Krispy Kreme, Inc.

Hello, everyone, and thanks for standing by. My name is Ian and I will be your conference operator today. At this time, I'd like to welcome everyone to the Krispy Kreme first quarter 2025 earnings call. I would now like to turn the call over to Alexander Eldridge, Krispy Kreme Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Welcome to Krispy Kreme's first quarter 2025 earnings call. Thank you for joining us today. We will be referencing our earnings press release and presentation during the call. These are available on our investor relations website at investors.crispycream.com. Joining me on the call this morning are President and Chief Executive Officer Josh Charlesworth and Chief Financial Officer Jeremiah Ashokian. After prepared reports, there will be a question and answer session. Before we begin, I would like to remind you that during this call, we will be making forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements of expectations, future events, or future financial performance. Forward-looking statements involve a number of risks, assumptions, and uncertainties, and we caution investors that many factors could cause actual results to differ materially from those contained in any forward-looking statement. These factors and other risks and uncertainties are described in detail in the company's Form 10-K filed with the SEC and in other filings we make from time to time with the SEC. Forward-looking statements made today are only as of today. The company assumes no obligation to publicly update or revise any forward-looking statements except as may be required by law. Additionally, we will be referring to non-GAAP financial measures. Please refer to our earnings press release and presentation on our website for additional information regarding these non-GAAP measures, including a reconciliation to the closest comparable GAAP measures. Jeremiah will take us through our financial performance in a moment, but first, here's Josh.

Thanks, Dre. Good morning, everyone, and thank you for joining us. We remain dedicated to our strategy of transforming into a bigger and better Krispy Kreme. With global brand awareness far exceeding household penetration, we're focused on Krispy Kreme's biggest growth opportunities to reach our long-term goal of 100,000 points of access, namely profitable U.S. expansion and capital-like international franchise growth. However, in this challenging macro environment, we are prioritizing paying down debt and deleveraging our balance sheet, generating positive cash flow and pursuing only profitable growth based on sustainable revenue streams. With our newly restructured leadership team in place, we are well positioned to take swift and decisive action. I will now review the key actions and progress we are making to drive consumer relevance, expand availability, increase hub and spoke efficiency, improve capital efficiency, and inspire engagement. We are taking action to drive consumer relevance and better leverage the power of our iconic brand to deliver profitable growth. We are spotlighting our most beloved and most affordable original-based donut, our strongest point of differentiation. Our original-based donut appeals to value-conscious consumers due to its lower price point and delivers a higher margin. We are already seeing the benefits from this focus, especially as we innovate with our flavored glazes. At the beginning of April, we sold out of our Fruity Pebbles glaze every day, and more flavored glazes are coming through the year. After testing new original-based marketing campaigns, which drove both higher sales and a positive mix shift, we'll now be launching a new multimedia original-based marketing campaign on June 6th, National Donut Day, reminding consumers of that feeling they get when a fresh donut pops off the line. I said last quarter we would offer fewer days on discount as we improve our discount strategy, which we began in Q1, supporting our cash flow and average transaction value, making us better. Our new approach limits discounts to times we can drive demand and create buzzworthy events. In the first quarter, we did this successfully with our Hershey's Chocomania collection, and just yesterday we offered a free original glazed donut for real ID day, relieving the stress from those long DMV lines. As we expand availability, we're taking important actions to become better. This means profitable growth based upon sustainable revenue streams with strategic scale D of D partners where we can deliver higher sales per door, utilize more efficient routes, and present better displays. In the US, we are now present and growing in multiple D of D channels, each with different characteristics and average sales volumes. At one end of the range are club stores, where we now sell unique larger packs at these high-volume shopping destinations, averaging more than $1,000 in fresh doughnut sales per week. We've already started with Costco and have also just begun a new multi-city pilot with Sam's Club. With our mass and grocery customers, we are adding secondary displays to improve display and visibility, These secondary cabinets offer an additional opportunity to showcase our unique, fresh-donor offering and drive incremental sales. During the quarter, we added nearly 100 cabinets, bringing our total to more than 600 in this DFD channel. We're also aiming to increase sales at Walmart, Target, and Kroger with Krispy Kreme recently made available through their e-commerce channels. At the other end of the range are convenience stores QSR doors, where we deliver mostly unpackaged donuts, and they average about $400 sales per week. Assuming only profitable growth with sustainable revenue streams means that we're also choosing to close inefficient doors. These generally consist of lower volume doors with smaller scale regional grocery and convenience store partners. Turning to McDonald's, six months after the national rollout began, we're now more than 2,400 restaurants, Our two companies have partnered closely together during this time to support execution, marketing, and training, delivering a great consumer experience. We are pleased with many aspects of the program. However, we are seeing that after the initial marketing launch, demand drops below our expectations, requiring intervention. To deliver sustainable, profitable growth, we are partnering with McDonald's to increase sales by stimulating higher demand and cutting costs by simplifying operations. At the same time, we are reassessing our deployment schedule together with McDonald's while we work to achieve a profitable business model for all parties. Given this, we do not expect to launch any additional restaurants in Q2. That said, we continue to believe in the long-term opportunity of profitable growth through our U.S. nationwide expansion, including McDonald's. I'd now like to share that we are increasing hub and spoke efficiency by better managing costs to drive profitable growth. We have already begun outsourcing our fresh donut delivery, and we expect that 15% of the network will have been outsourced by the end of May. Service rates are excellent, costs are now predictable, and we're seeing savings over our in-house delivery model. We expect to launch with a second carrier shortly and sign two additional contracts soon. Our goal is to fully outsource U.S. logistics by the middle of next year. This frees up time for our Krispy Kremers to focus on what they do best, serve our consumers and make fresh donuts, simplifying both our DFD and in-shop business. And our new Chief Operating Officer, Nicola Steele, is off to a great start, prioritizing lower costs and reducing waste by focusing on simplifying operations, reducing complexities, and improving drive-through service. She has already improved labor efficiency in the short time she's been in the role. When it comes to better capital efficiency, we are focused on deploying capital to pay down debt and fund profitable growth. As we grow bigger through our U.S. nationwide expansion, we will add production hubs to serve both in-shop guests with our iconic hot light, signaling fresh donuts, as well as profitable DFD customers. We are actively value engineering our footprint to lower costs as we grow. A great example is our new Minneapolis hub, which is under construction. Rather than building from the ground up, we're retrofitting an existing building in a high traffic trade area, which is delivering a 20% savings in capital and real estate costs. The site already includes critical infrastructure like highway access, loading bays, and a drive-through, making it a smart, efficient choice for us. Internationally, we're advancing our capital-like franchise strategy, which we believe is the best way to drive global growth by partnering with strong local operators who bring scale and regional expertise. Just last week, we opened in Brazil, and in the first two days alone, Krispy Kreme's global appeal was on full display with $100,000 in sales, surpassing even our France launch in 2023. We are evaluating opportunities to re-franchise Australia, New Zealand, Japan, Mexico, and the UK and Ireland. Proceeds from these efforts will be used to deliver and strengthen our balance sheet. Our international franchise partners, whether in emerging markets like Brazil and France, or more established ones like Korea and the Middle East, continue to deliver strong results, underscoring the value of local scale master franchise partners. The better execution required to grow bigger demands passion, dedication, and hard work from all Krispy Kremers, and therefore we must inspire engagement across our organization. First, we have upgraded teams at all levels, including internal promotions of our strongest district managers and hired outside talent with deep QSR expertise. Second, we have invested in new technology to measure shop execution. Our shops can now better assess performance and make data-driven decisions to improve quality, service, and efficiency. Third, as we discussed a moment ago, we are simplifying our operations. This frees up time for our Krispy Kremers to focus on the guest's experience. And to better support them, we launched role-based training, new onboarding programs, and a goal-setting and manager review process to support Krispy Kremers' growth within the company. This work has already helped us to improve turnover by over 30% year over year. To accelerate the benefits of all these improvements, we've also launched a new incentive program to support the team to deliver on a bigger and better Krispy Kreme. With that, I'll pass it over to Jeremiah.

Thanks, Josh. As Josh mentioned, we must get better as we grow bigger. As such, we're taking immediate action to improve our financial flexibility Strengthen our balance sheet so that we can deliver positive cash flow, profitable growth, and create shareholder value. We have a clear plan with actions already underway. I will discuss these in more detail after review of our first quarter results. In Q1, net revenue was $375.2 million, which falls within the guidance we provided last quarter and reflects continued growth through our omnichannel model, offset by the sale of insomnia cookies. organic revenue declined 1% largely due to expected consumer softness in a challenging macro environment. Adjusted EBITDA was $24 million with margin of 6.4% driven by the sale of insomnia cookies, reduced organic revenue, costs associated with our U.S. nationwide expansion, and residual cybersecurity impacts. Turning to the U.S. segment, growth in points of access and GFD revenue was more than offset by the aforementioned consumer softness and planned reduction of discount days, resulting in organic revenue decline of 2.6%. Adjusted EBITDA declined to $15.9 million due to softness in our retail segment, the sale of insomnia cookies, costs associated with our U.S. nationwide expansion, and an estimated $5 million of operational inefficiencies related to the 2024 cybersecurity incident. Average revenue per door per week, or APD, was $587, down from the same period one year ago, reflecting the shifting customer mix as we introduced McDonald's. Within our equity-owned international markets, organic revenue grew 1.5% led by growth in Canada, where we see strong results with Costco. Points of access grew 6.3%, reflecting expansion in Australia with cold and BP. We are also seeing international QSR as a promising opportunity and are expanding our test with Hungry Jacks in Australia. Adjusted EBITDA declined $14.9 million with margin of 12.5% due to lower transaction volumes in our retail business impacting operating leverage. Our new management team in the UK is revitalizing the brand's consumer relevance by bringing back family-centric offerings and an updated price-back architecture. Our donuts were recently added to Tesco's meal deal, a great value offering that is delivering consumer buzz. In our most profitable entirely franchise segment market development, organic revenue grew 2.7% by the expansion of our franchise business, including growth in the Middle East and launch of delivered fresh daily through our joint venture in France. Adjusted EBITDA declined 7.2%, driven by the impact of franchise acquisitions in 2024, now reflected in the U.S. segment. Adjusted EBITDA margin improved to 58.1% driven by revenue mix and a greater contribution from international franchisees. Adjusted earnings per share were negative 5 cents in Q1, a decline from prior year driven by expected lower revenue in EBITDA. Cash flow was also impacted by lower earnings. We used $20.8 million in cash for operating activities as we caught up payment delays following the 2024 cybersecurity incident. We expect this to normalize throughout the year. Importantly, we expect to deliver positive operating cash flow in 2025 as we continue to reduce our capital intensity and improve working capital. As I mentioned earlier, we have a clear plan and are taking immediate steps to improve our balance sheet, which I'll discuss in detail now. We're focused on improving financial flexibility, generating positive cash flow, and deleveraging the balance sheet, deploying capital to fund profitable growth, expanding margins through greater operational efficiency and SG&A improvements, and pursuing quality growth based on sustainable, profitable revenue streams. We're committed to deleveraging the balance sheet through working capital initiatives and inorganic opportunities, including re-franchising certain international markets, as Josh mentioned earlier. We have also made the decision to discontinue the quarterly dividend. This decision was made after careful consideration of our capital allocation strategy and we expect this capital to now be used to pay down debt. To improve financial flexibility, we've increased liquidity by amending our term loan in May to add $125 million in capacity, which we expect to use primarily to pay down the revolver. To drive return on invested capital, we are prioritizing the highest returning investments as we value engineer our HUB footprint to lower cost as we grow. To expand margins, We will see SG&A benefits of the restructuring completed in 2024 and are focusing on improving operational efficiency, but at the same time simplifying our portfolio and closing underperforming DFD doors in the U.S. We expect a negative revenue impact of $10 to $15 million in the year, but to immediately deliver margin improvement. As Josh mentioned, pursuing quality growth means scaling with strategic national partners and also focusing on our core offerings. Given the scope of these actions amid macroeconomic softness and uncertainty around McDonald's, we are withdrawing our prior full-year outlook and not updating it at this time. That said, I'll provide some insight into our second quarter expectations, reflecting the actions I just outlined. We expect to deliver revenue of $370 to $385 million and adjusted EBITDA of $30 to $35 million. I am confident that this pivot to driving cash Deleveraging the balance sheet and focusing on profitable growth is the right path forward, and we have the right team in place to ensure we are becoming a better business as we grow into a bigger business. With that, I'll turn it back to Josh for his closing remarks. Thanks, Jeremiah.

We're taking swift and decisive action to deleverage the balance sheet and achieve profitable growth. Through driving consumer relevance by spotlighting our core offerings, expanding availability by focusing on profitable growth based on sustainable revenue streams, increasing hub and spoke efficiency by simplifying operations and outsourcing U.S. logistics, improving capital efficiency by evaluating international re-franchising, and inspiring engagement by strengthening our performance-based culture. Thank you. We will now open it up for Q&A.

We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad to enter the question queue. Once again, that is star followed by the number one. We'll pause for a moment to compile the Q&A roster. Our first question comes from the line of Rahul Krathapali with JPMorgan. Your line is open.

Good morning, guys. Two questions. First, how are you thinking about the CapEx given you're going through this exercise currently and after all the changes for capital reallocation? And then second part, on the McDonald's decision to pause, was it your decision or was it the company's? I'm just trying to understand the dynamics of the demand driven versus your capital exercise driven.

Yes, thanks, Rahul, and good morning. I'll take the first question around CapEx. I think about capital priorities for us across the business, obviously, number one being strengthening the balance sheet, so things like using cash to reduce our reliance on supply chain financing and paying down debt, the second being business reinvestment, which is the core kind of where you were at, or capital. We are not providing a full-year update with respect to CapEx spend. But we are becoming even more disciplined, what I would say, with respect to capital allocation and investing in only things that have the highest return from a capital perspective. We're obviously also looking at the refacing of McDonald's launch to take an opportunity to kind of reduce and adjust spend as we go throughout the year.

Hi, Raoul. Yeah, regarding your second question, overall, you know, we're confident in the profitability expansion of the US by increasing availability and leveraging excess capacity in the system. But it's important that we ensure that we're positioned for profitable growth as we expand, and that includes McDonald's. I remain confident in the long-term national opportunity, but we Need to work together with them to identify levers to improve sales, simplify operations, and once we're positioned for profitable growth, we'll expand further.

Thank you. Our next question comes from the line of Daniel Guglielmo with Capital One Securities. Your line is opened.

Hi, everyone. Thank you for taking my questions. I appreciate that you all are taking a more conservative capital approach, and you mentioned it in your prepared remarks, but how aggressive do you plan to be around pruning underperforming or inefficient locations in the U.S., whether that be hot light or DFT doors?

Hey, Dan. You know, we're super focused this year around driving profitable growth, which includes what you mentioned, rationalizing profitable doors, but also products within our portfolio. As we look forward in the U.S. specifically, we can see us exiting as much as 5% to 10% of doors in our U.S. network, and that's how we're thinking about managing the kind of footprint of doors in the U.S. this year.

Okay. That's really helpful. Thank you. And then on the re-franchising of certain international markets, can you just talk about how that process works high level? And then is there a timeline or certain cash proceeds number that you all are working towards?

Yeah, I mean, first off, we don't need to re-franchise the fuel growth in the U.S. We have ample liquidity. As you mentioned on the call on QBON, we launched a process to re-franchise certain equity-owned international markets. I think it's important to note that these markets all have continued opportunity to grow. And as we think about decapitalizing the business, we know that it's critical to find the right partner to grow the business over the long term in a capital-efficient way. As we're going to take our time to find that partner, what I would say is we'll use any proceeds that we will come across to pay down debt.

Okay, thank you.

Our next question comes from the line of Sarah Senatore with Bank of America. Your line is open.

Hi, good morning. Thanks for the question. This is Isaiah Austin on for Sarah Senatore. Just a question around the McDonald's pause. If there's any difference that you guys could speak to on why you didn't see the fall off in demand just in test markets in Kentucky or with the early launch in Chicago, just You know, franchisees seem pretty bullish at that point. So I just want to see if there's any difference between that and the broader rollout. And also just a question about the profitability issues. Is that exclusively on Krispy Kreme, just giving you guys bare the cost and, you know, buyback on sold donuts? So it kind of seems like the economics for McDonald's are stable in this situation. If there's any color you can give on those two things. Thank you.

Yeah, we're pleased with many aspects of the McDonald's partnership. the execution across all the cities has been very good. Our teams have worked well together to make sure we have awesome fresh donuts readily available. I think it's also important to understand that we need it to be profitable on a sustainable basis over a long term. So really what we're doing working with them is to make sure that the availability and the visibility of the donuts is consistently prominent and that our operations are as simplified and streamlined as they can be. So really our focus through the 2,400 restaurants we're in today is making sure we're positioned for profitable growth before we expand further.

Thank you.

Our next question comes from the line of Andrew Wolf. Your line is open.

Thanks. I just wanted to ask about the $5 million you called out on the inefficiencies related to the cybersecurity. Was that

expected at was that the number you was in your guidance or was that more than expected and secondly uh is that ongoing is that still some of that impact in the car in the second quarter guidance yeah thanks for that thanks for asking andrew i could take that um it was contemplated in the guide that we provided in q1 and it's related to our inability to manage labor and materials efficiently as we're still restoring back uh back of house systems as we went through that um the back of house system piece is now behind us um and we're operating uh much more efficiently than we were in the first uh five to six weeks of the year um and uh and and should be behind us okay uh and secondly on the you know the um the sales per hub being down two percent obviously the distribution points being up

know quite a lot um there's different ways to unpack that but could is that more if you kind of speak to it vis-a-vis you know what you're saying about mcdonald's and uh maybe convenience stores you know diluting the the that number or is it more just driven by you know your average grocery store or walmart or those folks being down you know whatever percent you know their doors their sales per door even though it's you know a healthy business for you being down based on the consumer environment.

I think revenue for the quarter was largely in line with our expectations. I mean, recall the U.S. segment in particular, net revenue was impacted by the sale of insomnia cookies, as that had a kind of a large decline year over year. But when you think about um increased points of access and dfd revenue um being up it was more than offset by consumer softness in our retail channel and also planned reduction in discount days as we look to be more efficient and drive more profitable growth on the business which resulted in the organic revenue decline at 2.6 percent fair enough okay thank you our next question comes from the line of bill chapel with truest securities your wine is opened

Thanks. Good morning. Following up on McDonald's, I guess maybe to clarify the earlier question, was it your decision to stop this cause? Was it McDonald's decision? Was it combined? And then with that in mind, trying to understand over the past few months, I think you've publicly said, hey, this is it's a slow ramp. We expect it to. It is going as expected. I'm trying to figure out, you know, as we get more national advertising, as we get more scale, it will continue to grow. Was it the sales were not working kind of as you expected and they fell off a cliff? Or was it the economics fell off a cliff and said, okay, wait a minute, we're going to lose our shirt if we continue to expand at this level? Just trying to understand kind of where the change came from, too.

I'll start by saying, as with all our customers, we make decisions with them. And so, obviously, we partner with McDonald's to make decisions about rolling out distribution. And so, you know, I very much reinforce that this is something we're working together with them on and appreciate their partnership. Regarding your last point around sales, you know, the sales team, started strong with the local marketing, and then they dropped below what we were expecting once that had passed. We remain confident in the long-term opportunity when you have national distribution, but we really need to make sure that we're positioned for profitable growth before we expand any further. And so we're working with them on ways to drive the sales, and improve costs. I mean, you heard just at the end of the quarter that we've begun outsourcing logistics, for example, to simplify operations. Seen very good early read on that. And that's an example of ways we can work together to make sure we're positioned for profitable growth before we expand further.

Got it. I mean, I guess the question, Most people have today is why if you had a kind of 30 or 60 day pause or a slow down on a three year program, you would make a pause. So I think there's some questions of why that happened so quickly. But I guess related, you know, trying to understand kind of your CapEx spend, because I thought the impression was you needed to spend $25 million a year to build out distribution so you could have the national distribution or build out manufacturing so you have the national distribution. Are those projects now paused as well, or are there shovels in the ground that are being pulled back out? How does that work?

Well, regarding the speed of decision-making, I very much believe that it's important to take decisive action, make decisions that ensure the profitable growth of the business. So it's natural that we would work with McDonald's to make sure that we only expand further when we get that profitable growth. Regarding supporting the network, remember, we are expanding with several scale customers right now. We announced today, for example, we even started a new program with Sam's Club following and starting with Costco late last year. And we continue to see success with a number of national scale customers that we need to support with the network that is now going national. I mentioned earlier on the call, for example, that our Minneapolis hub is currently under construction, and we still expect to open five to seven new production hubs during the course of this year, mainly serving those underserved geographies where our customers, national ones like Target, for example, in Minneapolis can be supported. But do remember, we do have excess capacity in the network, which we're also leveraging Hence, we can make very thoughtful capital allocation choices, be focused on capital efficiency, and overall make sure that we are positioned to deleverage the balance sheet as we drive this profitable growth.

Okay. Thank you.

There are no further questions at this time. I would like to hand the call back over to Josh Charlesworth for some closing remarks.

Well, thank you, everybody, for your interest in Krispy Kreme today. Thank you also to our hardworking Krispy Kremers all over the world who remain dedicated to our strategy of transforming Krispy Kreme into a bigger and better business. We are taking action now to drive profitable growth and deleverage the value chain. Thank you.

This concludes today's call. You may now disconnect.

Thank you.