Krispy Kreme, Inc. — Q2 2023 Form 10-Q
Business context and period. Krispy Kreme operates an omni-channel doughnut and cookie business through company shops, Delivered Fresh Daily (DFD) retail outlets, ecommerce and delivery, and franchisees. The filing covers the 13-week quarter ended July 2, 2023, and the first 26 weeks of fiscal 2023; comparisons are to the corresponding periods ended July 3, 2022.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | First 26 weeks 2023 | First 26 weeks 2022 |
|---|---|---|---|---|
| Revenue | $408.9 million (+9.0%) | $375.2 million | $827.8 million (+10.7%) | $747.8 million |
| Organic revenue growth | 11.4% | Not stated here | 12.9% | Not stated here |
| Operating income | $5.6 million (1.4% margin) | $7.5 million (2.0%) | $20.6 million (2.5%) | $24.8 million (3.3%) |
| Net income/(loss) | $0.1 million | $(2.4) million | $1.7 million | $4.1 million |
| Net income/(loss) attributable to Krispy Kreme, Inc. | $0.2 million | $(3.8) million | $(0.1) million | $0.2 million |
| Adjusted EBITDA | $48.8 million (+3.1%) | $47.4 million | $103.7 million (+7.8%) | $96.3 million |
| Net interest expense | $12.1 million (+59.0%) | $7.6 million | $24.1 million (+61.0%) | $14.9 million |
Q2 Adjusted EBITDA margin was approximately 11.9%, versus 12.6% a year earlier. For the first 26 weeks, it was approximately 12.5%, versus 12.9%. Adjusted Net Income, Diluted was $11.4 million in Q2, down 13.1%, and $26.7 million for the first 26 weeks, up 1.3%; Adjusted EPS was $0.07 and $0.16, respectively. These are non-GAAP measures.
Cash and debt. Operating cash flow was $46.3 million for the first 26 weeks, down from $53.9 million. Capital expenditures were $54.3 million; net cash used in investing was $44.1 million. Cash and cash equivalents were $26.6 million at July 2, 2023, down from $35.4 million at fiscal year-end. The company reported $825 million principal outstanding under its new facility ($700 million term loan and $125 million revolver drawn); total debt carrying value, including finance leases and net of issuance costs, was $855.2 million. The $300 million revolver therefore had $175 million undrawn. The facility matures in March 2028. Leverage under the credit agreement was 3.76x against a maximum of less than 5.00x; the company reported covenant compliance.
Current assets were $159.3 million and current liabilities $446.7 million. Vendor finance program liabilities totaled $183.2 million, down from $263.0 million at January 1, 2023. Management said existing cash and debt facilities should fund operating and capital needs for at least 12 months, while noting that actual needs and financing availability depend on business conditions and spending.
Material changes and operating trends
- Revenue growth reflected expanded points of access, DFD, ecommerce and delivery, pricing, and international franchise performance. Global points of access reached 12,872, including 10,796 DFD doors; the company added 462 in Q2.
- U.S. Q2 revenue increased 9.3% and segment Adjusted EBITDA increased 16.3%, with margin expansion to 10.5%. International revenue rose 4.8%, but segment Adjusted EBITDA declined 0.4% and margin fell to 19.8%, amid inflation and softer transaction volume. Market Development revenue rose 17.4% and segment Adjusted EBITDA rose 27.3%, with margin expansion to 36.5%.
- For the first 26 weeks, U.S. and Market Development segment Adjusted EBITDA increased 17.8% and 31.6%, respectively; International segment Adjusted EBITDA fell 10.2%. Corporate Adjusted EBITDA expenses increased 30.5% year over year.
- Product and distribution costs rose faster than revenue: to 27.2% of revenue in Q2 from 26.8%, and to 27.7% for the first 26 weeks from 26.3%. SG&A also increased as a share of revenue, attributed partly to global leadership investments. Higher interest expense reflected higher benchmark rates and more unhedged debt.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear numeric full-year revenue or earnings guidance value. Management expects to open in at least five new countries in fiscal 2023 and sees DFD growth, including higher average revenue per door, as an important earnings-growth driver.
- The company decided to exit its pre-packaged Branded Sweet Treats business, which management said diluted margins and generated approximately $36 million of fiscal 2022 revenue. Exit-related costs were approximately $17.8 million for the first 26 weeks, including inventory write-offs, impairments and severance; inventory write-offs were $10.2 million.
- A sale-leaseback generated a $9.6 million gain in the first 26 weeks, helping offset operating income pressure. The period also included a discrete tax benefit and recognition of previously unrecognized tax benefits; the reported tax benefit was $7.6 million in Q2 and $7.2 million for the first 26 weeks.
- Risks and headwinds include commodity, labor and logistics inflation; softer transaction volumes in some markets; foreign exchange exposure; variable-rate debt costs; and dependence on third-party systems. A third-party point-of-sale provider outage disrupted the first part of Q2. Management also noted higher near-term Insomnia Cookies product costs.
- An employee lawsuit alleges violations of the Illinois Biometric Information Privacy Act. The company says it will defend the claims; it cannot predict the outcome or any potential loss. The filing also identifies broader data privacy and security compliance risks.
Important facts for investors to verify
- Whether organic revenue and points-of-access growth translate into sustained GAAP operating profit and margin improvement, particularly given cost inflation and transaction trends.
- How much of Adjusted EBITDA and reported earnings depends on exclusions, discrete tax benefits, the sale-leaseback gain, and costs associated with the Branded Sweet Treats exit.
- Debt, interest-rate exposure, liquidity and covenant headroom: $320 million of the $825 million facility principal was unhedged, and management estimated a 100-basis-point SOFR increase would add $3.2 million of annual interest expense.
- Progress in reducing vendor-finance obligations and the implications of extended supplier payment terms and working-capital movements for cash generation.
- Developments in the BIPA litigation, point-of-sale system reliability, and data privacy and security risks.