Krispy Kreme Doughnuts Inc. reported a 5.2-percent increase in U.S. same-store sales during the first quarter of fiscal 2016, ended May 3, despite cutting back on promotions and discounts.
As a result, unit margins at the Winston-Salem, N.C.-based quick-service operator improved considerably, by 2.7 percentage points, to 18.5 percent of revenue in the first quarter, from 15.8 percent the previous year. The lack of discounts did not hurt traffic either, the company said, as customer counts were essentially flat.
“Adjusting incentives to strike the right balance between driving traffic and enhancing margins is an area that requires continual refinement,” Krispy Kreme president and CEO Tony Thompson said during a call Tuesday evening discussing earnings. “But we believe that we’re dialing it in appropriately.”
“We continue to focus on scaling back the number and the depth of discounts,” he added.
Executives expect margins to keep growing, but at a more “moderate” rate.
A year ago, the company held a number of promotions that gave away free doughnuts, executives said. Krispy Kreme has shifted to fewer discounts and more limited-time offers of specialty doughnuts instead, with solid sales results.
The chain is one of several concepts that have recently moved away from discounting. In many cases, those strategies worked to get customers in the door, but often at the cost of margins. More chains have focused on ending discounts amid a stronger consumer environment.
The same-store sales increase helped Krispy Kreme’s revenue rise 9 percent in the quarter, to $132.5 million, from $121.6 million a year ago.
Net income rose 10.5 percent, to $10.7 million, or 16 cents per share, from $9.7 million, or 14 cents per share, a year ago.
The chain ramped up unit development amid rising sales. Its unit count increased 17.3 percent, to 1,003 units, during the quarter, the first time Krispy Kreme has had more than 1,000 locations.
Much of that growth is from international locations, and is expected to continue in 2015. The company expects to open 95 to 110 new international locations this year.
Domestically, both the company and franchisees will add locations. Krispy Kreme expects to open 10 to 12 new company-operated locations this year, while franchisees will open 15 to 20 new units.
“We can increase our systemwide unit count by 120 to 140 net shops this year,” Thompson said. “This reflects continued domestic and international growth and includes a variety of shop formats tailored to meet local market needs, along with disciplined and sustainable unit development.”
The company also continues to work on its long-awaited beverage program. Krispy Kreme depends on doughnut sales for its revenue, but has long wanted to sell more beverages, particularly coffee, much like larger competitor Dunkin’ Donuts.
Krispy Kreme is “committed to increasing our in-store beverage” rate, Thompson said, but he added that doughnuts would remain at the “center of the plate.” In the first quarter, the company introduced three frozen coffee beverages, including Mocha, Vanilla and Caramel Lattes.
The lattes “did extremely well,” Thompson said. He said the company is planning similar initiatives to get short-term results as the company works on its coffee plan.
Krispy Kreme is generating interest in the beverages by getting customers to try them on days with high traffic, such as when it has special doughnuts or offers, like the recent National Doughnut Day.
Contact Jonathan Maze at [email protected].
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