Krispy Kreme, Inc. — Q1 2022 Form 10-Q
Reporting period: 13 weeks ended April 3, 2022; comparisons are with the 13 weeks ended April 4, 2021. All amounts are U.S. dollars. The company operates Krispy Kreme through company-owned shops, franchisees, Delivered Fresh Daily (DFD), e-commerce and delivery, and branded sweet treats. Its three reporting segments are U.S. and Canada, International, and Market Development.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Net revenue | $372.5 million | $321.8 million | Up 15.8%; organic growth was 15.0% |
| Operating income | $17.3 million | $13.7 million | Up 26.4%; operating margin was 4.6% versus 4.3% |
| Consolidated net income/(loss) | $6.5 million | $(0.4) million | Improved by $6.8 million |
| Net income/(loss) attributable to Krispy Kreme, Inc. | $4.0 million | $(3.1) million | Basic and diluted EPS were $0.02 versus $(0.03) |
| Adjusted net income | $16.1 million | $17.6 million | Down 8.8%; non-GAAP measure |
| Adjusted EBITDA | $48.9 million | $46.4 million | Up 5.4%; non-GAAP measure |
| Operating cash flow | $28.4 million | $40.6 million | Down $12.3 million |
| Capital expenditures | $29.5 million | $30.3 million | Investing cash outflow was $26.4 million, versus $63.7 million |
Product sales increased 16.1% to $364.1 million; royalties and other revenue rose 3.1% to $8.5 million. Segment revenue was $253.1 million in U.S. and Canada (up 13.8%), $87.2 million International (up 31.1%), and $32.2 million Market Development (down 1.9%). Organic revenue growth was 9.7%, 35.5%, and 9.5%, respectively.
Product and distribution costs increased to 25.8% of revenue from 24.9%, reflecting commodity and logistics inflation. Operating expenses declined to 45.3% of revenue from 45.8%; SG&A declined to 14.4% from 15.4%. Adjusted EBITDA was approximately 13.1% of revenue, compared with 14.4% in the prior period.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $31.6 million at April 3, 2022, down from $38.6 million at fiscal year-end; including restricted cash, total cash was $32.3 million.
- Long-term debt was $717.4 million on the balance sheet, including $696.0 million principal under the 2019 Facility and $24.8 million of financing obligations, less debt issuance costs. The facility principal comprised a $612.5 million term loan and $83.5 million drawn on the revolver.
- Current liabilities were $495.2 million and current assets were $149.7 million. Structured payables were $132.4 million. The company says its supply-chain financing program has continued to expand, with program payment terms up to 360 days.
- Operating lease liabilities totaled $463.2 million. The company reported a 3.09x covenant-defined Total Net Leverage Ratio, was in compliance with its facility covenants, and said cash and debt facilities should fund operations and capital needs for at least 12 months.
- Operating cash flow fell mainly because of less favorable changes in operating assets and liabilities, particularly lower accounts payable and accrued liabilities. Financing cash flow was a $6.6 million outflow, including $12.5 million of IPO issuance costs.
Material changes and management commentary
- The company added 600 global points of access in the quarter, including 561 DFD Doors, reaching 11,027 total points of access: 1,849 shops and 9,144 DFD Doors. E-commerce represented 17.4% of retail sales.
- Management attributed growth to expansion of the omni-channel Hub and Spoke model, DFD distribution and higher average revenue per DFD Door. Trailing four-quarter Sales per Hub increased to $4.3 million in U.S. and Canada from $4.0 million at fiscal year-end, and to $9.7 million International from $9.1 million.
- Management said pricing actions and Hub and Spoke efficiencies helped offset commodity, logistics and labor inflation. U.S. and Canada Adjusted EBITDA rose 21.9%; International rose 12.4%. International margin was lower year over year, principally because the prior-year quarter included approximately $3.5 million of COVID-related business interruption insurance proceeds.
- Corporate Adjusted EBITDA worsened to $(13.2) million from $(7.4) million, primarily due to costs associated with operating as a public company.
- Management expects DFD expansion to remain a significant earnings-growth driver and aims to enter at least three new countries annually. Franchise agreements were signed for planned openings in Chile, Costa Rica, Jordan and Switzerland in fiscal 2022 or 2023. The filing provides no specific full-year revenue or earnings guidance.
Risks, contingencies and unusual items
- Management highlighted inflation, supply-chain disruption, labor costs, the continuing effects of COVID-19, consumer preferences and execution of the omni-channel strategy as risks. A new exclusive U.S. distribution agreement with BakeMark is expected to cover regions by March 2023; increased reliance on one distributor could disrupt supply if it fails to perform.
- Interest-rate exposure remains on $191.0 million of unhedged facility debt; the company estimated a 100-basis-point LIBOR increase would raise annual interest expense by approximately $1.9 million. It had swaps covering $505.0 million of debt.
- A March 2022 sale-leaseback generated $3.0 million of proceeds and a $2.6 million gain. The prior-year period included the $3.5 million insurance proceeds noted above. Related-party note interest expense of $5.6 million in Q1 2021 did not recur after the notes were repaid in 2021.
- Reported matters include an Insomnia Cookies wage-and-hour class action with a $0.4 million settlement in principle, a reseller arbitration with an outcome and potential loss that the company cannot predict, and a shareholder derivative suit dismissed with prejudice as moot, with attorneys’ fees still to be determined. The company does not expect the latter fees to be material.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic growth, DFD expansion and Sales per Hub continue to translate into durable margins and cash generation amid inflation.
- The impact of extended supplier payment terms and structured payables on working capital and cash flow.
- Debt-service capacity, interest-rate exposure, covenant headroom and liquidity as expansion and capital spending continue.
- Execution and contingency planning under the exclusive BakeMark distribution agreement.
- Progress against international expansion plans and any material developments in the disclosed legal matters.
- Comparability of non-GAAP Adjusted EBITDA and Adjusted Net Income, including the adjustments used; these measures are not GAAP results.