rosencrans - Value Advisory

So you will have an event a quarter and what is it specifically, I don’t believe I missed it, I might have that gets people to come in at different times during the day?

James Morgan

Well, there is myriad of answers to that but it is up to us to create a desire and an excuse to come in both for events and during the day and that’s what we are working on and the 75th was jut one example of that. But there will be others.

Douglas Muir

I think we are looking, Howard, at a frequency a whole lot more than once a quarter. It may not have quite the marketing push behind it just like the 75th did but we see this as an ongoing regular part of our life and we were just astounded what some good promotion can do.

Howard Rosencrans - Value Advisory

Beverages are now, what do they represent of the mix?

Douglas Muir

Just in terms of dollars, Howard, there is still 12% to low teens. Haven’t been a big move. There is definitely some movement but not enough to measure starting from that very small starting point.

Howard Rosencrans - Value Advisory

Okay, and I know your coffee goal is to go, and please correct me if I am mistaken, is from 5% to 15%?

Douglas Muir

4% to 12%.

Howard Rosencrans - Value Advisory

Okay, 4% to 12%. So coffee and everything in step a little bit, and the beverage, maybe we will focus on the beverage category as a whole. So the beverage category from 12 to low teens, where does that go?

Douglas Muir

Assuming we didn’t cannibalize non coffee beverage, then taking coffee from 4$ to 12% would take beverage from 125 to 20%, if we make no progress on other beverage. Making no progress on other beverage, we would rate that a fail.

Howard Rosencrans - Value Advisory

Right, I guess, I was just questioning whether or not you felt like that was going to cannibalize it.

Douglas Muir

I don’t know. My sense is that, people who want coffee want coffee and its not, gee, do I want a coke or a coffee, or maybe a chiller versus an ice coffee but they seem to be different to me, but I may not be a representative consumer.

Howard Rosencrans - Value Advisory

And if I got your comments right, you are now going to roll out more, is it non coffee beverages that are now going to come out more so?

James Morgan

For this fall, that would be specialty coffee beverages. Espresso based drinks, basically. Look for that along around October-ish for new roll on espresso specialty drinks. In terms of the overall beverage menu, we are probably about where we want to be at least for now in terms of some of the chillers and products that got reworked this summer. So now, it’s a matter of maybe a little bit less tinkering with the menu and a lot more promotion, particularly we have got some great new hardware for us, machines that is, for espresso and I think we have got one downstairs in the building and the number of employees down there in front of the thing is any indication, that’s going to go really well.

Howard Rosencrans - Value Advisory

And when you are talking about more promo, what sort of campaigns will we see? Because you have, in the past, indicated that promo which only include advertising, where in the past, you said there is not big enough store base to really amortize a meaningful advertising campaign, or maybe you have changed your mind to that regard or what do you mean by promo?

Douglas Muir

No, it won't be advertising in the historical sense. But we will, through social media and public relations and quite frankly, POP, just presentation, planning to see getting in front of mind. I think there are lots of ways to do it which has been effective for us with other areas of our life and we can expect to be very effective on the beverage portion.

Operator

We have no further questions at this time. I would now like to turn the call back over to the speakers for any closing remarks.

Anita Booe

Thanks, everyone. Have a great evening.

Operator

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

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