Q1 2025 Krispy Kreme Inc Earnings Call

Ian: Hello everyone and thanks for standing by, my name is Ian and I will be your conference operator today.

Speaker Change: At this time, I'd like to welcome everyone to the Krispy Kreme first quarter 2025 earnings call

Ian: I would now like to turn the call over to Alexander Eldredge, Krispy Kreme Investor Relations. Please go ahead.

Ian: 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 dot Krispy Kreme dot com.

Speaker Change: Joining me on the call this morning are President and Chief Executive Officer, Josh Charlesworth and Chief Financial Officer, Jeremiah Ashukian. After prepared works, there will be a question and answer

Speaker Change: Before we begin, I would like to remind you that during this call we will be making forward-looking statements pursuant to the Safe Harbour provisions of the Private Security's Litigation Reform Act of 1995, including statements of expectations, future events or future financial performance.

Speaker Change: 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 statements.

Speaker Change: These factors and other risks and uncertainties are described in detail in the company's form 10k filed with the SEC and in other filings we made from time to time with the SEC.

Speaker Change: 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.

Speaker Change: 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 .

Speaker Change: Jeremiah will take us through our financial performance in a moment, but first, here's Josh.

Josh Charlesworth: Thanks, Stray. Good morning, everyone and thank you for joining us.

Josh Charlesworth: We remain dedicated to our strategy of transforming into a bigger and better Krispy Kreme.

Josh Charlesworth: With Global Brand Awareness, Far Exceeding Household Penetration, we are 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.

Josh Charlesworth: With our newly restructural leadership team in place, we are well positioned to take swift and decisive action.

Josh Charlesworth: I will now review the key actions and progress we are making to drive consumer relevance.

Improved Capital Efficiency, and Inspired Engagement.

Josh Charlesworth: We are taking action to drive consumer relevance and better leverage the power of our iconic brand to deliver profitable growth.

Josh Charlesworth: We are spotlighting our most beloved and most affordable, original base donor, our strongest point of differentiation.

Josh Charlesworth: Our original base, Donna, feels to value conscious consumers due to its lower price point and delivers a higher margin.

Josh Charlesworth: 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.

Josh Charlesworth: After testing new, original-guased marketing campaigns which drove both higher sales and a positive makeshift, will now be launching a new multimedia, original-guased marketing campaign on June 6th, National Donut Day. Reminding consumers of that feeling they get from a fresh donut, pull off the lines.

Josh Charlesworth: I said last quarter we would offer fewer days on discount as we improve on discount strategy, which we began in Q1, supporting our cash flow and average transaction value and making

Josh Charlesworth: By new approach, limits discounts to times we can drive demand and create buzzworthy events.

Josh Charlesworth: In the first quarter, we did the successfully with our Hershey's Chocomany collection, and just yesterday we offered a free original glazed doughnut for real ID day, relieving the stress from those long DMV lights.

Josh Charlesworth: As we expand availability, we are taking important actions to become better.

Josh Charlesworth: This means profitable growth based upon sustainable revenue streams with strategic, scaled-DFD partners where we can deliver higher sales per door, utilize more efficient routes, and present better displays.

Josh Charlesworth: In the U.S., we are now present and growing in multiple D.F.D. channels, each with different characteristics

Josh Charlesworth: A 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 donut sales per week.

Josh Charlesworth: We've already started with Costco and have also just begun a new multi-sisterly pilot with Sam's Club.

Josh Charlesworth: 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.

Josh Charlesworth: During the quarter, we added nearly 100 cabinets, bringing our total to more than 600 in this DFD channel.

Josh Charlesworth: We're also aiming to increase sales at Walmart, Target and Kroger with Krispy Kreme recently made available through their e-commerce channels.

Josh Charlesworth: The other end of the range are convenience stores and QSR doors where we deliver mostly unpackaged donuts and the average about $400 sales per week.

Josh Charlesworth: Assuming only profitable growth for sustainable revenue streams, they were also choosing to close inefficient doors. These generally consists of lower volume doors with smaller scale regional grocery and convenience store partners.

Josh Charlesworth: Turning to McDonald's. Six months after the national rollout began, we're now more than 2,400 restaurants.

Josh Charlesworth: Our two companies are part of closely together during this time to support execution, marketing and training, delivering a great consumer experience and we're pleased with many aspects of the program.

Josh Charlesworth: However, we are seeing that after the initial marketing launch demand drops below our expectations, requiring intervention.

Josh Charlesworth: To deliver sustainable, profitable growth, we are partnering with McDonald's to increase sales by stimulating higher demand and cutting costs by simplifying operations.

Josh Charlesworth: At the same time, we are reassessing our deployment schedules together with McDonald's, or we were to achieve a profitable business model for all parties.

Josh Charlesworth: Given this, we do not expect to launch any additional restaurants in Q2.

Josh Charlesworth: That said, we continue to believe in the long-term opportunity of profitable growth through our U.S. nation-wide expansion, including McDonald's.

Josh Charlesworth: I'd now like to share a we are increasing carbon spoke efficiency by better managing costs to drive profitable growth.

Josh Charlesworth: We have already begun outsourcing our fresh donor delivery, and we expect that 15% of the network will have been outsourced by the end of May.

Josh Charlesworth: Service rates are excellent, costs are now predictable, and we're seeing savings over our in-house delivery model

Josh Charlesworth: We expect to launch with a second carrier shortly and sign two additional contracts soon.

Josh Charlesworth: This frees up time for our Krispy Kremeers to focus on what they do best. Serve our consumers and make fresh donuts, simplifying both our DFD and in-shop business.

Speaker Change: and our new Chief Operating Officer, Nicola Steele, is off to a great start, prioritising lower costs and reducing waste by focusing on simplifying operations, reducing complexities and improving drive-through sales. She has already improved labour efficiency in the short time she's been in the role.

Speaker Change: When it comes to better capital efficiency, we are focused on deploying capital to pay down debt and fund profitable growth.

Speaker Change: As we grow bigger, through our U.S. nationwide expansion, we will have production hubs to serve both in-shop guests with our iconic pop light, signaling fresh donuts as well as profitable DFD customers.

Speaker Change: 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.

Speaker Change: The site already includes critical infrastructure like highway access, loading bays and a drive-through, making it a smart, efficient choice for us.

Speaker Change: 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

Speaker Change: 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.

Speaker Change: We are evaluating opportunities to re-franchise Australian New Zealand, Japan makes go in the UK and Ireland.

Speaker Change: Proceeds from these efforts will be used to deliever and strengthen our balance sheet.

Speaker Change: I 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-scaled master-franchised partners.

Speaker Change: The better execution requires to grow bigger, demands passion, dedication and hard work from all Krispy Kreme and therefore we must inspire engagement across our organisation.

Speaker Change: First, we have upgraded teams at all levels, including internal promotions of our strongest district managers and hide outside talent with deep QSR expertise.

Speaker Change: 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.

Speaker Change: Sir, as we discussed a moment ago, we are simplifying our operations.

Speaker Change: It's free's up time for our Krispy Kremeers to focus on the guest's experience.

Speaker Change: And to better support them, we launched raw-based training, new onboarding programs and a goal setting and manager review process to support Krispy Kreme's growth within the company. This work has already cut us to improve turnover by over 30% year over year.

Speaker Change: 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.

Jeremiah Ashukian: Thanks, Josh. As Josh mentioned, we must get better as we grow bigger. As such, we're taking immediate actions to improve our financial flexibility, strengthen our balance sheet so that we can deliver positive cash flow, probable growth, and create shareholder value.

Jeremiah Ashukian: We have a clear plan with actions already underway. I will discuss these in more detail after review of our first quarter results.

Jeremiah Ashukian: 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 copies. Organic revenue declined 1% largely due to expected consumer softness in a challenging macro environment.

Jeremiah Ashukian: The Justice EBITDA was $24 million with margin at 6.4% trim by the sale of Insomnia Cookies, reduced organic revenue, cost associated with our U.S. nationwide expansion, and residual cybersecurity

Jeremiah Ashukian: Turning to the U.S. segment, Groanthin points of access and DFD revenue was more than offset by the aforementioned consumer softness and planned reduction of discount days, resulting in organic revenue decline of 2.6 percent.

Jeremiah Ashukian: Adjusted EBITDA to decline to $15.9 million due to softness and a 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.

Jeremiah Ashukian: 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.

Jeremiah Ashukian: With our equity owned international markets, organic revenue grew 1.5% lead by growth in Canada, where we see strong results with Costco.

Jeremiah Ashukian: Points of access grew 6.3% reflecting expansion in Australia with coals and BP. We are also seeing international Kiosar as a promising opportunity and are expanding our test with Hungry Jacks in Australia.

Jeremiah Ashukian: Adjusted emit a decline to 14.9 million dollars with margin of 12.5 percent due to lower transaction volumes in our retail business impacting operating leverage.

Jeremiah Ashukian: 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 donors were recently added to Tesco's meal deal, a great-value offering that is delivering consumer buzz.

Jeremiah Ashukian: Intermost 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 a delivered fresh daily through our joint venture in France.

Jeremiah Ashukian: Adjusted EBITDA declined 7.2% driven by the impact of franchise acquisitions in 2024, now reflected in the US segment.

Jeremiah Ashukian: Adjusted even a margin improved at 58.1% during by revenue mix and a greater contribution from international franchisees

Jeremiah Ashukian: Adjusted earnings per share were negative five cents in Q1, a decline from prior year term by expected lower revenue and EBITDA.

Cashflow was also impacted by lower earnings.

Jeremiah Ashukian: We use $20.8 million in cash for operating activities as we cut up payment delays following the 2024 cyber security incident.

Jeremiah Ashukian: We expect this to normalize throughout the year. Importantly, we expect it to deliver positive operating cash flow in 2025, as we continue to reduce our capital intensity and improve working capital.

Speaker Change: 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.

Expending margins through greater operational efficiency and S.G.A. improvements .

and Percent Quality Growth based on sustainable, profitable revenues dreams.

Josh Charlesworth: We're committed to de-leveraging the balance sheet through working capital initiatives and inorganic opportunities, including re-franchising certain international markets as Josh mentioned earlier.

Josh Charlesworth: We have also made the decision to discontinue the quarterly dividend.

Josh Charlesworth: The decision was made after careful consideration of our capital allocation strategy and we expect this capital to now be used to pay down debt.

Josh Charlesworth: To improve financial flexibility, we've increased liquidity by amending our terminal on in May to add $125 million in capacity, which we expect to use primarily to pay down the revolver.

Josh Charlesworth: to drive return on a bestie capital, we're prioritizing the highest returning investments as we value engineer a hub footprint to lower cost as we grow.

Josh Charlesworth: To expand margins, we will see SGNA benefits of the restructuring completed in 2024 and are focusing on improving operational efficiency, while at the same time simplifying our portfolio, and closing underperforming DFD doors in the US.

Josh Charlesworth: We expect a negative revenue impact of $10 to $15 million in a year, but to immediately deliver

Josh Charlesworth: As Josh mentioned, pursuing quality growth in scaling with strategic national partners and also focusing on our core offerings.

Speaker Change: Given the scope of these actions amid macroeconomic softness and uncertainty around McDonald's, we were withdrawing our prior failure 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.

Speaker Change: We expect to deliver revenue of $370 to $385.9 and adjust to the EBITDA of $30 to $35.9.

Speaker Change: I am confident that this pivot to driving cash, the leveraging 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. [inaudible]

Josh Charlesworth: With that, I'll turn it back to Joshua's closing remarks.

Josh Charlesworth: Thanks, Jeremiah. We're taking swift and decisive action to deliver to the balance sheet and achieve profitable growth.

Josh Charlesworth: Through driving consumer relevance by spotlighting our core offerings, expanding availability by focusing on a profitable growth based on sustainable revenue streams.

Josh Charlesworth: Increasing carbon spoke efficiency by simplifying operations and outsourcing U.S. logistics.

Josh Charlesworth: Improving Capital Efficiency by evaluating international refranchising and inspiring engagement by strengthening our performance-based culture.

Thank you. We will now open it up for Q&A.

Josh Charlesworth: We will now begin the question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad to answer the question queue. Once again, that is a star, followed by the number 1. We'll pause for a moment to compile the Q&A roster.

Speaker Change: Our first question comes from the line of Rahul Krotthapalli with JP Morgan. Your line is opened.

Raul Kratopali: Good morning, guys. Two questions. First, how are you thinking about the capex given you are going through this exercise currently and after all the changes for capital relocation?

Raul Kratopali: 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

Speaker Change: Yeah, thanks, Rahul. Good morning. I'll take the first question around CapEx.

Speaker Change: You know, and I think about capital priorities for us across the business. Obviously number one being strengthening the balance sheet. So things like he's in cash to reduce our reliance on.

Speaker Change: Sply Chain financing and paying down debt, the second being business reinvestment, which is the core kind of where you were at or on capital.

Speaker Change: 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 the things that have the highest return from a capital perspective.

Speaker Change: We're obviously also looking at the refacing McDonald's launch to take an opportunity to kind of reduce and adjust spend as we go through the year.

Raoul: Hi, Rahul. Yeah, regarding your second question, overall, you know, we're confident in the

Raoul: expansion of the U.S. 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. [inaudible]

Raoul: We are the most 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 with position from proper and all growth, we will expand further.

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

Daniel Guglielmo: 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 under-performing or inefficient locations in the US, whether that be hot light or

Daniel Guglielmo: Hey, Dan. We're super focused this year around driving profitable growth, which includes, you mentioned rationalizing and profitable doors, but also products within our portfolio. As we look forward in the US specifically, we can see, we can see us exiting as much as 5 to 10% of doors in our US network.

Daniel Guglielmo: and that's what we're thinking about managing the kind of footprint of doors in the US this year.

Speaker Change: Okay, that's really helpful. Thank you. And then I'm on the refranchising 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 numbers that you're all are working towards?

Speaker Change: Yeah, I mean, first off, we don't need to refranchise the fuel growth in the U.S., and we have ample liquidity. As you mentioned on the call on Q1, we launched a process to refranchise certain equity owned international markets.

Speaker Change: 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. And so we're going to take our time to find that partner. What I would say is we will use any proceeds.

Speaker Change: that we would come across to pay down debt.

Okay, thank you.

Speaker Change: Our next question comes from the line of Sara Senatore with Bank of America. Your line is open.

Speaker Change: Hi, good morning. Thanks for the question. This is Aisling Austin on for Sara Senatore. It's just a question around the McDonald's cause. 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 franchisees seem pretty bullish at that point. So just want to see if there's any difference between that and the broader rollout. And also just a question about the profitability issues.

Speaker Change: is that exclusively on Krispy Kreme, just giving you guys their the cost and you know buyback on sold donuts. So it kind of seems like the economics from McDonald's are stable in the 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 on...

Speaker Change: The two of us work well together, make sure we have awesome fresh doughnuts readily available.

Speaker Change: 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.

Speaker Change: is consistently prominent, and that our operations are as simplified and streamlined as they can be. So really, our focus...

Thank you.

Speaker Change: Our next question comes from the line of Andrew Wolf. Your line is opened.

Speaker Change: Thanks. I just want to ask about the $5 million you call out on the inefficiencies related to the cybersecurity. What's that?

Speaker Change: Expected, was that the number within your guidance or was that more than expected?

Speaker Change: And secondly, is that ongoing? Is that still some of that impact in the card in the second quarter guidance?

Speaker Change: Yeah, thanks for asking, Andrew, and I can take that. 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 were still restoring. Thank you.

Speaker Change: back-of-house systems as we went through that. The back-of-house system piece is now behind us and we're operating much more efficiently than we were in the first five to six weeks of the year and should be behind us.

Okay, and secondly on the, you know, the, um, [inaudible]

Speaker Change: The sales per hub being down 2%, not obviously the distribution point is being up, you know, quite a lot. There's different ways to unpack that but could is that more?

Speaker Change: It's kind of speak to it, vis-a-vis, you know, what you're saying about McDonald's and maybe convenience stores, you know, diluting that number, or is it?

Speaker Change: More just driven by your average grocery store or Wal-Mart or those folks.

Speaker Change: Bing Down, you know, whatever percent, you know, their sales partner, even though it's, you know, a healthy business for you. Bing Down based on the consumer environment.

and I think revenue from the court. [inaudible]

Speaker Change: Remnant for the quarter was largely in line with our expectations.

Speaker Change: I mean, recall the U.S. segment, in particular, net revenues impacted by the sale of insomnia cookies, and that had a kind of a large decline year of year, but when you think about it.

Speaker Change: Increase Points of Access and DFT Revenue, being up, it was more than offset by consumer softness in our retail channel, and also planned reduction in discount days as we looked to be more efficient and drive more profitable growth on the business, which resulted in their organic revenue to decline at 2.6%.

Fair enough. Okay. Thank you.

Speaker Change: Our next question comes from the line of Bill Chappell with truest securities. Your wine is opened.

Eric. Thanks. Good morning.

You know, following up on McDonald's, I guess.

Speaker Change: and maybe to clarify the earlier question, was it your decision to...

Speaker Change: to stop it, put this car, it was a McDonald's decision, it was a combined, and then with that in mind, you know, trying to just like...

Speaker Change: I'm going to pass you months. I think you've publicly said, A, this is, it's a slow ramp. We expect it to it is going at kind of expected.

Speaker Change: I'm trying to figure out, you know, as we get more national advertising, as we get more skill, it will continue to grow.

Speaker Change: Was it the sales, we're not working kind of as expected and they fell off a cliff or was it the unineconomics fell off a cliff and they said okay wait a minute we're going to lose our shirt if we continue expanded this level just to understand kind of where the change came from too.

Speaker Change: Well, start by saying, as with all our customers, we make decisions with them.

and so obviously we partner with McDonald's to make.

Speaker Change: and decisions about rolling out distribution. And so, you know, I very much reinforced that this is something we were working.

together with them on and appreciate their partnership.

Speaker Change: Regarding your last point around the sales, you know, the sales.

Speaker Change: Started strong with the local marketing and then they dropped below what we're expecting or once that had passed.

Speaker Change: Gromaine Comforter in the long term opportunity, when you have national distribution, 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, you heard just at the end of the quarter that we've begun outsourcing logistics, for example, [inaudible]

Speaker Change: of the Fire Operations, seemed very good early read on that. That's an example of ways we can work together to make sure we're a position for profitable growth before we expand further.

Speaker Change: 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 slowdown on a three-year program you would.

I guess, related...

Speaker Change: Well, regarding the speed of decision-making, I very much believe that it's important to take the size of action, make decisions, then sure.

Speaker Change: and the proper growth of the business. So it's natural that we would work with my dance to make sure that we only expand further when we get that proper growth.

Speaker Change: Regarding supporting the network, remember we are expanding with several scale customers right now. We announce

Speaker Change: Today, for example, we've started a new program with Sounds 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.

Speaker Change: that is now going national. I mentioned earlier on the call for example that on Minneapolis Hub is currently under construction and we still expect to open five to seven new production hubs during the course of this year.

Speaker Change: Mainly serving those undeserved 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 deliver to the balance sheet as we drive this profitable growth.

Okay, thank you.

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

Josh Charlesworth: Well, thank you everybody for your interest in Krispy Kreme today. Thank you also to our whole working Krispy Kreme as all over the world. We 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 deliver to the Archie. Thank you.

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

Thank you.