In a conference call with securities analysts to discuss second-quarter financial results on Aug. 17, Michael J. Tattersfield, president and chief executive officer of Krispy Kreme, Inc., acknowledged ongoing transformation within its hub-and-spoke distribution model in the United States as well as difficulties with challenging foreign exchange rates as adjusted EDITDA for the company eased 10% in the 13 weeks ended July 3.
“Despite robust organic revenue growth, adjusted EBITDA in the quarter declined modestly to $47.4 million due to significant foreign exchange headwinds of $2.7 million, cycling a very tough margin comp in the UK,” Mr. Tattersfield said.
“It’s no secret that some of our legacy hubs without spokes in the US are underperforming, both on the top and bottom line,” he said. “We knew this when we acquired the system over the last few years in order to control the brand and begin implementing our hub-and-spoke model, and not every shop would remain as it was then, in particular, hubs without spokes today. Some of this optimization may include converting shop types and exiting underperformers that are not set up well to support DFD (delivered fresh daily).”
Adjusted net income in the second quarter ended July 3 totaled $14.6 million, equal to 8¢ per share on the common stock, a decline of 28% from $20.47 million, or 14¢ per share, in the same period a year ago. Adjusted EBITDA, meanwhile, eased 10% to $47.36 million from $52.39 million.
Net revenues totaled $375.25 million in the second quarter, up 7.5% from $349.19 million in the same quarter a year ago. Organic revenue increased 8.9% in the quarter.
“Adjusted EBITDA in the second quarter declined modestly in the US and Canada due to weaker performance in our hubs without spokes, cycling a banner quarter from our vaccine promotion a year ago and modestly higher promotional activity to help consumers with Acts of Joy and delayed price increase to the beginning of the third quarter,” Mr. Tattersfield said.
“It’s worth pointing out, however, that this level of EBITDA is still nearly 50% up compared to pre-pandemic and 60% up from 2020,” he said. “Pricing actions offset most of our inflation in the quarter, and we continue to look at pricing and promotional activity strategically. We took pricing actions early in the third quarter in the US and UK, and we’ll continue to review pricing. Additionally, we expect lower promotional activity after August.”
Hubs without spokes in the United States grew at a pace 5% below hubs with spokes in the quarter, according to the company.
“We are reviewing poor-performing hubs without spokes in the US and expect to close approximately 10 shops in the coming weeks and months,” said Joshua Charlesworth, global president, chief operating officer and chief financial officer. “These are margin-dilutive hubs, which cannot be converted to supply off-premises DFD sales. Many of the hubs without spokes are strong and profitable and much-loved local community stores.”
Mr. Charlesworth said there are currently 118 stores in the United States the company identifies as hubs without spokes. The 10 stores to be shuttered are those identified by Mr. Charlesworth as “not sustainable in the long run.”
In response to a question from analysts about deceleration in the US organic growth number, Mr. Charlesworth said the biggest driver of organic growth for the company is volume — improving distribution to the consumer.
“In terms of 9% volume growth in the US shows that fundamentally we’re selling more donuts every quarter than the quarter before in the prior year because we’re making it more available,” he said. “When you look at the breakdown of the organic growth to your question, the biggest driver is Delivered Fresh Daily. It’s adding more points of access to the donuts and growth within the DFD cabinets themselves.”
Mr. Tattersfield commented further regarding drivers of growth in the company’s omnichannel strategy.
“E-commerce remains a pillar of our omnichannel strategy,” he said. “In the second quarter, 17.5% of our retail sales came from our e-commerce, up from less than 10% pre-pandemic and 17.2% for the full year 2021, with a goal to achieve e-commerce penetration of over 25% globally long term.”
While the company doesn’t provide quarterly guidance, Mr. Charlesworth said Krispy Kreme has seen some positives early in the third quarter.
“After softer organic revenue growth in the UK and the US in May and June, we have seen a strong start to the third quarter, with 10% organic growth quarter-to-date, helped by recent price increases and strong LTOs, such as our ice cream truck donuts in the US, which have so far been enough to offset another summer heat wave in the UK,” he said. “Q3 organic growth continues to also be high in Insomnia Cookies, Australia, Mexico, Japan and international franchises.“Recently, we’ve seen large decreases in key input costs in the commodities market, in particular, on wheat and edible oils, which we’ve begun to lock in for the first half of 2023. This would lead to a large deceleration of expense growth next year from recent levels, with some pricing even lower than our 2022 average if trends continue. At this point, we’ve locked in approximately 80% of our commodities for the first half of 2023 at mid- to high single-digit inflation, cut down materially from approximately 20% plus we’ve seen in the last quarter.”