Krispy Kreme, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. The filing covers the 13 weeks and 26 weeks ended July 4, 2021, compared with the equivalent periods ended June 28, 2020. Krispy Kreme operates through company shops, fresh-delivery outlets, ecommerce and delivery, branded packaged treats, and franchise operations. Its three reporting segments are U.S. and Canada, International, and Market Development. The company completed its IPO on July 1, 2021; its shares began trading on Nasdaq as DNUT.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | First two quarters 2021 | First two quarters 2020 |
|---|---|---|---|---|
| Net revenue | $349.2 million | $245.0 million | $671.0 million | $506.2 million |
| Operating income (loss) | $9.1 million | $(0.6) million | $22.8 million | $3.8 million |
| Net loss | $(15.0) million | $(11.7) million | $(15.4) million | $(22.6) million |
| Net loss attributable to Krispy Kreme, Inc. | $(17.1) million | $(12.6) million | $(20.2) million | $(24.1) million |
| Adjusted EBITDA | $52.4 million | $29.5 million | $98.8 million | $65.9 million |
| Adjusted net income | $20.5 million | $5.8 million | $38.1 million | $16.9 million |
Q2 revenue rose 42.5%; management reported organic revenue growth of 22.5%. Q2 Adjusted EBITDA margin was 15.0%, up 300 basis points year over year. Product and distribution costs declined to 24.3% of revenue from 28.1%, while operating expenses increased to 45.2% from 42.5%. Company-reported diluted loss per share was $0.13, versus $0.10 a year earlier. Adjusted EBITDA and adjusted net income are non-GAAP measures.
Q2 segment revenue was $230.9 million in U.S. and Canada, $89.2 million International, and $29.0 million Market Development. Segment Adjusted EBITDA was $28.3 million, $23.7 million, and $9.9 million, respectively, before $9.4 million of corporate costs. International results benefited from recovery from COVID-19 restrictions in the prior-year quarter.
Cash from operations for the first two quarters was $56.8 million, versus $13.9 million; investing cash outflow was $86.3 million, including $52.8 million of property and equipment purchases and $33.9 million for acquired shops and franchise rights. Financing provided $30.6 million. Cash and cash equivalents were $37.4 million at July 4, 2021.
At July 4, 2021, reported debt included $500.0 million under a short-term term loan and $643.8 million outstanding under the 2019 Facility; related-party notes had been repaid. The balance sheet also included $437.7 million of operating lease liabilities. The IPO’s $459.7 million net proceeds were received after quarter-end and recorded as a subscription receivable at July 4. On July 7, the company repaid and terminated the $500.0 million term loan. It subsequently drew and repaid amounts on the 2019 revolving facility; the revolver balance was $40.0 million as of August 9. Management stated that available cash and debt facilities should fund operating and capital needs for at least 12 months.
Material changes and management commentary
- Revenue growth reflected expanded fresh points of access, DFD growth, ecommerce, acquisitions, and comparison with COVID-affected 2020 results. The company reported 9,575 global points of access at quarter-end, including 7,849 DFD doors.
- For the first two quarters, organic revenue growth was 15.2%. Growth was partly offset by the continued transition away from legacy wholesale products and channels.
- Cost of sales improved as a share of revenue, but operating expenses rose with acquired shops, new openings, labor investment, delivery routes, and reopening-related overtime and training.
- IPO preparation, share-based compensation, and acquired-shop expenses contributed to higher SG&A. Q2 also included $6.7 million of IPO-related expenses; first-half IPO-related expenses were $10.2 million.
- First-half other income included approximately $3.5 million of one-time COVID-19 business-interruption insurance proceeds in the U.K./Ireland. Income tax expense included the U.K. deferred-tax revaluation following a planned 2023 tax-rate increase and nondeductible IPO-related executive compensation.
Outlook, risks, and contingencies
The filing provides no quantified revenue or earnings guidance. Management expects to continue expanding DFD, ecommerce, delivery, and the Hub-and-Spoke model, and expressed confidence in continued Branded Sweet Treat Line growth. It also expects higher operating costs from commodities and shop labor in the second half of fiscal 2021, and higher SG&A as a public company, including compliance, insurance, investor-relations, and share-based compensation costs.
Key risks include renewed COVID-19 restrictions, labor and commodity-cost inflation, foreign-exchange movements, and variable interest rates. At July 4, $505.0 million of 2019 Facility debt was hedged; the company reported a 2.92-to-1.00 net leverage ratio and compliance with facility covenants. The supply-chain financing program permits vendor payment terms of up to 360 days. Contingencies include an employee-wage class action with a $0.4 million settlement in principle, a reseller arbitration with an outcome and potential loss not predictable, and other litigation; the company did not consider the disclosed matters likely to have a material adverse effect.
Important facts for investors to verify
- Reconcile the post-quarter IPO proceeds, over-allotment proceeds, executive share repurchases, distributions, and subsequent debt repayments to cash and outstanding share count.
- Assess whether organic growth and margin performance persist after the unusually COVID-affected 2020 comparison period, and monitor the shift from legacy wholesale to DFD.
- Review debt, lease obligations, revolving-facility usage, covenant headroom, and the extended vendor-payment terms in the supply-chain financing program.
- Evaluate the sustainability of Adjusted EBITDA and adjusted net income in light of the company’s exclusions, including recurring share-based compensation and IPO or other adjustment items.
- Track labor, commodity, currency, and COVID-19 developments, as well as the status and potential exposure of the disclosed legal matters.