Krispy Kreme Doughnuts' (KKD) CEO Tony Thompson on Q4 2016 Results - Earnings Call Transcript

| About: Krispy Kreme (KKD)

Krispy Kreme Doughnuts, Inc. (KKD) Q4 2016 Earnings Conference Call March 22, 2016 5:00 PM ET

Executives

Anita Booe – Director-Investor Relations

Tony Thompson – President and Chief Executive Officer

Price Cooper – Executive Vice President, Chief Financial Officer and Treasurer

Analysts

Michael Gallo – C.L. King

Tony Brenner – ROTH Capital Partners

Brittany Whitman – Longbow Research

Will Slabaugh – Stephens

Francesco Pellegrino – Sidoti & Company

Operator

Greetings and welcome to the Krispy Kreme Fourth Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Ms. Anita Booe. Thank you, Anita, you may begin.

Anita Booe

Good afternoon and welcome to the Krispy Kreme fourth quarter and fiscal 2016 conference call. On the call today are Tony Thompson, President and Chief Executive Officer; and Price Cooper, Chief Financial Officer.

Comments on today’s call may 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 these expectations. Like any such statements, they are subject to a number of factors, risks, and uncertainties that could cause 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. In addition, we may refer to non-GAAP financial measures. A reconciliation of any non-GAAP measure to GAAP can be found in the earnings release furnished today.

I’d now like to turn the call over to Tony Thompson.

Tony Thompson

Thank you, Anita, and we appreciate all of you joining us today. I’d like to spend a few minutes discussing our fourth quarter and fiscal 2016 highlights, after which Price will walk you through the financial results in greater detail as well as our financial outlook for fiscal 2017. Then we will wrap up our remarks with a discussion of our plans for fiscal 2017 and beyond.

Total revenue increased 4% for the quarter and nearly 6% for the year. Company’s same-store sales increased slightly for the quarter and rose 2.4% for fiscal 2016 marking our seventh consecutive year of same-store sales growth. Domestic franchise comps outpaced company shops increasing 2.5% and 4.8% for the quarter and year respectively. International franchise comps were negative as anticipated given the growth strategy in those markets.

We added a net 134 shops during the fiscal year, representing 14% systemwide growth. Our international business led the way with very solid double-digit unit growth and included new country openings in South Africa and Germany. We also signed development agreements for seven new countries including Bangladesh, Cambodia, Guatemala, Panama, Peru, Bolivia and Myanmar. Domestically, we’re growing units at a prudent mid to high single-digit rate as we continue refining and optimizing our domestic operating model.

For the year, adjusted earnings per share increased a solid 14%. During fiscal 2016, we made substantial progress in transitioning our discounting program from a heavy reliance on everyday discounts to special events days. In addition, we relied less on three offers to drive traffic. While the overall level of discounting was still higher than we would have preferred and impacted our company store margins. We were able to achieve our goal of having a lower overall percentage of discount transactions.

Some of the special events, we focused on during the year were Valentine’s Day, Hero Day, our Birthday, Talk Like A Pirate Day and Day of the Dozens. Also we took advantage of the success of our Carolina Panthers partnership and leveraged that with our Panthers Win Days. In addition to focusing more on special event days, we introduced tiered pricing for our limited time offers.

Market research and consumer actions have demonstrated that guests are willing to pay a higher price for what they perceive to be more distinct and value-added doughnuts. Some examples of our LTO doughnuts this past year included our Valentine Love Bug, Spring Chick, Halloween Monster, Holiday Santa Belly and a Triple Chocolate Doughnut just to name a few. Overall, our results were positive and we made progress in many areas, including improving store level margins over last year. But there are still many areas of opportunity. I will speak more about this following the financial review.

I will turn the call over to Price for comments.

Price Cooper

Thank you, Tony. Good afternoon everyone and thank you for joining us. For the quarter, we generated $0.22 in adjusted diluted earnings per share on 4% revenue growth. Our fourth quarter results included the following more one-time type items. First, as we mentioned on the last call, we recorded a $660,000 gain relating to a settlement received in conjunction with the 2010 oil spill in the Gulf. Second, we recorded an $810,000 gain in conjunction with a sell of our minority interest in a franchise.

Third, we recorded a $70,000 credit this year in conjunction with our self insurance reserves, which compares to a credit of $940,000 recorded during the same quarter of the prior year. Lastly, we recorded $4.4 million of impairment in closing costs during the quarter, the majority of which related to closing of company shops.

We did adjust reported results for this amount in the calculation of our adjusted diluted earnings per share. For the year, we generated $0.80 in adjusted diluted earnings per share on 5.8% revenue growth. From a margin perspective, we experienced expansion in all four segments for the year and our company shop contribution margin expanded despite a weaker than expected fourth quarter.

On our last call, we mentioned the margin expansion within the company shop segment was going to be much tougher in the fourth quarter and it was. The lower self-insurance adjustment this year weighed on fourth quarter company shop contribution margins. Higher returns within our CPG channel also weighed on margins. We anticipated these and we’re expecting lower year-over-year margins from these. However, the magnitude of the margin decrease was magnified by the level of promotional incentives driven by higher participation in special event days than we had anticipated, specifically the Panthers Win program.

Reported G&A was $6.6 million compared to $9.2 million in the fourth quarter last year. The decrease was largely driven by prior year costs of $2.5 million related to the former CEO’s employment contract. In addition, prior year incentive compensation was $670,000 higher. On the tax front, our effective tax rate was much lower than our anticipated longer-term expectation of 38% to 40% as a result of booking credits of $1.7 million in the current year. These credits primarily related to a reduction in our valuation allowance and other realized credits as our earnings have continued to increase.

During the year, we generated just over $50 million in free cash flow and repurchased $50 million of stock. Thus we ended the year at about the same place in terms of cash on hand as we started the year. As stated in the earnings release, we are forecasting adjusted diluted earnings per share for fiscal 2017 of $0.87 to $0.91. This represents 9% to 14% growth over fiscal 2016. On a GAAP basis, this represents $0.54 to $0.58 diluted earnings per share.

Our fiscal 2017 outlook is based on the following assumptions. We are forecasting 30 domestic shop openings. We will be focused on continuing to build our domestic franchising pipeline and expect company store growth to be roughly flat to fiscal 2016. On the international front, we are forecasting 120 to 140 net openings compared to 115 net new stores for the past year. This includes growth in existing markets as well as the addition of 6 to 8 new countries.

We also expect to continue driving positive system-wide domestic comparable sales. Since the start of the new fiscal year comp sales have been slightly negative, changes in promotional calendars have driven some of this along with adverse weather conditions in some of our major markets. However, sales for March are positive and we are confident in our plans to deliver our eighth consecutive year of comp sales growth. Last in terms of margins and profitability, there are some puts and takes related to fiscal 2017.

On the positive side of things, overall commodity costs should be down approximately $1.5 million, driven by lower fuel costs. Our G&A for 2017 should be essentially flat to 2016 due to approximately $1.5 million in lower ERP related costs. And with regard to our CPG channel, we are working with a national distributor to create a higher profile presence for our brand by delivering non-yeast longer shelf-life products into convenience and drugstore channels across the United States beginning this quarter.

We anticipate that this new distribution relationship will add a couple million dollars to overall profitability. We will know more as we get into the program. Offsetting these expected benefits were the following. First we are forecasting considerably higher store level incentive compensation related to the new shop level incentive programs. This could be a couple of million dollar investment.

Second, we expect increases in healthcare cost based on higher participation as we shift back to a more full time based hourly model. Lastly, we expect the negative foreign exchange impact to continue to the tune of $1 million to $1.5 million in fiscal 2017.

In terms of segment margins, we anticipate domestic and international franchise margins to be similar to fiscal 2016 levels. We expect company store operating margins to increase somewhat during fiscal 2017 and we expect supply chain margins to be a little lower this year. We anticipate depreciation expense will increase by $1.5 million to $2 million year-over-year.

We ended the year with $124 million of federal net operating loss carryforwards currently we do not anticipate having a federal tax liability until fiscal 2019 or after. And that’s while we anticipate our tax rate will be approximately 40%, our cash taxes will continue to be approximately $3 million per year primarily consisting of foreign withholding tax.

Regarding our balance sheet and cash flow was approximately $30 million being spent on capital expenditures and we anticipate continuing to generate a meaningful amount of free cash flow. Our intention is to use our free cash flow and some portion of our cash to repurchase stock during the year. In line with that our board increased the company’s share repurchase authorization by another $100 million brining the current amount available for repurchase to $143 million.

Lastly, while we do not give specific quarterly guidance there are few timing things to think about from a modeling perspective. First, we anticipate more of the year-over-year growth and adjusted diluted earnings per share will occur in the second and third quarters of fiscal 2017.

Secondly, when comparing Q1 fiscal 2017 versus last year, it is worth mentioning that we anticipate preopening cost will be higher this year and we will not have the $450,000 gain of derivatives that we had in the prior year. Finally, we anticipate company shop margin performance will be challenging in the short-term based on where we are so far this year, with same store sales and the fact that we anticipate many of the investments we are making in initiatives like store incentives will pay off overtime.

And with that, I’d like to turn the call back to Tony.

Tony Thompson

Thank you, Price. In closing, let me provide some comments on both near-term initiatives and our longer-term plans. During fiscal 2016, we made head way on a number of key initiatives. One of the most significant was that we were able to drive positive comp sales while pulling back on the percentage of transactions involving a discount. We’re pleased with what we’ve been able to accomplish directionally. However, we still have room for improvement on delivering consistent margin performance in the company store segment. It is a challenge for everyone in our industry to balance the promotional activity needed to drive sales with the ability to generate acceptable margins.

We have a number of initiatives in place to address this, including first implementing a new manager level incentive programs, gear toward instilling more of an ownership culture. It is an investment we are making this year for the longer-term. Second, we have additional targeted incentive programs in place to drive beverage attachment. We are already seeing a few percentage points of increase in our beverage attachment rate and this is before we begin our drip coffee relaunch in the second quarter.

Third, we are working on increasing the number of full-time versus part-time employees in many of our shops. The shift which our industry saw a few years ago producing higher numbers of part-time employees as we believe adversely impacted the quality of the talent that we’re able to recruit to our shops. Fourth, we will be implementing third tier pricing later this spring.

Our premium LTO pricing was very successful in FY16 so we plan to build upon on that. Finally, we will continue to build on our loyalty platform as well as further define our overall brand positioning. We believe these actions in combination with our existing initiatives will help to generate more consistent execution and better results that our company shops.

Another key long-term strategy, we have made significant progress on, is our CPG product distribution. We are partnering with a third party for the manufacturing and distribution of our longer shelf-life, non-yeast based products within the convenient and direct store channels. This arrangement will enable us to achieve national distribution within these channels overtime.

As Price mentioned, we expect this to add a couple of million dollars to this years profits. The bigger accomplishment here is it will help us learn as we explore other longer-term opportunities to more efficiently distribute great Krispy Kreme products and increase our reach. With fewer than 300 shops domestically, and just over 800 locations internationally, there is tremendous runway for growth ahead of us.

As our management team has considered where we are today, and the best path to achieve Krispy Kreme’s potential, we’ve come to the following conclusion. First, we will remain focused near-term on what I just mentioned, in order to drive more consistent company shop performance. Second, we will enhance and improve our new shop model. And finally, we will drive future growth through franchising. These are essential to maximizing the long-term potential of the Krispy Kreme brand and long-term value for our shareholders.

Domestically our franchisees continue to outperform our company shops. Thus we believe that by focusing more on franchising we will be in a greater position to maximize the value of the brand for the long-term. A more exclusive focus on franchising involves among other things, working to improve our franchisees return potential. In that regard, we have several initiatives in place including, reducing new store investment costs by several hundred thousand dollars, which includes all aspects of the investment including, construction, site location, equipment costs and pre-opening costs.

In addition, we’re making improvements in the customer ordering and flow process in our shops to drive top line sales and overall profitability. We first implemented an improved flow design in our Clemmons North Carolina shop, which opened in the fall. We have seen higher beverage attachment rates, which we believe have been driven by the new flow design.

Two existing shops are being retrofitted with the new improved flow and we expect to be in a position to begin retrofitting more shops in the back part of this year. We also have work streams in place to provide alternative shop types and formats that will allow our franchisees to grow the Krispy Kreme brand with multiple investment options. Everything we’re doing around the new shop model is geared toward providing our franchisees a greater return and improved profitability.

Our greater focus on franchising also entails having a more sophisticated franchise support structure. We have made, and are continuing to make improvements in our support for our shops whether company or franchise. Some of these include first, marketing. We need to become a more marketing driven company and transition from good to great in this area.

We do not have the biggest budget, but we have an incredible brand that we have not fully leveraged. We are working on how we continue to grow guest engagement through initiatives like loyalty, a mobile guest engagement platform, and continuing to further leverage our existing digital and social media platforms. We are currently in the search process for a new CMO, as we continue to build depth in our organization.

Second, culture. We will begin a cultural change inside our organization domestically to become more franchise support focused. As part of that, we will be seeking to improve some of the systems and processes around critical competencies such as technology support, finance, development and real estate. Again, this is an area where we need to be not really good, but great.

In closing, we are more excited than ever about what the Krispy Kreme brand can be. The size of the Company pales in comparison to the potential of this great brand and we are committed to and focused on realizing that potential. We believe, however, that to get there means becoming an industry leader as a franchisor.

Much of what I’ve discussed today relates to longer-term goals and plans. But we also have a solid fiscal 2017 plan in place that we’re excited about and will be executing against. This plan is based on continuing to grow at a reasonable rate, while at the same time affording us the opportunity to return a significant portion of cash flow to our shareholders.

Thank you for making time to be with us today. Operator, we are ready to take questions.

Question-and-Answer Session

Operator

Thank you, Tony. At this time we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Michael Gallo from C.L. King. Please proceed with your question.

Michael Gallo

Hi, good afternoon. I just wanted to dig in if I can on the company store margins. I was wondering if we could parse out how much of the delta year-over-year was due to the changes in the discount program or the amount of discounting. And how much of that specifically was related to the Carolina Panthers promotion which obviously you had, I’m sure a lot more usage this year and probably I don’t say it’s one-time, but obviously you were giving away a lot of free doughnuts on Mondays.

Price Cooper

Yes, no problem. Thanks, Mike this is Price. I’ll start off. In general, we had expected, we talked last quarter about we expected Q4 margins to be a challenge on a year-over-year basis because, and we mentioned little bit on the call on the fact that the self-insurance pickup that we had in the last year. So I want to remind you that. But the direct answer to question, you are exactly right with the success of the program, it was good in the fact that drove same sales for sure. But the margin impact definitely weighed in on us for the quarter, it’s probably somewhere around a 150 basis points if you had to parcel it out. It’s probably somewhere on the magnitude of that is our best guess.

Michael Gallo

Okay, next just a follow-up. Perhaps I missed in Tony’s comments earlier but the comment on some of the changes in terms of pricing that you are contemplating for later in the year, that I hear you say more of a tired pricing or is that an evolution of what you’ve done with the premium doughnuts? Can we parse that out in a little more detail? Thanks.

Tony Thompson

Sure, Mike this is Tony. The LTO premium pricing that we put in place during fiscal 2016 rolled through the year with that very successful. So this year, we are adding a second tier that is incorporating not only those LTO doughnuts, but within our current doughnut set, a number of doughnuts that are at that same premium price point. So a second tier of pricing. And of course we have a third tier such as our Apple Fritter, that we will work on developing our longer-term that it at an even higher price point.

And we’re looking to incorporate that company in all of our company shops that second tier, third tier pricing later here, later in this spring, kind of toward the end of April.

Michael Gallo

And how much pricing do you expect to have in the menu for this year?

Price Cooper

Mike, we’ll have on the order of 1% or 1.5% of call it pricing if you will, that’s exclusive of what Tony is talking about as far as additional, more premium offerings.

Michael Gallo

Okay, thank you.

Price Cooper

Thanks, Mike.

Operator

Our next question comes from the line of Tony Brenner from ROTH Capital Partners. Please proceed with your question, sir.

Tony Brenner

Thank you. I have two questions. First of all, regarding your supply chain, you’ve got more stores open. You are projecting somewhat higher comps for domestic sales anyway. And you’ve got lower commodity costs. I’m wondering why you’re also projecting lower margins for that segment?

Price Cooper

Yes, Tony. I think I’m going to take it, I think you said you may have a few more but just moderating because to your point, the commodity costs continue to come in lower this year and so that resulted in a little bit higher margin this year in the supply chain than we had originally anticipated. So it’s more getting back to what we would call a normalized margin within the supply chain segment.

And then did you have a follow-up as well Tony?

Tony Brenner

I had a second question.

Price Cooper

Okay, sure.

Tony Brenner

You mentioned that – sales as a percent of the mix were a couple points higher, I presume. You mean on the new format store? Right.

Price Cooper

No.

Tony Brenner

Or is that overall?

Price Cooper

Actually, we’re seeing the beginning of this quarter we’re seeing some leftover within our company stores. We’ve got some incentives that I mentioned. They are in place and it’s basically the beverage attachment, not the overall mix. So we’re seeing a couple points of attachment, Tony, across-the-board from some of the things we put in place last year toward incentivizing, upsell beverage attachment. But I would like to talk about that Clemmons store. Overall, that attachment we’re seeing as a whole around four or five basis points up and inside the shop as high as seven.

So, it’s working as planned. We’re pretty excited about directionally where that’s headed. And there’s going to be more to come on that.

Tony Brenner

Okay. That was really my intended question then. Half of your sales are coming through the drive-through. What, if anything, will you be doing to increase the beverage attachment there?

Price Cooper

So we’re going to be working on beverage attachment pretty much across the board. The biggest opportunity in the near-term that we definitely know we have is inside the shop. So, that’s been a pretty big focus for us, for our overall coffee strategy and as you’ve heard me say before, the approach to coffee, it’s not doing one, or two, or three things, it’s pretty, you got to be comprehensive about that. And so, overall design inside the shop is part of that and important but we’re also focused on drive-through separately as a whole of just improvements. And we’ll share more about that as we progress down the road.

Tony Thompson

Tony, part of that I’d add on to it is various incentive programs are geared towards rewarding and incentivizing operators for continuing to increase that overall beverage attachment rate as well.

Tony Brenner

Thank you

Tony Thompson

You got to apply both in-stores as well drafted [ph]. Thanks, Tony.

Operator

Our next question comes from the line of Alton Stump from Longbow Research. Please proceed with your question.

Brittany Whitman

Hey guys, it’s actually Brittany Whitman on for Alton this afternoon. I had a couple of questions just surrounding comparable sales. I was wondering, if you could break those numbers out between what was volume and mix versus pricing for both company and international stores?

Price Cooper

Brittany, I don’t have the exact breakdown between volume and pricing. I’ll tell you in general, traffic has been slightly negative and the check has been positive driven by combination of pricing and mix. But don’t have that exact breakdown.

Brittany Whitman

Okay. And then breakdown on company storage?

Price Cooper

Yes, on company storage, that’s exactly right. Yes.

Brittany Whitman

Okay.

Price Cooper

So and on the volume, Brittany as you may recall we’ve focused pretty heavily in fiscal 2016 on pulling back on everyday discounting at least a shift of toward more a big event days, scaling back and certainly eliminating a lot of the free transactions that we had that were in our discounting plan historically. So, that’s impacted traffic to some degree.

Brittany Whitman

Got you. And then just for international franchise stores, the comp was a little bit lower than it has been in the past, and I know that’s from some of your growth strategies that you’re putting into place. I’m just wondering if you can elaborate a little bit further on that, like what specifically that’s made up of and how far into the future you’re expecting that to continue.

Price Cooper

Yes, sure. In general you’re exactly right. We do anticipate overall that with the international focus being more on the hub and spoke model, where they focus on more revenues versus necessarily same-store sales out of that model. That tends to result in continue negative comp trends, to your point they were little bit lighter this quarter. And there have been some more one-off situations that have driven that. I would say there are a handful of different situations. In one case, you’ve got a country that didn’t have as much of an overall incentive drops and special offers they were running last year, they didn’t repeat that this year. You’ve got, obviously we’re in areas more impacted, our franchisees rather than areas more impacted by the fall off in oil prices. And resulting, impact on that on foot traffic, maybe in certain malls and in certain areas. So more of that is a handful of different franchisees across the board I would say. And so in general, we expect that the international side will continue to run negative same-store sales.

Brittany Whitman

Okay.

Price Cooper

As long as they’re growing

Brittany Whitman

That’s right.

Tony Thompson

This is Tony, the key is franchisees who are making money and profitable, they will continue to grow and that’s exactly what’s happening. So, very healthy, certainly healthy part of our business it’s pretty excited about where it’s going.

Brittany Whitman

Okay. And then just one more quick question and I will hop back in the queue. Just to think Donald all-day breakfast lunch, are you guys seeing any impact from that?

Tony Thompson

As you know, our transactions are fairly consistent around the clock. Nothing that we can tease out to say, here’s what they went out and focused on and promoted and we’re seeing an impact. So I really can’t really put anything to say there’s a cause and effect there. We like to pride ourselves with the fact that we’ve been all-day breakfast for a long time. Obviously, doughnuts for dessert or great when that hot light is on and that’s what we see.

Brittany Whitman

Absolutely. Okay great, thank you so much.

Tony Thompson

Thanks.

Operator

Our next question comes from the line of Will Slabaugh from Stephens. Please proceed with your question.

Will Slabaugh

Yes, thanks guys. Wondered if you could talk a little bit more about the promotional environment just out there? I know you said it’s impacted you a little bit but I wonder given that you’re seeing the rest of your QSR peers become a little bit more promotional actually quite a bit more promotional. If you think that’s having much of an impact on your customer? If you think that they expect the deal a little bit more than maybe they did a while back and if that may impact what you do in terms of planning your promotions for fiscal 2017?

Tony Thompson

Thanks, Will, great question. And I mean for us, looking at the category it seems like it’s any given time. It’s always extremely competitive. And the deal opportunities they kind of ebb and flow all of a sudden everybody jumps on 4 for 5 or something like that. The fact that’s mostly in meal replacement areas and category within QSR – we’re not really seeing a cause and effect is that affecting what consumers are doing overall within their spend, we’re not necessarily seeing that and then you put the fact that we are – we’ve been making adjustments ourselves on our discounting. So it’s really hard to tease that out. I don’t think that it’s going to have a significant impact on our strategy going forward from a pricing standpoint. Because we think we have a lot of opportunity there. Some of the way that we are undoing some of the things that we’ve had some patents in the recent past, that’s more within our own customer base I think that we need to manage.

The other thing I would tell you that’s really near-term situation in our rear-view mirror that is a good example of opportunities for us within our brand is like St. Patrick’s Day. We just finished up on and we had a really, really successful St. Patrick’s Day I know I’m not going to give you any numbers on that yet. But the fact is, it was a day where we drove a lot of traffic at full menu price. We had folks come in based on our offerings and our strategy and those are the things that we’re looking at as we’re weaning away from a lot of the free transactions that we began last year as we’re working on weaning away from the proliferation I can tell you that everyday discounting and couponing. How we leveraged our brand equity on for events like that, with St. Patrick’s Day, that’s what we’re working on in addition to our regular menu set in commanding a premium for products that we know consumers are willing to pay a little bit more for. I know that’s a mouthful but that’s the way we are looking at the future.

Will Slabaugh

Got it. That’s helpful. I wonder if I can follow-up as well on the comments you made toward the end there about becoming lack of a better phrase is the franchisor of choice and becoming more beneficial to your franchisees. So, as you think about that longer term view of becoming more of a franchisor versus sort of this more of a dual grower as you are now, what might that look like? Are we too early on to make a projection as far as what you want that mix to look like? And then, maybe, if so, at what point do you think will be far enough along to say here sort of what we want to look like when we grew up, so to speak?

Tony Thompson

Thanks. That’s a great question and – basically we’re trying to give a projection for fiscal 2018 and beyond or at least not a projection, directional. Here’s where we’re going. I know in the past year and a half, a lot of folks have, hey Tony what’s you’re thinking on that to your very question that you just asked. And I wanted to go ahead and we did as a team, to go ahead and lay that out appears where we are headed. And through later this year we will be prepared to share a little bit more detail along those lines. I think those important for you just to understand what we are thinking. That’s a question we’ve had I want to answer that emphatically of here’s where we’re going and gave some qualifiers on why and will be able to flesh that out a little bit more, longer term. Meanwhile, we’ve got a great plan for fiscal 2017 and we are going to be focused on that and that’s what we are going to be executing against for this year but we will be sharing that later this year, Will.

Will Slabaugh

Great. Thanks, guys.

Operator

Our next question comes from the line of Francesco Pellegrino with Sidoti & Company. Please proceed with your question.

Francesco Pellegrino

Hi, guys. Thanks for taking my question. First thing I wanted to touch on was obviously 2015 was a big year for you guys in technology. What are some trends that you’re seeing, some of the data analysis, I know Tony with your background this was a big initiative for you. How will you be leveraging what you’ve implemented in 2015 into your fiscal 2017 operating environment?

Tony Thompson

Sure, thank you, Francesco. Good question. And, as you’re probably aware from prior conference calls and maybe meetings as well, on the technology side, especially on the data and business analytics, that’s still an opportunity for us. We’ve made I think really good progress on that. At a macro level we certainly have on our business forecasting within the micro and connecting calls and effects within what we’re doing from our promotional activity to financials, et cetera. There’s still a lot of work in progress there, especially on the heels of the new ERP system that we implemented this past year.

But, things like our loyalty platform that we just finished rolling that out here at the end of the last fiscal year, and so we’re in the process right now of baselining. And basically, testing and trying to understand behavior of our base that we have. So not far enough along yet to share any real data from that, but again, as we progress through this year and we have that meaningful information from a trending standpoint we are going to be prepared to do that.

What I would also like to share is we’re focused on continuing to build upon that. So loyalty was the first step in our customer engagement platform from a consumer facing standpoint and we’re working on other pieces of that, such as, mobile ordering for future implementation past fiscal 2017. There’s work in progress for the long-term while we’re continuing to work on what we’ve implemented.

Francesco Pellegrino

Is it fair to say that a majority of the benefit from, I guess, what you’ll be able to leverage and learn from this technology will be more on the domestic side than on the international side to drive sales growth?

Tony Thompson

Yes. As far as the mobile data and the loyalty data, that answer, yes, that answer would be yes.

Francesco Pellegrino

So, then, for a follow-up question to that, I noticed when it came to your fiscal 2017 outlook, in regards to net new shop openings, you kept company shop openings the same and you kept domestic franchise shop openings the same. But it seemed as if there was a higher level of interest for net new international shops. You raised the outlook by 20% to 40% company owned store margins aren’t that great, it seems as if your franchisees are doing a lot better. As you’re transitioning to more beverage – the beverage rate attachment, what cause I guess, the net new domestic franchise shop opening number to remain constant, and now get that 20% to 40% increase that you guys just disclosed after the close?

Tony Thompson

Okay. Well, there was a lot, so let me – let me hit. I think the international growth parts. So the international, we’re basically – we’re building on our base that we already have established. Plus as you heard, we’ve got some new countries where we’ve signed and we opened in a couple new countries last year. But growing that base is what’s helping that’s pickup some momentum on the international side.

And as far as the domestic franchise growth that we’ve got planned for this year – from last year to this year, that the word I’ve used I think in my script was being – we’re being prudent about that is where we are in our lifecycle. We want to make sure that we can deliver and service and support the level of growth that we have planned, and we’re actually still a very healthy growth rate for you us. And I would add to that the domestic side is actually up a little bit from our net opening of this year. So if you look at it on a year-over-year basis we’re opening 24 – we opened 24 between company and domestic this year and our outlook for next year is 30.

Francesco Pellegrino

The clearance in North Carolina prototype that you guys are running it. It’s a company owned location. I would think you might have some domestic franchisees almost chomping at the bit to sort of get their hands on this type customer flow and the new design that you guys are implementing there. What’s the timeframe to letting franchisees domestically get their hands on this type of design and flow? And is this something that could really maybe re-energize your domestic franchise growth here domestically or is it something that maybe five – five or six years from now you’ll finally let them touch? Because I know you only have about a couple of shop.

Tony Thompson

And that’s I think a great question and the way we’re looking at that its kind of multi-faceted. I mentioned our suite of shop types that we’re working through. So as we look at how we grow out the U.S. rather than just having just a freestanding factory store in our portfolio in our toolbox so to speak, it has a suite of shop types where we can develop a market very strategically and better penetrate it with some other types of models that the overall flow though inside the shop that certainly is fundamental for what we want to accomplish. And that will be transitioning into our new shop design later this year, but we have – already have things in the pipeline.

Our model today works as it is. So the current new freestanding model that we have works extremely well. So it’s a little bit of a – it’s a phase transition and so you’ll see more of that. Yes, we have a lot of interest from folks from our franchisees, but we want to manage that ourselves and prove that out and get it to how we want that before we start having five, six, seven different versions out there that becomes hard to manage from a scale standpoint and training and things that we need to support as a franchisor.

Francesco Pellegrino

All right. I’ll jump back in queue. Thanks again.

Tony Thompson

Thank you, Francesco.

Operator

[Operator Instructions] Our next question comes from the line of Michael Gallo with C.L. King. Please proceed with your question.

Michael Gallo

Hi, just a couple of follow-ups. Price, did you say where you expect that level exchange rates, what kind of headwinds you expect from the dollar this year?

Price Cooper

We said between $1 million and $1.5 million is what we currently expect for 2017.

Michael Gallo

And then what was the actual year-end – the full year, the actual year-end share count? It seemed like the buyback in their for –

Price Cooper

The actual shares outstanding were 63.1 million as of the end of the year.

Michael Gallo

Okay. So it doesn’t seem like in the 64 million, I think you’re guiding to overall that you have a whole lot of buyback given the size of the authorization? Is that fair?

Price Cooper

I don’t know that is completely fair because keep in mind that 63.1 million does not include the dilutive impact of stock options and restricted stock.

Michael Gallo

So it’s probably like 65 million in change, something like that, I mean it’s actually where the quarter end share count with 65.7 million fully diluted.

Price Cooper

Yes, 65.7 million, yes.

Michael Gallo

Yes, so just in general, again, I think you have 100 million…

Price Cooper

Now we have 143 million authorized.

Michael Gallo

Right. So again, just back-of-the-envelope, you could buy 10 million shares back if you want to and given the $50 million cash you got on the balance sheet and other, I don’t know, call it, $50 million of free cash flow, you could do it very easily if you wanted to. I’m just tried to parse out again what you have baked in there, but it doesn’t seem like you have a whole lot.

Tony Thompson

No. We have considerable amount actually baked in there. So, we are expecting to use at least all of our free cash flow and comfortable going beyond that and using some of the cash on our balance sheet. It’s a matter of the timing of when it comes in.

Michael Gallo

Okay.

Tony Thompson

And then what the impact is for the overall year.

Michael Gallo

Okay. And then can you parse out at all, I know you’re saying you’re doing to retrofits, what is the cost to a retrofit?

Tony Thompson

We just completed one within like the last week basically, so we’re still getting all of our cost in on that so we don’t have that number now. We will have a lot better number when we’re sitting here this time next quarter because we’ll have everything in on that one plus we’ll be through our second one here in a few weeks as well.

Michael Gallo

Right. In terms of disruptions of the store when you do a retrofit, fairly minimal?

Tony Thompson

Yes. Fairly minimal. Yes, definitely.

Michael Gallo

Okay. Great. Thank you.

Tony Thompson

Thanks.

Price Cooper

Thank you, Michael.

Operator

Ladies and gentlemen, there are no further questions in queue at this time. I’d now like to turn the conference back over to Anita for any closing comments.

Anita Booe

Thank you for your time. Have a great evening.

Tony Thompson

Thanks everybody.

Operator

Ladies and gentlemen this does conclude today’s teleconference. We thank you for your time and participation, and have a wonderful rest of your day.

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