Krispy Kreme, Inc. — Q1 2023 Form 10-Q
Reporting period: 13 weeks ended April 2, 2023; comparative period was the 13 weeks ended April 3, 2022. Financial statements are unaudited. Unless noted otherwise, amounts are in U.S. dollars.
Business context
Krispy Kreme operates an omni-channel doughnut and cookie business through Company-owned shops, Delivered Fresh Daily (DFD) outlets, e-commerce and delivery, and franchises. It reported U.S., International, and Market Development segments. The company added 573 Global Points of Access in the quarter, reaching 12,410, including 10,390 DFD doors.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $419.0 million | $372.5 million | +12.5%; organic growth 14.4% |
| Operating income | $14.9 million | $17.3 million | -13.5% |
| Operating margin | 3.6% | 4.6% | -1.0 percentage point |
| Consolidated net income | $1.6 million | $6.5 million | -74.5% |
| Net income attributable to Krispy Kreme, Inc. | Loss of $0.3 million | Income of $4.0 million | Declined $4.3 million |
| Adjusted EBITDA (non-GAAP) | $54.9 million | $48.9 million | +12.3% |
| Adjusted net income, diluted (non-GAAP) | $15.3 million | $13.2 million | +15.5% |
| Operating cash flow | $10.4 million | $28.4 million | Down $18.0 million |
| Capital expenditures | $26.6 million | $29.5 million | Down $2.9 million |
Revenue growth reflected access-point expansion, e-commerce and delivery, DFD growth, pricing, and strength in Insomnia Cookies and franchise markets. Product and distribution costs rose to 28.1% of revenue from 25.8%, reflecting inflation and costs associated with exiting Branded Sweet Treats. Operating expenses were 45.7% of revenue versus 45.3%. Interest expense increased 63.1% to $12.0 million, primarily due to higher benchmark rates on unhedged variable-rate debt.
Segment Adjusted EBITDA was $38.5 million in the U.S. (+18.9%), $13.6 million International (-21.3%), and $17.0 million in Market Development (+35.9%); corporate costs were $14.1 million. Management cited Hub-and-Spoke efficiencies in the U.S. and Market Development, while international segment results were pressured by inflation.
Balance sheet, debt and liquidity
- At April 2, 2023, cash and cash equivalents were $29.7 million, down from $35.4 million at January 1, 2023. Total assets were $3.145 billion and total liabilities were $1.838 billion.
- Long-term debt, including current portion and finance leases, was $817.2 million net of debt issuance costs; principal outstanding under the new credit facility was $790.0 million. The facility includes a $700 million term loan and $300 million revolving facility, with $90 million drawn on the revolver.
- The March 2023 refinancing extended maturity from June 2024 to March 2028 and moved the benchmark to SOFR. The company reported a 3.56-to-1.00 leverage ratio and compliance with its covenants; the facility’s ongoing maximum leverage test is 5.00-to-1.00.
- Vendor finance program liabilities totaled $216.9 million, including $139.1 million in accounts payable under supply-chain financing and $77.7 million in structured payables. Management said cash and available debt facilities should fund operating and capital needs for at least 12 months, while noting that actual needs and access to additional financing are uncertain.
- Cash, cash equivalents, and restricted cash declined $5.6 million during the quarter. Operating cash flow was reduced by working-capital movements, including lower accounts payable and accrued liabilities, as the company reduced balances under supply-chain financing. Financing cash flow included substantial debt issuance and repayment activity related to refinancing and vendor finance obligations.
Material changes, outlook and risks
- The company decided to exit its pre-packaged Branded Sweet Treats business, which management said diluted margins and diverted focus from fresh doughnuts. The business generated about $36 million of fiscal 2022 revenue. Q1 included approximately $13.4 million of related strategic-initiative costs, including inventory write-offs, impairments, severance, and other costs.
- A $9.7 million sale-leaseback gain helped offset reported expenses; the transaction generated $10.0 million in proceeds. The prior-year quarter included a $2.6 million sale-leaseback gain.
- Management expects DFD expansion and average revenue per door growth to remain important earnings drivers, and expects to open in at least five new countries in fiscal 2023. It also reported U.S. DFD average revenue per door increased 8% year over year. These are expectations, not guaranteed results; the filing does not provide a specific full-year financial guidance range.
- Risks highlighted include commodity, labor and logistics inflation; higher interest rates; foreign-exchange movements; execution of the omni-channel strategy; and the ability to maintain covenant compliance and liquidity. A 100-basis-point increase in one-month SOFR was estimated to add $2.9 million to annual interest expense on the unhedged debt balance at quarter-end.
- An employee filed a putative class action alleging violations of the Illinois Biometric Information Privacy Act. The company said it would defend the case but could not predict the outcome or estimate any potential loss. The filing also identifies data privacy and security compliance as a risk. Management reported disclosure controls were effective as of quarter-end.
Investor verification priorities
- Track whether revenue growth converts into stronger GAAP operating income, margins, and operating cash flow, particularly after Branded Sweet Treats exit costs.
- Verify the pace and profitability of DFD-door expansion, including performance of the McDonald’s test locations and the Hub-and-Spoke model.
- Monitor debt, interest expense, leverage and covenant headroom, alongside the company’s use of supply-chain financing and structured payables.
- Assess whether inflation, pricing actions, and international cost pressures improve or further compress segment margins.
- Follow the resolution and potential financial exposure of the Illinois biometric privacy litigation and any other material contingencies.