Krispy Kreme, Inc. — Q1 2024 Form 10-Q
Reporting period: 13 weeks ended March 31, 2024; comparable period was 13 weeks ended April 2, 2023. Unaudited results. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Krispy Kreme operates an omni-channel doughnut and cookie business across company shops, Delivered Fresh Daily (DFD) retail locations, digital channels, and franchises. Its three reportable segments are U.S., International, and Market Development. The company realigned segment reporting in 2024, moving company-owned Canada and Japan operations from Market Development to International; prior-period segment figures were restated.
Financial results and year-over-year changes
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total net revenue | $442.7 million | $419.0 million | +5.7%; organic growth 6.7% |
| Operating income | $11.9 million | $14.9 million | -20.3% |
| Operating margin | 2.7% | 3.6% | -0.9 percentage points |
| Net income/(loss) | $(6.7) million | $1.6 million | Turned to loss |
| Net loss attributable to Krispy Kreme, Inc. | $(8.5) million | $(0.3) million | Loss widened |
| Diluted GAAP loss per share | $(0.05) | $0.00 | |
| Adjusted EBITDA | $58.2 million | $54.9 million | +5.9% |
| Adjusted diluted net income | $11.3 million | $15.3 million | -25.8% |
| Operating cash flow | $(17.7) million | $10.4 million | Cash use increased |
| Capital expenditures | $29.1 million | $26.6 million |
Revenue growth reflected increased points of access, pricing, digital sales, and brand activations. U.S. revenue rose 5.2% (7.4% organic), International rose 11.4% (9.8% organic), and Market Development declined 14.1%, mainly due to timing of franchise mix and equipment sales and Middle East softness. Product and distribution costs fell to 24.2% of revenue from 28.1%, benefiting from the exit of the lower-margin Branded Sweet Treats business and comparison with prior-year inventory write-offs and severance. Offsetting pressures included higher operating costs, SG&A, marketing, and depreciation and amortization. Interest expense rose 14.6% to $13.7 million, primarily due to higher debt and rates on unhedged variable-rate debt.
Adjusted EBITDA is a non-GAAP measure and increased despite the decline in GAAP earnings. Company-defined adjustments include strategic initiatives, share-based compensation, and other items; investors should review the reconciliation and consider GAAP results alongside it.
Liquidity, debt, and capital
- At March 31, cash and cash equivalents were $33.1 million, versus $38.2 million at December 31, 2023; total current assets were $174.0 million and current liabilities were $490.1 million.
- Long-term debt, including finance lease obligations and net of debt issuance costs, was $942.1 million; $60.3 million was classified as current. Principal outstanding under the 2023 Facility was $881.3 million, compared with $837.5 million at year-end. The company also had $17.0 million drawn on short-term lines of credit.
- The facility leverage ratio was 3.75x, up from 3.48x at fiscal year-end; the company reported compliance with its 5.00x maximum covenant and expects compliance over the next 12 months.
- Cash used in operations was attributed mainly to intentional reductions in supply-chain financing obligations and the absence of prior-year proceeds from settling interest-rate swaps. Financing provided $43.6 million, including facility draws. Cash, cash equivalents, and restricted cash ended at $33.6 million.
- Management believes cash and debt facilities will fund operating and capital needs for at least 12 months, while cautioning that actual needs may differ and additional financing may be required. Fiscal 2024 capital expenditures are expected to be 7%–8% of revenue; accelerated U.S. expansion could raise capital outflows in 2025 and 2026.
Outlook, commentary, risks, and unusual items
- The company added 667 Global Points of Access in Q1, reaching 14,814, including 12,529 DFD Doors. Digital sales were a record 23.0% of Doughnut Shop and Cookie Bakery sales, excluding DFD, versus 19.6% a year earlier.
- A U.S. national McDonald’s rollout is expected to phase through the end of fiscal 2026, following a pilot. The agreement sets a deployment schedule but does not guarantee any level of deployment, sales, or profits. Management expects DFD expansion to be an important earnings-growth driver.
- Management expects entry into three to five new countries in fiscal 2024; agreements have been reached with franchise partners in Brazil and Germany. These are forward-looking plans, not guaranteed outcomes.
- Interest-rate swaps covering $505.0 million of debt are scheduled to mature in June 2024; the company was evaluating whether to extend them. A 100-basis-point change in one-month SOFR was estimated to change annual interest expense by approximately $3.9 million on the then-unhedged debt.
- Foreign-currency translation, commodity inflation, labor costs, transaction-volume softness, consumer preferences, and execution of the omni-channel strategy are relevant risks. A 10% exchange-rate movement across specified major currencies was estimated to change quarterly revenue by approximately $12.5 million.
- Q1 included $4.8 million of strategic-initiative costs, primarily transformation, consideration of strategic alternatives for Insomnia Cookies, and McDonald’s rollout preparation. Q1 2023 included a $9.7 million sale-leaseback gain and costs associated with exiting Branded Sweet Treats, affecting comparisons.
- Income tax expense was $4.3 million despite a pretax loss; the reported effective tax rate was -177.5%, with the company citing executive compensation disallowances, jurisdictional income mix, and noncontrolling interests. The Illinois biometric privacy lawsuit had an immaterial accrual; management does not expect it or other disclosed legal matters to materially affect results.
- The company reported no material changes to its previously disclosed risk factors and concluded disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether revenue and DFD growth translate into sustained GAAP profitability, margins, and operating cash generation, particularly given weaker transaction volumes in some markets.
- Actual investment, deployment pace, sales, and returns from the McDonald’s rollout; the agreement guarantees no particular business outcome.
- Debt trends, facility availability, covenant headroom, and refinancing or rate exposure when the June 2024 swaps mature.
- Whether expected fiscal 2024 capital expenditures remain within 7%–8% of revenue and how accelerated expansion affects 2025–2026 cash needs.
- The composition and recurrence of non-GAAP adjustments, strategic-initiative spending, tax effects, and vendor-finance obligations.