Krispy Kreme, Inc. — Q3 2021 Form 10-Q
Business context and period. The filing covers the 13 weeks ended October 3, 2021, and year-to-date results for the 39 weeks ended that date, compared with the equivalent 2020 periods. Krispy Kreme operates across U.S. and Canada, International, and Market Development segments using shops, delivered-fresh-daily (DFD) outlets, ecommerce and delivery, and branded products. The company completed its IPO in July 2021.
Key financial results
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Net revenue | $342.8 million | $290.2 million | $1,013.8 million | $796.4 million |
| Organic revenue growth | 6.2% | — | 11.9% | — |
| Operating income | $1.8 million | $0.1 million | $24.6 million | $4.0 million |
| Net loss attributable to Krispy Kreme, Inc. | $(5.7) million | $(14.9) million | $(25.9) million | $(39.0) million |
| Basic and diluted loss per share | $(0.04) | $(0.12) | $(0.20) | $(0.31) |
| Adjusted EBITDA | $41.4 million | $37.8 million | $140.2 million | $103.7 million |
| Adjusted net income | $12.6 million | $11.8 million | $50.7 million | $28.7 million |
Margins and drivers. Q3 operating margin was approximately 0.5% (versus approximately 0.05% in Q3 2020); net loss attributable to the company was 1.7% of revenue (versus 5.1%). Product and distribution costs declined to 26.9% of revenue from 29.4%, as the shift toward DFD improved mix and margins. Operating expenses rose to 45.9% of revenue from 42.0%, with acquisitions and labor costs contributing. Adjusted EBITDA is a non-GAAP measure.
Segment performance. Q3 revenue grew 11.5% in U.S. and Canada, 37.4% in International, and 23.1% in Market Development. International adjusted EBITDA rose 43.4% to $21.7 million; U.S. and Canada was nearly flat at $19.9 million; Market Development declined 3.6% to $9.0 million. Corporate adjusted EBITDA costs increased to $9.2 million from $6.7 million.
Cash flow, balance sheet and debt
- For the first 39 weeks, operating cash flow was $98.8 million, versus $30.8 million in 2020. Investing cash outflow was $116.7 million, including $83.5 million of property and equipment purchases and $33.9 million for acquisitions. Financing cash inflow was $27.4 million.
- At October 3, cash and cash equivalents were $44.9 million; current assets were $164.0 million and current liabilities $493.6 million. The filing says cash and existing debt facilities are expected to cover operating and capital needs for at least 12 months.
- Long-term debt, including its current portion, was $721.3 million, including $70.0 million drawn on the revolving facility; related-party notes had been fully repaid. The $500.0 million IPO-related term loan was also repaid and terminated. The company reported a 3.19x covenant-defined net leverage ratio and compliance with covenants.
- The company reported $108.97 million of structured payables at quarter end and described extended vendor-payment terms under its supply-chain financing program. Operating lease liabilities totaled approximately $440.3 million.
Material changes and unusual items
- Revenue increased 18.1% in Q3 and 27.3% year to date. Acquired shops contributed about $32.5 million of Q3 product-sales growth and $104.8 million year to date. Q3 organic growth was led by International and Market Development; U.S. and Canada organic revenue declined 2.3%, primarily due to a $22.8 million reduction from exiting legacy wholesale products. Excluding that impact, management reported U.S. and Canada organic growth of 8.9%.
- IPO transactions brought total net proceeds to $514.9 million, including the over-allotment. The company used IPO-related financing to repay debt and also repurchased shares; year-to-date financing cash flows included $138.5 million of common-stock repurchases and $42.3 million of shareholder distributions. A $0.035-per-share dividend was declared in Q3, payable in Q4.
- Year-to-date income tax expense was $8.3 million despite a pretax loss, primarily reflecting the U.K. deferred-tax revaluation following a future tax-rate increase and IPO-related disallowed executive compensation.
- Q3 included $4.0 million of IPO-related expenses; management said certain costs were not expected to recur in future quarters. Year-to-date other income included approximately $3.5 million of one-time COVID-19 business-interruption insurance proceeds.
Outlook, commentary and risks
The filing provides no quantified full-year revenue, earnings, or cash-flow guidance. Management expects continued growth in points of access and the DFD network, describing DFD expansion and higher average revenue per DFD door as important growth and profitability drivers. The company had more than 10,000 global points of access at quarter end, including 8,242 DFD doors. Management cited International markets’ recovery and the potential for further benefit from the Hub-and-Spoke model.
Management reported commodity inflation, labor-market and wage pressures, supply challenges in the Branded Sweet Treat Line, and ongoing COVID-19 disruptions in some markets. Price increases on fresh doughnuts took effect at the end of Q3. Other exposures include foreign currency movements and variable interest rates; $505 million of $700 million in facility borrowings was hedged with interest-rate swaps. The company warned that failure to meet debt covenants could restrict borrowing or trigger acceleration. It reported no material change to previously disclosed risk factors.
In litigation, the TSW reseller arbitration outcome and any potential loss could not be predicted. Insomnia Cookies reached a settlement in principle of $0.4 million in a wage-related class action, subject to documentation and court approval. A separate K 2 Asia matter had exhausted and lost appellate review. On October 4, after quarter end, the company acquired a 60% controlling interest in ten Canadian franchise shops for approximately $14.7 million.
Important facts for investors to verify
- Whether organic growth, DFD-door expansion, and average revenue per door continue after accounting for legacy wholesale exits, acquisitions, and foreign-exchange effects.
- Whether operating costs—especially labor, commodities, and public-company costs—allow revenue growth to translate into sustained GAAP operating profit and cash generation.
- Debt, covenant headroom, revolving-credit availability, and the scale and terms of structured payables and extended vendor-payment arrangements.
- The sustainability of adjusted EBITDA and adjusted net income, including the company’s recurring use of non-GAAP adjustments.
- The performance and integration of the Canadian shops acquired after quarter end, and the eventual outcome of the TSW arbitration and wage-settlement approval.