Krispy Kreme, Inc. — Q3 2023 Form 10-Q
Business context and period. Krispy Kreme operates doughnut shops, fresh-delivery outlets and ecommerce and delivery channels, alongside Insomnia Cookies. This filing covers the 13-week quarter ended October 1, 2023, and the first 39 weeks of fiscal 2023; comparisons are with the same periods of 2022. Unless stated otherwise, dollar figures below are in millions.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First 3 quarters 2023 | First 3 quarters 2022 |
|---|---|---|---|---|
| Net revenue | $407.4 | $377.5 | $1,235.2 | $1,125.3 |
| GAAP net loss | $(40.3) | $(11.8) | $(38.5) | $(7.8) |
| Net loss attributable to Krispy Kreme | $(40.5) | $(13.1) | $(40.5) | $(12.9) |
| Adjusted EBITDA | $43.7 | $38.5 | $147.5 | $134.8 |
| Operating income/(loss) | $(2.1) | $(1.0) | $18.5 | $23.8 |
| Interest expense, net | $12.8 | $8.9 | $36.9 | $23.8 |
| Cash from operating activities | Not separately provided | Not separately provided | $44.0 | $70.7 |
| Capital expenditures | Not separately provided | Not separately provided | $88.6 | $75.0 |
Q3 revenue rose 7.9% (organic growth 9.6%), while Adjusted EBITDA increased 13.5%. Q3 operating margin was approximately negative 0.5%; Adjusted EBITDA margin was approximately 10.7%, versus 10.2% a year earlier. For the first three quarters, revenue grew 9.8% (organic growth 11.8%), but operating income fell 22.3% and the company reported a larger net loss. GAAP diluted loss per share was $0.24 in Q3 and $0.24 year to date, compared with $0.08 in each prior-year comparable period. Adjusted diluted EPS was $0.03 for Q3 and $0.18 year to date.
At October 1, cash and cash equivalents were $25.7, down from $35.4 at January 1; total cash including restricted cash was $26.1. Current assets were $160.1 and current liabilities $525.0. Debt on the balance sheet was $870.9, including finance lease obligations and net of debt issuance costs; the company separately reported $834.3 of principal under its 2023 credit facility and $1.5 drawn on short-term lines. Long-term debt, net of current portion, was $827.4. Operating lease liabilities totaled $491.1.
Material changes and operating developments
- Revenue growth reflected pricing, expanded points of access, ecommerce and delivery, and DFD network growth. Krispy Kreme added 522 Global Points of Access in Q3, reaching 13,394, including 11,249 DFD doors.
- Product and distribution costs fell to 24.9% of Q3 revenue from 27.2%, helped by slower materials inflation and the exit of the lower-margin Branded Sweet Treats business. Operating expenses rose to 48.0% of revenue from 47.0%; SG&A increased to 16.8% from 14.5%, reflecting labor costs, growth investments, performance compensation and share-based compensation.
- U.S. Q3 Adjusted EBITDA rose 8.8%, with margin up 30 basis points to 8.6%. International Adjusted EBITDA rose 17.3%, with margin up 30 basis points to 20.2%. Market Development Adjusted EBITDA rose 13.3%, with margin up 220 basis points to 32.6%.
- For the first three quarters, U.S. Adjusted EBITDA increased 15.4%; International decreased 1.1%, with margin down 170 basis points to 18.5%; and Market Development increased 25.7%. Higher corporate costs weighed on consolidated performance.
- Operating cash flow declined by $26.7 year over year to $44.0. The filing cites the larger net loss and reduced balances in supply-chain financing as factors. Investing cash outflow was $78.4, including $88.6 of property and equipment purchases. Financing provided $27.5, including increased credit-facility borrowings.
Outlook, risks and unusual items
- The filing provides no numerical revenue, earnings or cash-flow guidance. Management expects existing cash and debt facilities to support operating and capital needs for at least the next 12 months, while noting that actual requirements may differ and additional financing may be needed.
- Management highlighted continued Hub-and-Spoke and DFD expansion, pricing and international growth. It said DFD growth is expected to be a significant earnings-growth driver. McDonald’s collaboration discussions were advanced, but expansion was not finalized.
- The company exited its pre-packaged Branded Sweet Treats business, citing margin dilution and a desire to focus on fresh doughnuts. The business generated about $36 million of fiscal 2022 revenue. Exit-related costs totaled about $18.1 million in the first three quarters of 2023, including inventory write-offs and impairments.
- Q3 income tax expense was $24.4 despite a pretax loss of $15.9; the filing cites jurisdictional income mix, professional and transaction costs, and tax items. Year-to-date tax expense was $17.1 on a pretax loss of $21.4. A $9.6 sale-leaseback gain and business-interruption insurance recoveries also affected reported results.
- In March 2023, the company refinanced its debt with a $700 million term loan and a $300 million revolving facility, maturing in March 2028. Borrowings bear floating SOFR-based rates; the unhedged rate was 7.42% at quarter end. Of $834.3 million facility principal, $505 million was hedged. Leverage under the credit agreement was 3.81x, below the required maximum of 5.00x; the company reported covenant compliance.
- Risks include interest-rate exposure, commodity and labor inflation, foreign exchange movements, transaction softness, and substantial lease and debt obligations. Management estimated that a 100-basis-point SOFR increase on the unhedged balance would increase annual interest expense by about $3.3 million. A 10% currency-rate move across specified currencies would change year-to-date revenue by about $35.9 million.
- On October 3, the company announced it was exploring strategic alternatives for Insomnia Cookies, including a possible sale; evaluation was ongoing at filing issuance. An employee lawsuit alleges violations of Illinois biometric privacy law; management intends to defend it and does not expect a material financial impact.
Important facts for investors to verify
- Whether organic revenue growth and points-of-access expansion translate into sustained transaction growth and GAAP profitability.
- How Branded Sweet Treats exit costs, labor and product-cost pressures, and Insomnia Cookies’ higher product costs affect future margins.
- Debt balances, interest-rate hedging, covenant headroom, and the effect of vendor-financing changes on operating cash flow and liquidity.
- Any decision and financial-reporting consequences from the strategic review of Insomnia Cookies.
- The size and timing of unusual tax items, sale-leaseback gains, and other adjustments included in non-GAAP results.