Krispy Kreme, Inc. — Q2 2022 Form 10-Q
Reporting period: 13-week quarter ended July 3, 2022; year-to-date figures cover 26 weeks. Comparative periods ended July 4, 2021. Figures below are in U.S. dollars.
Business context and financial performance
Krispy Kreme operates through company shops, delivered-fresh-daily (DFD) outlets, ecommerce and delivery, branded sweet treats, and franchise operations. Its three reporting segments are U.S. and Canada, International, and Market Development. Management’s strategy centers on expanding access through a capital-efficient Hub and Spoke distribution model.
| Metric | Q2 2022 | Q2 2021 | First two quarters 2022 | First two quarters 2021 |
|---|---|---|---|---|
| Net revenue | $375.2 million (+7.5%) | $349.2 million | $747.8 million (+11.4%) | $671.0 million |
| Organic revenue growth | 8.9% | Not stated here | 11.8% | Not stated here |
| Operating income | $7.5 million | $9.1 million | $24.8 million | $22.8 million |
| Net income/(loss) | $(2.4) million | $(15.0) million | $4.1 million | $(15.4) million |
| Net income/(loss) attributable to Krispy Kreme, Inc. | $(3.8) million | $(17.1) million | $0.2 million | $(20.2) million |
| Adjusted EBITDA | $47.4 million (-9.6%) | $52.4 million | $96.3 million (-2.6%) | $98.8 million |
| Adjusted net income | $14.6 million (-28.4%) | $20.5 million | $30.7 million (-19.3%) | $38.1 million |
Q2 reported revenue growth was led by increased points of access and DFD expansion; the stronger U.S. dollar reduced reported sales. The company sold a record 420 million doughnuts worldwide in the quarter, up 7% year over year. At quarter-end it reported 11,409 Global Points of Access, including 9,540 DFD Doors.
Margins, cash flow, debt and liquidity
- Q2 operating margin was 2.0%, versus 2.6% a year earlier. Product and distribution costs rose to 26.8% of revenue from 24.3%, reflecting commodity and logistics inflation and promotional activity; operating expenses rose to 46.4% of revenue from 45.2%, reflecting labor costs and investment.
- Q2 segment Adjusted EBITDA was $26.0 million for U.S. and Canada (down 8.0%), $19.5 million for International (down 17.5%), and $10.5 million for Market Development (up 6.5%). Reported segment EBITDA margins were 10.4%, 20.8%, and approximately 33.9%, respectively.
- For the first two quarters, operating cash flow was $53.9 million, compared with $56.8 million; capital expenditures were $51.5 million, compared with $52.8 million. Investing cash outflow was $48.3 million, and financing cash outflow was $14.2 million. Cash, cash equivalents and restricted cash ended at $26.2 million, including $25.8 million of unrestricted cash.
- Outstanding principal under the 2019 Facility was $700.8 million at July 3, 2022, including $603.8 million of term loans and $97.0 million drawn on the revolver. Balance-sheet long-term debt, including financing obligations and net of issuance costs, was $725.9 million. Total net leverage under the credit agreement was 3.31x, up from 2.99x at fiscal year-end; the company reported covenant compliance.
- Current liabilities were $517.3 million and current assets $162.5 million. The company also reported $135.5 million of structured payables. Management said cash and available debt facilities should fund operations and capital needs for at least the next 12 months, while noting that this depends on assumptions and future financing may be needed.
Material changes, outlook and risks
- Management cited inflation in ingredients, logistics and labor, supply-chain disruption, and weaker consumer traffic, particularly in the U.K. and at U.S. and Canada Hubs without Spokes. These pressures weighed on margins and International results.
- Mid- to high-single-digit price increases were implemented in the U.S. and Canada and U.K. at the start of Q3. Management expects pricing and continued DFD expansion to help offset costs, but provided no specific full-year numerical guidance in the supplied filing text.
- The company began U.S. and Canada portfolio optimization and decided to exit six lower-margin U.S. shops. It expects further impairment and lease-termination costs in the second half of fiscal 2022 and believes optimization could improve margins in fiscal 2023 and 2024.
- Q2 ecommerce represented 17.5% of Doughnut and Cookie Shop sales excluding DFD, and loyalty membership exceeded 13 million in equity markets. Management described continued expansion of ecommerce, delivery and DFD as growth priorities.
- After quarter-end, the company reached a net settlement of approximately $3.3 million in TSW Foods litigation; the related liability was reflected in the statements. A March sale-leaseback generated $3.0 million of proceeds and a $2.6 million gain. Foreign-currency translation reduced goodwill by $22.1 million and contributed to a $36.2 million year-to-date translation loss in other comprehensive income.
- On August 5, 2022, the company agreed to acquire six U.S. franchise shops and one shop under construction for approximately $18.5 million cash, with closing expected later in August.
- Key risks include inflation and consumer demand, currency movements, variable-rate debt exposure, execution of the Hub and Spoke strategy, and growing reliance on BakeMark under an exclusive U.S. distribution agreement. A disruption at BakeMark could interrupt supply to company and franchise shops. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile GAAP results with Adjusted EBITDA, adjusted net income and organic revenue growth, including the exclusions and adjustments used.
- Monitor whether pricing and DFD growth offset commodity, labor and logistics inflation, and whether segment margins recover.
- Track cash generation, capital spending, structured payables, debt balances and compliance with the tightening leverage covenant.
- Confirm completion, final consideration and integration effects of the announced franchise-shop acquisition, and costs from the six shop closures.
- Assess exposure to foreign exchange and the concentration and contingency arrangements associated with BakeMark distribution.