Krispy Kreme, Inc. (NASDAQ:DNUT) Q4 2023 Earnings Call Transcript
Krispy Kreme, Inc. (NASDAQ:DNUT) Q4 2023 Earnings Call Transcript February 13, 2024
Krispy Kreme, Inc. misses on earnings expectations. Reported EPS is $0.09 EPS, expectations were $0.13. Krispy Kreme, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Mandeep and I will be your conference operator today. At this time, I would like to welcome everyone to the Krispy Kreme Fourth Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Ms. Stephanie Daukus, Vice President of Investor Relations. Ms. Daukus, please go ahead.
Stephanie Daukus: Thank you. Good morning, everyone, and welcome to Krispy Kreme's fourth quarter and full year 2023 earnings call. Thank you for joining us today. Our earnings release and associated earnings presentation, which we will be referencing during the call, are available on our Investor Relations website at investors.krispykreme.com. Joining me on the call this morning are Josh Charlesworth, Chief Executive Officer; and Jeremiah Ashukian, Chief Financial Officer. After prepared remarks, there will be a question-and-answer session. Before we begin, I would like to remind you that this call contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events, or future financial performance.
Forward-looking statements involve a number of inherent risks and uncertainties, and we caution investors that these risks could cause actual results to differ materially than those contained in any forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's Form 10-K filed with the SEC for the year ended January 1, 2023, and in the 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, today's call will include certain non-GAAP financial measures. A reconciliation between non-GAAP financial measures and their closest comparable GAAP measure can be found in our fourth quarter 2023 earnings press release and Form 8-K filed today with SEC and is also available at our investors.krispykreme.com website.
With that, I'll turn the call over to Josh.
Josh Charlesworth: Good morning, everyone, and thank you for joining us today. I'm so excited for what is ahead of us at Krispy Kreme. Our strategy is clear to make our fresh doughnuts available in more places and keep reminding people of the joy that is Krispy Kreme, not just to eat, but to share and give to others. We make great progress on this in 2023 with strong consumer demand and increased access to our fresh doughnuts in both existing and new markets around the world. We also improved profitability as we grew, demonstrating the productivity benefits of our unique Hub and Spoke operating model. As we move forward in 2024, we will continue to offer new and exciting specialty premium doughnuts, upgrade our digital commerce capabilities, and expand the availability of our doughnuts around the world, including in our newer sales channels like club stores and quick service restaurants.
We will also increase our efforts to modernize the making and moving of doughnuts to ensure we deliver high quality profitable growth. Let me summarize today's key messages. We continued to deliver double-digit organic revenue growth with all markets and channels growing sales. We expanded profit margins by leveraging existing production hubs to support our growth, especially in the U.S. where operating leverage was strongest. Our ongoing strategy is to scale the business efficiently by adding more fresh points of access. There are now more than 14,100 places where you can buy our melt-in-your-mouth fresh doughnuts in 39 countries. And our focus on operating excellence means that we're building both a bigger and better Krispy Kreme business.
And finally, we are introducing our 2024 outlook with organic growth expected to translate into adjusted EBITDA expansion, reflecting our intent to drive increasingly profitable growth. We delivered 13.2% organic revenue growth in the fourth quarter, ahead of our guide, and 12.2% organic revenue growth for the full year. This performance reflected strong consumer demand, with people choosing to celebrate Halloween, Thanksgiving and the holiday season with premium priced specialty doughnuts from Krispy Kreme, including a Scooby-Doo Dozen and our first ever Elf doughnut collection celebrating the 20th anniversary of the family-favorite holiday movie. Tie-ins like this helped create tremendous excitement for the brand in 2023 and we finished the year with over 40 billion media impressions, reflecting how well Krispy Kreme’s fresh and innovative doughnuts resonated with the consumer.
Ecommerce also continues to play a bigger role within our business, growing over 25% in the fourth quarter, driven by new loyalty members which now total over 15 million, as well as operational improvements to our website, app and in-shop availability. Organic growth was also driven by adding new points of access, which increased by 743, a much stronger fourth quarter expansion than in prior years, reflecting the growing demand from existing and new partners who want to make everybody's favorite fresh doughnuts available to their customers. The same goes for new countries, with Krispy Kreme opening in Ecuador and France in the fourth quarter to add to Jamaica, Kazakhstan, Switzerland, Chile and Costa Rica which were all added earlier in the year.
The continued expansion of our hub-and-spoke model delivered productivity growth and increased profitability in the fourth quarter, with adjusted EBITDA margin improving 40 basis points to 14.2%. The hub-and-spoke model is becoming more productive as we add more points of access without adding significantly more production hubs. We ended 2023 with 2300 more points of access than in 2022, mostly through delivered fresh daily displays in grocery and convenience stores, and we did this whilst adding net one production hub. The resulting increased utilization of our production hubs, most of which can still make twice as many doughnuts as they do today, made them more efficient and profitable. We also completed the optimization of our production hubs without spokes in 2023, closing legacy doughnut shops which were not well suited to the strategy.
Our fourth quarter and full year results exemplify the success and power of our hub-and-spoke model. And in 2024 I look forward to us becoming a bigger and better Krispy Kreme by continuously improving our business operations as we grow. And the number one reason why someone may not buy a Krispy Kreme Doughnut continues to be access and convenience. With more than two million locations where we could in theory sell Krispy Kreme, at least in the markets we have targeted, the opportunity to expand availability is big. We have previously shared our long-term goal of opening at least 75,000 points of access around the world, yet this still represents less than 3% of the total addressable market and we are adding new customers all the time, such as Costco and international markets and McDonald’s in the US, where we have been conducting an extended test in Kentucky for much of 2023.
Our relationship with McDonald’s remains strong with discussions ongoing about further expansion and we look forward to providing updates on our quick-service restaurant plans through 2024. We also expect to launch Krispy Kreme in three to five new countries in 2024 with several priority markets identified in Europe as well as Brazil where we just announced an exciting new partnership with the convenience store chain AmPm. We have perfected the art of making our original glazed doughnut over the last 87 years and bringing joy to our consumers across the world. Yet there remains the opportunity to modernize the way we make and move our doughnuts, bringing efficiency to the process whilst maintaining consistent high quality and service levels.
We have started 2024 by making changes to our global leadership team to reflect these opportunities. Angela Yochem, we are adding a new Chief Information Officer with deep digital technology experience across multiple industries. Our Global Chief Supply Chain Officer, Sherif Riad, formerly of Mondelēz, has stepped into the team, as has our U.S. Business Leader, Javier Rancaño, who has extensive QSR operations experience. As a leadership team, we are focused on quality fresh doughnuts in every channel, every day, expanding the use of automated doughnut making and processing, and continuously improving our doughnut delivery capabilities as we support more and more points of access. An example of this is a pilot we are just starting on select routes in LA and DC to deliver our fresh doughnuts through a third party logistics provider still using dedicated Krispy Kreme trucks and drivers.
As we focus on our core strategy of producing, selling and distributing fresh doughnuts daily, we continue our strategic review of Insomnia Cookies. With that, I will turn it over to Jeremiah to give further insight on our financial performance and provide an outlook for 2024.
Jeremiah Ashukian: Thanks Josh, and good morning, everyone. As Josh mentioned, we reported strong double-digit fourth quarter organic growth and improved profitability for the year, demonstrating the productivity benefits of our Hub and Spoke model. In the fourth quarter, we grew double digit on both the top and bottom line on a percentage basis, resulting in adjusted EBITDA margin expansion of 40 basis points year-over-year to 14.2%. We saw growth in all our markets driven by high impact global brand activations and seasonal offerings, increased points of access and premiumization efforts. Adjusted EBITDA grew 14.7%, outpacing our revenue growth for the second consecutive quarter as we continue to realize cost efficiencies across the global business through both productivity efforts, increased utilization of our hubs.
For the full year, the business performed largely aligned with expectations as we delivered 12.2% organic growth, increased adjusted EBITDA by 11% and expanded margins. Organic growth accelerated to 13.2% in the fourth quarter. Notably, we saw growth across all our segments in 2023 on top of strong performance in 2022. In the U.S. segment, organic revenue grew 13.7% in the fourth quarter, driven by record holiday season as specialty doughnut offerings drove incremental sales through all channels, especially DFD, and had positive impact on our sales. We also observed increased transaction values due to growth of our ecommerce channel. All of this was underpinned by our strategy of growing points of access which grew 17.7% year-over-year with more than 300 DFD Doors added in Q4 versus Q3 and over 1,000 Doors added versus 2022.
At Insomnia Cookies, we observed strong organic growth of 16.3% as well as sequential margin improvement from Q3. That said, margins in the business remain pressured given the elevated cost of cocoa. The Hub and Spoke model, first established in the UK and Australia, is now well underway in the U.S., with several cities seeing marked improvements in profitability during the year as we added more points of access to the existing hubs. This, as well as our ability to leverage pricing to offset inflation, explains the increase in sales per hub of 8.9% year-over-year and the subsequent 120 basis point adjusted EBITDA margin improvement for the year. In the International segment, organic revenue grew 9% year-over-year as we expanded points of access and leveraged global campaigns over the holiday season to drive volume of our specialty doughnuts.
Most notably, we executed our Elf specialty doughnuts in nine markets worldwide, leveraging a single set of marketing materials, seeing great results in Mexico and the UK. Mexico was a substantial contributor to growth this quarter. We have nearly doubled points of access in Mexico through existing partners such as Oxxo, with meaningful room to continue expanding in the country. We also saw successful growth in new partners such as Costco in Australia, which continues to prove to be an efficient customer. Adjusted EBITDA improves sequentially in a quarter to 20.6% with margin expansion in both Australia and Mexico. Profitability continues to be pressured in the UK and we're taking actions to improve productivity. In the Market Development segment, organic revenue grew 19.2% in the fourth quarter as we continue our international expansion by opening 126 more points of access through a combination of theaters, Fresh Shops and DFD Doors.
We opened in two new markets, Ecuador and France, and expect that these two countries alone can support more than 2,000 further points of access. Most notably, Paris represented a record breaking launch in the fourth quarter. This shop was our best performing shop worldwide on a sales basis in December. Market Development adjusted EBITDA grew 21.1% in the fourth quarter with margins expanding by 120 basis points to 35.4%. Margin improvements were primarily driven by continued Hub and Spoke efficiencies in our equity owned Japanese and Canadian markets. As we continue to expand globally, we expect to see high returns in international franchises. The JV structure of the French market is a prime example of our capital light model approach, which enables earnings flow through at significant margins while providing the option to take equity ownership of the market in the future.
As you heard from Josh earlier, we announced our future entry into Brazil using a similar approach. For the year ending 2023, we delivered $0.27 in adjusted earnings per share, driven by improvements in adjusted EBITDA that were offset by higher than expected depreciation and amortization as we continued to accelerate expansion both domestically and globally at Insomnia Cookies and made choiceful investments in anticipation of accelerated growth in the U.S. DFD business. We also saw increased annual interest expense as a result of the higher interest rate environment. As a result, we saw adjusted diluted earnings per share finish lower than our original expectations. Our business fundamentals remain strong and we are confident in our ability to grow EPS despite remaining in the somewhat higher interest rate environment in 2024.
As mentioned on previous calls, in 2023 we deployed some of our operating cash flow to strategically reduce our use of vendor financing, which had an impact on net cash from operations. Over the year we reduced vendor financing by roughly $82 million, which will provide a long-term tailwind of $3 million to $5 million on an annualized basis to adjusted EBITDA beginning in mid-2024. Despite these efforts, we are able to hold leverage flat through 2023, finishing the year at 4.1 times. We have a healthy balance sheet having extended our maturities to 2028 in the first quarter of 2023. We closed the year with just under $40 million in cash and have access to ample liquidity through a revolver with an undrawn capacity of $159 million. We remain focused on the long-term health of the business and setting up our capital structure to support growth through a strong balance sheet.
We expect to delever in 2024 primarily through the growth of adjusted EBITDA and running the business with an eye towards efficiency and capital expenditures as well as managing working capital. Over the long-term we remain on track to be between 2.0 times and 2.5 times net leveraged in 2026. As we look forward to 2024 we're providing our outlook for the full year, which assumes a nominal impact from foreign exchange and contemplates all operations including Insomnia Cookies. For the full year 2024 we expect to deliver net revenue growth of 5% to 7%, organic revenue growth of 6% to 8%, adjusted EBITDA growth of 8% to 11%, and adjusted diluted earnings per share of between $0.27 and $0.31. After reporting strong double-digit fourth quarter and full year organic growth in excess of our full year guide, we remain confident in our 2024 guidance and our ability to drive operating leverage as we become more coordinated as a global company.
We believe we are well positioned for sustainable, high quality growth in the years to come leveraging the tools which helped us deliver a great finish to the year in 2023. As it relates to the first quarter despite the harsh weather in broad parts of the U.S. in January and lapping record breaking sales in the first quarter of 2023 we expect net revenue growth of 2% to 4%. We also expect adjusted EBITDA to grow in line with the revenue growth. We will closely monitor and adapt to changes in the market and consumer environment. And I remain confident about the profitable growth potential of our business in 2024, and we are excited for a great year to come. With that, I'll turn it over to Josh for his closing remarks.
Josh Charlesworth: Thanks Jeremiah. In summary, we are expanding availability by adding high quality productive points of access, driving operating leverage through the efficiency of our operating model, and maximizing capital return both by leveraging existing capacity and making selective investments in geographies which have limited access to Krispy Kreme today. All in I look forward to us building a bigger and better Krispy Kreme in the years ahead. Operator, let's now open it up to Q&A, please.
See also 15 Worst States to Retire in 2024 and 15 Highest Quality Pasta Brands In The US.
To continue reading the Q&A session, please click here.
