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(Unaudited)
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Income/(Loss) (Unaudited)
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Income/(Loss) (Unaudited) (Parenthetical)
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(Parenthetical)
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Shareholders? Equity (Unaudited)
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Shareholders? Equity (Parenthetical) (Unaudited)
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(Unaudited)
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Accounting Policies
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Accounting Policies (Details)
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Schedule of Other Intangible Assets (Details)
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Information Related to Leases (Details)
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Information Related to Leases (Details)
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Instruments in Condensed Consolidated Balance
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Instruments in Condensed Consolidated Statements
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Activity (Details)
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Unrecognized Compensation Expense (Details)
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Option Activity (Details)
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Share, Basic and Diluted (Details)
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Unvested RSUs Excluded from Computation of Net
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Events The Company evaluated subsequent events and transactions for potential recognition or disclosure in the Condensed Consolidated Financial Statements through November 15, 2022, the date the Condensed Consolidated Financial Statements were available to be issued. All subsequent events requiring recognition and disclosure have been incorporated into these Condensed Consolidated Financial 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(Registrant’s
telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
_________________________
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol
Name of each exchange on which registered
iCommon stock, $0.01 par value per share
iDNUT
iNasdaq
Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒iYes☐ No
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒iYes☐ No
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated
filer
☐
iNon-accelerated filer
☒
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). i☐ Yes ☒ No
Other
comprehensive (loss)/income, net of income taxes:
Foreign currency translation adjustment
(i25,708)
(i9,823)
(i61,887)
(i13,544)
Unrealized
income on cash flow hedges, net of income taxes(1)
i7,692
i1,398
i24,798
i7,631
Total
other comprehensive loss, net of income taxes
(i18,016)
(i8,425)
(i37,089)
(i5,913)
Comprehensive
loss
(i29,856)
(i12,177)
(i44,879)
(i25,039)
Net
income attributable to noncontrolling interest
i1,216
i1,907
i5,113
i6,736
Foreign
currency translation adjustment attributable to noncontrolling interest
(i1,283)
(i414)
(i2,186)
(i414)
Total
comprehensive (loss)/income attributable to noncontrolling interest
(i67)
i1,493
i2,927
i6,322
Comprehensive
loss attributable to Krispy Kreme, Inc.
$
(i29,789)
$
(i13,670)
$
(i47,806)
$
(i31,361)
(1)Net
of income tax expense of $i2.6 million and $i8.3
million for the quarter and three quarters ended October 2, 2022, respectively, and $i0.5 million and $i2.6
million for the quarter and three quarters ended October 3, 2021, respectively.
See accompanying notes to Condensed Consolidated Financial Statements.
(1)Includes
a $i0.035 cash dividend per common share declared in the third quarter of fiscal 2022 and expected to be paid in the fourth quarter of fiscal 2022.
See accompanying notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollars in thousands, unless otherwise specified)
Note 1 — iDescription
of Business and Summary of Significant Accounting Policies
Description of Business
Krispy Kreme, Inc. (“KKI”) and its subsidiaries (collectively, the “Company” or “Krispy Kreme”) operate through their omni-channel business model to provide doughnut experiences and produce doughnuts for Doughnut Shops, Delivered Fresh Daily (“DFD”) outlets, Ecommerce and delivery, and Krispy Kreme branded sweet treats (“Branded Sweet Treat Line”) channels, expanding consumer access to the Krispy Kreme brand.
The Company has ithree reportable
operating segments: 1) U.S. and Canada, which includes all Krispy Kreme Company-owned operations in the U.S. and Canada, Insomnia Cookies shops and the Branded Sweet Treat Line; 2) International, which includes all Krispy Kreme Company-owned operations in the U.K., Ireland, Australia, New Zealand and Mexico; and 3) Market Development, which includes worldwide franchise operations, as well as Krispy Kreme Company-owned shops in Japan. Unallocated corporate costs are excluded from the Company’s measurement of segment performance.
Basis of Presentation and Consolidation
iThe
Company operates and reports financial information on a 52 or 53-week year with the fiscal year ending on the Sunday closest to December 31. The data periods contained within fiscal years 2021 and 2022 will reflect the results of operations for the 52-week periods ended January 2, 2022 and January 1, 2023, respectively. The quarters ended October 2, 2022 and October 3, 2021 were both 13-week periods.
The unaudited Condensed Consolidated Financial Statements include the accounts of KKI and subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, these interim financial statements do not include all information and footnotes required under GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of results of operations, balance sheet, cash flows, and shareholders’ equity for the periods presented. All significant intercompany balances and transactions among KKI and subsidiaries have been eliminated in consolidation. Investments in entities over which the Company has the ability to exercise significant influence
but which it does not control and whose financial statements are not otherwise required to be consolidated, are accounted for using the equity method.
iThese Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto as of and for the year ended January 2, 2022, included in the Annual Report on Form 10-K. The Condensed Consolidated Balance Sheet as of January 2, 2022 was derived
from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. The results of operations for the quarter and three quarters ended October 2, 2022 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending January 1, 2023.
Noncontrolling interest in the Company’s Condensed Consolidated Financial Statements represents the interest in subsidiaries held by joint venture partners and employee shareholders. The joint venture partners hold noncontrolling interests in the
Company’s consolidated subsidiaries, Awesome Doughnut, LLC (“Awesome Doughnut”), W.K.S. Krispy Kreme, LLC (“WKS Krispy Kreme”), and Krispy K Canada, Inc. (“KK Canada”). Employee shareholders hold noncontrolling interests in the consolidated subsidiaries Krispy Kreme Holding U.K. Ltd. (“KKUK”), Krispy Kreme Holdings Pty Ltd. (“KK Australia”), Krispy Kreme Mexico S. de R.L. de C.V. (“KK Mexico”) and Insomnia Cookies Holdings, LLC (“Insomnia Cookies”). Since the Company consolidates the financial statements of these subsidiaries, the noncontrolling owners’ share
of each subsidiary’s net assets and results of operations are deducted and reported as noncontrolling interest on the Condensed Consolidated Balance Sheets and as net income attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations and comprehensive income attributable to noncontrolling interest in the Condensed Consolidated Statements of Comprehensive Income/(Loss).
The Company’s significant accounting policies are described in Note 1, “Description
of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for the year ended January 2, 2022 included in the Annual Report on Form 10-K. There have been no material changes to the significant accounting policies during the quarter ended October 2, 2022.
i
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform
(Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. It is effective for all entities as of March 12, 2020 through December 31, 2022. A company may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial
statements are available to be issued. The Company is currently evaluating the effect of the new guidance on its Condensed Consolidated Financial Statements and related disclosures.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which prescribes the measurement of acquired contract assets and contract
liabilities arising from revenue contracts with customers recognized in a business combination. It is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect of the new guidance on its Condensed Consolidated Financial Statements and related disclosures.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832):
Disclosures by Business Entities about Government Assistance, which requires certain disclosures be made when an entity receives government assistance, including the types of assistance, an entity’s accounting for the assistance, and the effect of the assistance on an entity’s financial statements. It is effective for all entities for financial statements issued for annual periods beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the effect of the new guidance on its annual disclosures.
In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which requires certain disclosures
be made by a buyer in a supplier finance program, including the key terms of the program and, for the obligations that the buyer has confirmed as valid to the finance provider, the amount outstanding that remains unpaid by the buyer as of the end of the fiscal period, a description of where those obligations are presented in the balance sheet, and a rollforward of those obligations during the fiscal period. It is effective for all entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the effect of the new guidance on its annual and interim
disclosures.
Note 2 — iAcquisitions
2022 Acquisitions
In the third quarter of fiscal 2022, the Company acquired the business and operating assets of ione
franchisee, consisting of iseven Krispy Kreme shops in the U.S. (with ione shop under construction). The Company
paid total consideration of $i19.4 million, consisting of $i17.3 million of cash, $i1.2
million of consideration payable to the sellers, and $i0.9 million settlement of amounts related to pre-existing relationships, to acquire substantially all of the shops’ assets. Consideration payable of $i1.2
million was withheld primarily to cover indemnification claims that could arise after closing. Absent any claims, these amounts are payable within i12 months of the acquisition date.
The settlement of pre-existing relationships included in the purchase consideration includes the write-off of accounts and notes receivable, net of deferred revenue, of $i0.3
million. It also includes the disposal of the franchise intangible asset related to the franchisee recorded at time of the acquisition of Krispy Kreme by JAB Holding Company (“JAB”). The cumulative net book value of the franchise intangible asset was $i0.6 million at the acquisition date. The Company accounted for the transaction as a business combination.
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition for the acquisition above.
KK U.S. Shops
Assets acquired:
Cash
and cash equivalents
$
i7
Prepaid expense and other current assets
i138
Property
and equipment, net
i895
Other intangible assets, net
i11,652
Operating
lease right of use asset, net
i4,702
Other assets
i20
Total
identified assets acquired
i17,414
Liabilities assumed:
Accrued liabilities
(i106)
Current
operating lease liabilities
(i221)
Noncurrent operating lease liabilities
(i4,481)
Total
liabilities assumed
(i4,808)
Goodwill
i6,842
Purchase
consideration, net
$
i19,448
Transaction costs in 2022
$
i589
Transaction
costs in 2021
i6
Reportable segment
U.S. and Canada
/
During the measurement period, the
Company will continue to obtain information to assist in determining the fair value of net assets acquired, which may differ materially from these preliminary estimates. Measurement period adjustments, if applicable, will be applied in the reporting period in which the adjustment amounts are determined.
Equity Method Investment in KK France
In the third quarter of fiscal 2022, the Company acquired a i33%
noncontrolling ownership interest in the newly formed entity Krispy Kreme Doughnuts France SAS (“KK France”), for approximately $i1.0 million in cash. As the Company has the ability to exercise significant influence over KK France, but it does not exercise control, the investment will be accounted for using the equity method, and equity method earnings will be recognized within Other expenses/(income), net on the Condensed Consolidated Statements
of Operations.
2021 Acquisitions
In the first quarter of fiscal 2021, the Company acquired the business and operating assets of itwo franchisees, collectively consisting of i17
Krispy Kreme shops in the U.S. On October 4, 2021, the Company acquired a i60% controlling ownership interest in iten
franchise shops in Canada (KK Canada). The valuation for the acquisitions requires significant estimates and assumptions. The estimates are inherently uncertain and subject to revision as additional information is obtained during the measurement period for the acquisitions. Measurement period adjustments for the 2021 acquisitions did not have a material impact to the Condensed Consolidated Financial Statements for the three quarters ended October 2, 2022.
Amortization
expense related to intangible assets included in depreciation and amortization expense was $i7.1 million and $i21.3 million for the quarter and three
quarters ended October 2, 2022, respectively, and $i7.5 million and $i22.6 million for the quarter
and three quarters ended October 3, 2021, respectively.
Note 5 — iiLeases/
i
The Company included the following amounts related to operating and finance lease assets and liabilities within the Condensed Consolidated Balance Sheets:
Right-of-use
assets obtained in exchange for new lease liabilities:
Operating leases
$
i31,246
$
i48,770
Finance
leases
i4,549
i1,788
/
(1)Operating
cash flows for operating leases include variable rent payments which are not included in the measurement of lease liabilities. For the three quarters ended October 2, 2022 and October 3, 2021, variable rent payments were $i17.4 million and $i11.3
million, respectively.
The Company recognized $i3.0 million and $i4.4
million of lease termination charges in the quarter and three quarters ended October 2, 2022, respectively, related to the decision to exit certain Krispy Kreme shops in the U.S. There were iino/
lease termination charges in the three quarters ended October 3, 2021.
In March 2022, the Company completed a sale-leaseback transaction whereby it disposed of the land at ione real estate property for proceeds of $i3.0
million. The Company subsequently leased back the property, which is accounted for as an operating lease. The Company recognized a gain on sale of $i2.6 million, which is included in Other expenses/(income), net on the Condensed Consolidated Statement of Operations for the three quarters ended October 2, 2022. In September
2022, the Company completed a sale-leaseback transaction whereby it disposed of the land at ione real estate property for proceeds of $i2.7
million. The Company subsequently leased back the property, which is accounted for as an operating lease. The Company recognized a gain on sale of $i1.9 million, which is included in Other expenses/(income), net on the Condensed Consolidated Statement of Operations for the quarter ended October 2, 2022. There were no sale-leaseback
transactions completed in the three quarters ended October 3, 2021.
There
were ino assets nor liabilities measured using Level 3 inputs and no transfers of financial assets or liabilities among the levels within the fair value hierarchy during the quarter ended October 2, 2022 and fiscal year ended January 2, 2022. The Company’s derivatives are valued using discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves and
currency rates.
Note 7 — iDerivative Instruments
Commodity Price Risk
The Company uses forward contracts
to protect against the effects of commodity price fluctuations in the cost of ingredients of its products, of which flour, sugar and shortening are the most significant, and the cost of gasoline used by its delivery vehicles. Management has not designated these forward contracts as hedges. As of October 2, 2022 and January 2, 2022, the total notional amount of commodity derivatives was i2.1
million and i1.9 million gallons of gasoline, respectively. They were scheduled to mature between October 3, 2022 and December 1, 2024 and January 3, 2022 and March 31, 2023, respectively. As of October 2, 2022 and January 2, 2022, the
Company recorded an asset of $i0.6 million and $i1.5 million, respectively, related to the fair market values of its commodity derivatives.
The settlement of commodity derivative contracts is reported in the Condensed Consolidated Statements of Cash Flows as a cash flow from operating activities.
Interest Rate Risk
The Company uses interest rate swaps to manage its exposure to interest rate volatility from its debt arrangements. Management has designated the swap agreements as cash flow hedges and recognized the changes in the fair value of these swaps in other comprehensive income. As of October 2, 2022 and January 2, 2022, the Company has recorded assets
of $i18.4 million and liabilities of $i14.7 million, respectively, related to the fair market values of its interest
rate derivatives. The cash flows associated with the interest rate swaps are reflected in operating activities in the Condensed Consolidated Statements of Cash Flows, which is consistent with the classification as operating activities of the interest payments on the term loan.
The Company is exposed to foreign currency risk primarily from its investments in consolidated subsidiaries that operate in Canada,
the U.K., Ireland, Australia, New Zealand, Mexico and Japan. In order to mitigate the impact of foreign exchange fluctuations on commercial and financial transactions with these subsidiaries, the Company enters into foreign exchange forward contracts. Management has not designated these forward contracts as hedges. As of October 2, 2022 and January 2, 2022, the total notional amount of foreign exchange derivatives was $i59.3
million and $i51.8 million, respectively. They were scheduled to mature between October 2022 and November 2022 and between January 2022 and February 2022, respectively. The Company recorded an asset (net of liabilities) of $i0.3
million and a liability of $i0.1 million as of October 2, 2022 and January 2, 2022, respectively, related to the fair market values of its foreign exchange derivatives.
Quantitative Summary of Derivative Positions and Their Effect on Results of Operations
i
The
following tables present the fair values of derivative instruments included in the Condensed Consolidated Balance Sheets as of October 2, 2022 and January 2, 2022, for derivatives not designated as hedging instruments and derivatives designated as hedging instruments, respectively. The Company only has cash flow hedges that are designated as hedging instruments.
The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the quarter and three quarters ended October 2, 2022 and October 3, 2021 is as follows:
Derivative Gain/(Loss)
Recognized in Income for the Quarter Ended
Derivative Gain/(Loss) Recognized in Income for the Three Quarters Ended
The
Company recorded total non-cash compensation expense related to RSUs under the plans of $i2.5 million and $ii11.4/
million for the quarter and three quarters ended October 2, 2022, respectively, and $i5.1 million and $i14.9 million for the quarter and three quarters ended October 3,
2021, respectively.
i
The unrecognized compensation cost related to the unvested RSUs and the weighted-average period over which such cost is expected to be recognized are as follows:
The estimated fair value of restricted stock is calculated using a market approach (i.e., market multiple is used for the KKUK and Insomnia Cookies plans and an agreed-upon EBITDA buyout multiple is used for KK Australia and KK Mexico plans).
KKI issues time-vested stock options under its Omnibus Incentive Plan. The fair value of time-vested stock
options was estimated on the date of grant using the Black-Scholes option pricing model.
iA summary of the status of the time-vested stock options as of January 2, 2022 and changes during the first three quarters of fiscal 2022 is presented below:
The
Company recorded total non-cash compensation expense related to the time-vested stock options of $i0.3 million and $i1.9 million for the quarter and three quarters ended
October 2, 2022, respectively, and $i1.2 million and $i2.1 million for the quarter and three quarters ended October 3,
2021, respectively.
The unrecognized compensation cost related to the unvested stock options and the weighted-average period over which such cost is expected to be recognized are as follows:
For interim tax reporting, the
Company estimates a worldwide annual effective tax rate and applies that rate to the year-to-date ordinary income/(loss). The tax effects of significant unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.
The Company’s effective income tax rates were (i2.5)% and (i267.1)%
for the quarter and three quarters ended October 2, 2022, respectively, and i38.4% and (i76.1)%
for the quarter and three quarters ended October 3, 2021, respectively. The Company’s effective income tax rate for the quarter and three quarters ended October 2, 2022 differed from the respective statutory rates primarily due to disallowed executive compensation expense, the mix of income and taxes attributable to foreign jurisdictions, the recognition of previously unrecognized tax benefits, and a discrete tax benefit related to a litigation settlement. The Company’s effective income tax rate for the quarter and three quarters ended October 3, 2021 differed from the respective statutory rates primarily due to the revaluation of U.K. deferred taxes
as a result of the increase in the corporate tax rate from 19.0% to 25.0% beginning in 2023 and disallowed executive compensation in connection with the IPO. The Company’s effective income tax rates were also impacted by the mix of income and taxes attributable to foreign jurisdictions.
Note 10 — iCommitments and
Contingencies
Legal Matters
The Company is engaged in various legal proceedings arising in the normal course of business. The Company maintains insurance policies against certain kinds of such claims and suits, including insurance policies for workers’ compensation and personal injury, all of which are subject to deductibles. While the ultimate outcome of these matters could differ from management’s expectations, management currently does not believe their resolution will have a material adverse effect on the Company’s Condensed Consolidated Financial Statements.
Other Commitments
and Contingencies
One of the Company’s primary banks issued letters of credit on its behalf totaling $i12.2 million and $i8.5
million as of October 2, 2022 and January 2, 2022, respectively, a majority of which secure the Company’s reimbursement obligations to insurers under its self-insurance arrangements.
Note 11 — iRelated Party Transactions
As of October 2, 2022, the Company had an equity ownership in ithree franchisees, KremeWorks USA, LLC (i20%
ownership), KremeWorks Canada, L.P. (i25% ownership), and KK France (i33% ownership), with an aggregate carrying value of $i1.9
million. As of January 2, 2022, the Company had an equity ownership in itwo franchisees, KremeWorks USA, LLC (i20%
ownership) and KremeWorks Canada, L.P. (i25% ownership), with an aggregate carrying value of $i1.1 million.
The
Company was party to a senior unsecured note agreement with Krispy Kreme, G.P. (“KK GP”) for an aggregate principal amount of $i283.1 million. In April 2019, the Company entered into an additional unsecured note with KK GP for $i54.0 million
(such notes together, the “Related Party Notes”). As of January 3, 2021, the outstanding amount of principal and interest was $i344.6 million. The Related Party Notes were paid off in full during the second quarter of fiscal 2021. The interest expense was $i10.4
million for the three quarters ended October 3, 2021. iNo interest expense was incurred for the three quarters ended October 2, 2022.
Other
revenues include advertising fund contributions from franchisees, rental income, development and franchise fees, and licensing royalties from Keurig related to Krispy Kreme brands coffee sales.
Deferred revenue subject to Accounting Standards Codification Topic 606, Revenue from Contracts
with Customers, and related receivables are as follows:
Adjustment
to net loss attributable to common shareholders
i—
(i522)
(i374)
(i1,815)
Net
loss attributable to common shareholders - Basic
$
(i13,056)
$
(i6,181)
$
(i13,277)
$
(i27,677)
Additional
income attributed to noncontrolling interest due to subsidiary potential common shares
(i76)
(i88)
(i174)
(i237)
Net
loss attributable to common shareholders - Diluted
$
(i13,132)
$
(i6,269)
$
(i13,451)
$
(i27,914)
Basic
weighted average common shares outstanding
i167,431
i166,034
i167,353
i141,124
Dilutive
effect of outstanding common stock options and RSUs
i—
i—
i—
i—
Diluted
weighted average common shares outstanding
i167,431
i166,034
i167,353
i141,124
Loss
per share attributable to common shareholders:
Basic
$
(i0.08)
$
(i0.04)
$
(i0.08)
$
(i0.20)
Diluted
$
(i0.08)
$
(i0.04)
$
(i0.08)
$
(i0.20)
/
Potential
dilutive shares consist of unvested RSUs and stock options, calculated using the treasury stock method. The calculation of dilutive shares outstanding excludes certain unvested RSUs granted under certain subsidiaries’ executive ownership plans and long-term incentive plans, because their inclusion would have been antidilutive.
i
The following table summarizes the gross number of potential dilutive
unvested RSUs excluded due to antidilution (unadjusted for the treasury stock method):
For
the quarter and three quarters ended October 2, 2022, as well as the quarter and three quarters ended October 3, 2021, all i2.6 million time-vested stock options were excluded from the computation of diluted weighted average common shares outstanding based on application of the treasury stock method.
The Company conducts business through the ithree
reportable segments: U.S. and Canada, International, and Market Development. Unallocated corporate costs are excluded from the Company’s measurement of segment performance. These costs include general corporate expenses.
Employer
payroll taxes related to share-based compensation
i2
i1,171
i92
i2,012
Other
non-operating expense/(income), net(2)
i1,648
i732
i2,083
(i126)
Acquisition
and integration expenses(3)
i790
i1,288
i1,389
i3,663
Shop
closure expenses(4)
i5,735
i—
i7,859
i—
Restructuring
and severance expenses(5)
i2,328
i57
i2,804
i1,393
IPO-related
expenses(6)
i—
i4,018
i—
i14,221
Gain
on sale-leaseback
(i1,937)
i—
(i4,311)
i—
Other(7)
i1,699
i1,081
i6,108
i3,064
Net
loss
$
(i11,840)
$
(i3,752)
$
(i7,790)
$
(i19,126)
(1)Consists
of interest expense related to the Related Party Notes which were paid off in full during the quarter ended July 4, 2021.
(2)Primarily foreign translation gains and losses in each period.
(3)Consists of acquisition and integration-related costs in connection with the Company’s business and franchise acquisitions, including legal, due diligence, consulting and advisory fees incurred in connection with acquisition and integration-related activities for the applicable period.
(4)Includes lease termination costs, impairment charges, and loss on disposal of property, plant and equipment.
(5)The
quarter and three quarters ended October 2, 2022 consist of costs associated with restructuring of the global executive team. The quarter and three quarters ended October 3, 2021 consist of severance and related benefits costs associated with the Company’s realignment of the Company shop organizational structure to better support the DFD and Branded Sweet Treat Line businesses.
(6)Includes consulting and advisory fees incurred in connection with preparation for and execution of the Company’s IPO.
(7)The quarter and three quarters ended October 2, 2022 and October 3, 2021 consist primarily of legal expenses incurred outside the ordinary course of business, including the net settlement of approximately $ii3.3/ million
negotiated with TSW Foods, LLC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year
ended January 2, 2022, and in other reports filed subsequently with the SEC.
This report contains forward-looking statements that involve risks and uncertainties. The words “believe,”“may,”“could,”“will,”“should,”“anticipate,”“estimate,”“expect,”“outlook,”“guidance,” or similar words, or the negative of these words, identify forward-looking statements. Such forward-looking statements are based on certain assumptions and estimates that we consider reasonable but are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial conditions, business, prospects, growth strategy and liquidity. Accordingly, there are, or will be,
important factors that could cause our actual results to differ materially from those indicated in these statements. The inclusion of this forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will be achieved. Our actual results could differ materially from the forward-looking statements included herein. Factors that could cause actual results to differ from those expressed in forward-looking statements include, without limitation, the risks and uncertainties described under the headings “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10-K for the year ended January 2, 2022, filed by us with the SEC and described in the other filings we make from time to time with the SEC. We believe that these factors include, but are not limited to, the impact of pandemics,
changes in consumer preferences, the impact of inflation, and our ability to execute on our omni-channel business strategy. These forward-looking statements are made only as of the date of this document, and we do not undertake any obligation, other than as may be required by applicable law, to update or revise any forward-looking or cautionary statement to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise.
Overview
Krispy Kreme is one of the most beloved and well-known sweet treat brands in the world. Our iconic Original Glazed® doughnut is universally recognized for its hot-off-the-line, melt-in-your-mouth experience. Krispy Kreme operates in
over 30 countries through its unique network of fresh Doughnut Shops, partnerships with leading retailers, and a rapidly growing Ecommerce and delivery business. Our purpose of touching and enhancing lives through the joy that is Krispy Kreme guides how we operate every day and is reflected in the love we have for our people, our communities, and the planet.
The following table presents a summary of our financial results for the periods presented:
We made strong progress on the execution of our omni-channel strategy in the third quarter of fiscal 2022, where we focus on being able to deliver fresh doughnuts and cookies to where our
consumers are located. We continued to add quality Global Points of Access across our network as we convert markets into fully implemented Hub and Spoke models, including a net total of 294 new Global Points of Access in the third quarter of fiscal 2022 to surpass 11,700 Global Points of Access. The primary driver of the increased Points of Access during the third quarter was the continued expansion of our low capital DFD network in alignment with our transformation strategy, as we added 254 DFD Doors globally, including 200 DFD Doors to the U.S. and Canada segment, five to the International segment, and 49 to the Market Development segment. As highlighted by the more developed model within the International segment, the capital-efficient Hub and Spoke distribution model increases accessibility to our consumers and drives higher profitability and increased margins. We expect DFD growth to continue to be one of our most significant drivers of earnings growth, through
both increased door count and growth in average revenue per door per week (“APD”), which rose by 3.1% in the U.S. and Canada in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021. During the third quarter, we also continued to reassess performance of DFD Doors globally, and took actions to reduce the number of lower growth doors while at the same time leveraging price increases in the U.S. and Canada towards the end of the quarter.
At the beginning of the fourth quarter of fiscal 2022, we announced a partnership with McDonald’s on a small-scale test to offer doughnuts at McDonald’s restaurants in Louisville, Kentucky and the surrounding area, which began October 26, 2022. This is our first restaurant partnership as we continue to look for new ways to increase access to fresh doughnuts through our DFD network – a key element of our omni-channel
strategy to attain 50,000 Global Points of Access.
Internationally, we added a net 29 franchised Doughnut Shops during the third quarter of fiscal 2022. We also signed a new agreement for 33% equity ownership of Krispy Kreme development rights in France, with shop openings expected in the future.
The increase in Points of Access and the strong growth in APD in the U.S. and Canada allowed our trailing four quarters Sales per Hub to increase 18.4% from $3.8 million in the third quarter of fiscal 2021 to a record high $4.5 million in the third quarter of fiscal 2022. Our trailing four quarters International Sales per Hub also increased by 16.3% from $8.6 million to $10.0 million for the same periods. The increase in our Sales per Hub domestically and internationally led to 12.0% organic revenue growth in the third quarter compared to the same period in the prior year. Our goal is to
continue to grow our Sales per Hub over time, which we believe will drive higher margins and higher return on invested capital.
During the third quarter, the macroeconomic environment has continued to be challenging with supply chain disruption, inflationary pressures in commodities and labor costs, and inflationary pressures on consumer demand. These effects have been felt most heavily by our KKUK business. To protect margins, we increased prices in the U.K. and for Krispy Kreme U.S. by mid to high single digits at the beginning of the third quarter in most channels, and increased prices for DFD in September. At the same time, we reduced the level of discounting for Krispy Kreme U.S. and Canada towards the end of the quarter, seeing a beneficial impact on adjusted EBITDA margins in the latter part of the quarter.
Additionally, during the third quarter of fiscal 2022, we continued
to progress on portfolio optimization efforts for our legacy Krispy Kreme U.S. and Canada business, with a focus on our Hubs without Spokes and overall efficiencies. Some of this optimization includes converting shop types to better leverage labor costs and to better facilitate the expansion of DFD, reviewing the overall cost structure, and other actions. We believe this will enable us to focus even more on capital-efficient expansion in key strategic markets and to improve overall margins. As part of these efforts, we decided to exit additional Doughnut Shops in the U.S. during the third quarter of fiscal 2022, incremental to the Doughnut Shop exits determined during the second quarter. We will continue to assess the Krispy Kreme U.S. and Canada portfolio through the end of fiscal 2022.
Ecommerce represented 18.5% of our Doughnut and Cookie Shop sales (excluding DFD) for the third quarter of fiscal 2022, up from less than 10% pre-pandemic and 17.2% for the full fiscal year 2021. We are also expanding the delivery radius in several key markets around the world through partnerships with third party aggregators and the addition of Dark Shops.
Innovation is a significant driver of frequency as we create and introduce premium, fresh and buzz-worthy offerings to consumers across our Points of Access. High profile initiatives during the third quarter included Pumpkin Spice across all channels in the U.S. and Jaffa Cake in the U.K., among many others.
Key
Performance Indicators and Non-GAAP Measures
We monitor the key performance indicators and non-GAAP metrics set forth below to help us evaluate our business and growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. The calculation of the key performance indicators discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.
Throughout this Quarterly Report on Form 10-Q, we utilize “Global Points of Access” as a key performance indicator. Global Points of Access reflect all locations at which fresh doughnuts or cookies can be purchased. We define Global Points of Access to include all Hot Light Theater Shops, Fresh Shops, Carts, Food Trucks, and Other, DFD Doors, Cookie Shops, and other defined points at both Company-owned and franchise
locations as of the end of the respective reporting period. We monitor Global Points of Access as a metric that informs the growth of our omni-channel presence over time and believe this metric is useful to investors to understand our footprint in each of our segments and by asset type.
The following table presents our Global Points of Access, by segment and type, as of the end of the third quarter of fiscal 2022, the third quarter of fiscal 2021, and fiscal 2021, respectively:
(1)Excludes Branded Sweet Treat Line distribution points.
(2)Includes Points of Access that were acquired from a franchisee in Canada during the fourth quarter of fiscal 2021. These Points of Access were previously included in the Market Development segment. See Note 2, Acquisitions,
to our Condensed Consolidated Financial Statements for further information.
(3)Carts and Food Trucks are non-producing, mobile (typically on wheels) facilities without walls or a door where product is received from a Hot Light Theater Shop or Doughnut Factory. Other includes a vending machine as of October 2, 2022. Points of Access in this category are primarily found in international locations, in airports, train stations, etc. Comparative data has been included in all periods presented above.
(4)Includes locations in Japan, which are Company-owned. All remaining Points of Access in the Market Development segment relate to our franchise business.
As of October 2, 2022, we had 11,703 Global
Points of Access, with 1,867 Krispy Kreme and Insomnia Cookies branded shops, 42 Carts, Food Trucks, and Other, and 9,794 DFD Doors. During the third quarter of fiscal 2022 we added a net 30 additional shops globally, including 24 Fresh Shops and six Insomnia Cookie Shops. In the quarter, Hot Light Theater Shops were added in locations such as Tennessee and Staten Island, New York domestically, as well as Dublin, Ireland, Abu Dhabi, United Arab Emirates, and Penang, Malaysia, internationally. These additions were offset by the strategic exit of Hot Light Theater Shops in the U.S. discussed in “Significant Events and Transactions.” We added a net 254 new DFD Doors during the quarter as we continue to focus on the expansion of our Hub and Spoke model. We plan to continue adding new locations and expanding our Ecommerce and delivery platform in order to extend the availability of our products.
We also utilize “Hubs” as a key performance indicator. Our transformation is driven by the implementation of an omni-channel strategy to reach more consumers where they are and drive revenue growth, and this strategy is supported by a capital-efficient Hub and Spoke distribution model that provides a route to market and powers profitability. Our Hot Light Theater shops and Doughnut Factories serve as centralized production facilities (“Hubs”). From these Hubs, we deliver doughnuts to our Fresh Shops, Carts, Food Trucks, and Other, Dark Shops, and DFD Doors (“Spokes”) through an integrated network of company-operated delivery routes, ensuring quality and freshness. A Dark Shop is a non-consumer facing, non-producing facility where product is received from a Hub and stored until taken out for delivery, typically via Ecommerce channels.
The
following table presents our Hubs, by segment and type, as of the end of the third quarter of fiscal 2022, the third quarter of fiscal 2021, and fiscal 2021, respectively:
(1)Includes
only Hot Light Theater Shops and excludes Mini Theaters. A Mini Theater is a Spoke location that produces some doughnuts for itself and also receives doughnuts from another producing location.
Non-GAAP Measures
We report our financial results in accordance with generally accepted accounting principles in the United States of America (“GAAP”); however, management evaluates our results of operations using, among other measures, organic revenue growth, adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), and Adjusted Net Income as we believe these non-GAAP measures are useful in evaluating our operating performance.
These non-GAAP financial measures are not universally consistent calculations, limiting their usefulness as comparative measures. Other companies may calculate similarly titled
financial measures differently than we do or may not calculate them at all. Additionally, these non-GAAP financial measures are not measurements of financial performance under GAAP. In order to facilitate a clear understanding of our consolidated historical operating results, you should examine our non-GAAP financial measures in conjunction with our historical Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q.
Organic Revenue Growth
Organic revenue growth measures our revenue growth trends excluding the impact of acquisitions and foreign currency, and we believe it is useful for investors to understand the expansion of our global footprint through internal efforts. We define organic revenue growth as the growth in revenues, excluding (i) acquired shops owned by us for less than 12 months following their acquisition, (ii)
the impact of foreign currency exchange rate changes, and (iii) the impact of revenues generated during the 53rd week for those fiscal years that have a 53rd week based on our fiscal calendar defined in Note 1, Description of Business and Summary of Significant Accounting Policies. See “Results of Operations” for our organic growth calculations for the periods presented.
We
define “Adjusted EBITDA” as earnings before interest expense, net (including interest payable to related parties), income tax expense/(benefit), and depreciation and amortization, with further adjustments for share-based compensation, certain strategic initiatives, acquisition and integration expenses, and other certain non-recurring, infrequent or non-core income and expense items. Adjusted EBITDA enables operating performance to be reviewed across reporting periods on a consistent basis and is one of the principal measures used by management to evaluate and monitor our operating performance.
We define “Adjusted Net Income” as net loss adjusted for interest expense – related party, share-based compensation, certain strategic initiatives, acquisition and integration expenses, amortization of acquisition-related intangibles, the tax impact of adjustments and other certain non-recurring, infrequent or non-core
income and expense items.
Adjusted EBITDA and Adjusted Net Income have certain limitations, including adjustments for income and expense items that are required by GAAP. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as share-based compensation. Our presentation of Adjusted EBITDA and Adjusted Net Income should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using Adjusted EBITDA and Adjusted Net Income supplementally.
The following tables present a reconciliation of net loss to Adjusted EBITDA and net loss to Adjusted Net Income for the periods presented:
Employer
payroll taxes related to share-based compensation
2
1,171
92
2,012
Other non-operating expense/(income), net(2)
1,648
732
2,083
(126)
Acquisition
and integration expenses(3)
790
1,288
1,389
3,663
Shop closure expenses(4)
5,735
—
8,109
—
Restructuring
and severance expenses(5)
2,328
57
2,804
1,393
IPO-related expenses(6)
—
4,018
—
14,221
Gain
on sale-leaseback
(1,937)
—
(4,311)
—
Other(7)
1,699
1,081
6,108
3,064
Amortization of acquisition related intangibles(8)
7,083
7,497
21,307
22,573
KKI
Term Loan Facility interest and debt issuance costs(9)
—
107
—
2,448
Tax impact of adjustments(10)
(2,470)
(5,784)
(5,889)
(10,604)
Tax
specific adjustments(11)
—
(114)
(628)
3,833
Adjusted net income
$
5,863
$
12,616
$
36,592
$
50,711
(1)Consists
of interest expense related to the Related Party Notes which were paid off in full during the quarter ended July 4, 2021.
(2)Primarily foreign translation gains and losses in each period.
(3)Consists of acquisition and integration-related costs in connection with the Company’s business and franchise acquisitions, including legal, due diligence, consulting and advisory fees incurred in connection with acquisition and integration-related activities for the applicable period.
(4)Includes lease termination costs, impairment charges, and loss on disposal of property, plant and equipment. Shop closure expenses included in Adjusted Net
Income for the three quarters ended October 2, 2022 are inclusive of accelerated depreciation related to replacing a point of sale system.
(5)The quarter and three quarters ended October 2, 2022 consist of costs associated with restructuring of the global executive team. The quarter and three quarters ended October 3, 2021 consist of severance and related benefits costs associated with the Company’s realignment of the Company shop organizational structure to better support the DFD and Branded Sweet Treat Line businesses.
(6)Includes
consulting and advisory fees incurred in connection with preparation for and execution of the Company’s IPO.
(7)The quarter and three quarters ended October 2, 2022 and October 3, 2021 consist primarily of legal expenses incurred outside the ordinary course of business, including the net settlement of approximately $3.3 million negotiated with TSW Foods, LLC.
(8)Consists of amortization related to acquired intangible assets as reflected within depreciation and amortization in the Condensed Consolidated Statements of Operations.
(9)Includes interest expense and debt issuance costs
incurred and recognized as expenses in connection with the extinguishment of the KKI Term Loan Facility within four business days of receipt of the net proceeds from the IPO.
(10)Tax impact of adjustments calculated applying the applicable statutory rates. The three quarters ended October 2, 2022 also include the impact of disallowed executive compensation expense and a discrete tax benefit related to a legal accrual.
(11)The three quarters ended October 2, 2022 consist of the recognition of a previously unrecognized tax benefit unrelated to ongoing operations. The three quarters ended October 3, 2021 consist primarily of the effect of tax law changes on existing temporary differences.
In order to measure the effectiveness of our Hub and Spoke model, we use “Sales per Hub” on a trailing four-quarter basis, which includes all revenue generated from a Hub and its associated Spokes. Sales per Hub equals Fresh Revenues from Hubs with Spokes, divided by the average number of Hubs with Spokes during the period. Fresh Revenues include product sales generated from our Doughnut Shop business (including Ecommerce and delivery), as well as DFD sales, but excluding sales from our legacy wholesale business and our Branded Sweet Treat Line. It also excludes all Insomnia Cookies revenues as the measure is focused on the Krispy Kreme business. The Average Hub with Spokes for a period is calculated as the average of the number of Hubs with Spokes at the end of the five most recent quarters. The Sales per Hub performance measure allows
us and investors to measure our effectiveness at leveraging the Hubs in the Hub and Spoke model to distribute product and generate cost efficiencies and profitability.
Sales per Hub was as follows for each of the trailing four quarters periods below:
Fresh Revenues from Insomnia Cookies and Hubs without Spokes (2)
(402,544)
(415,768)
(323,079)
Sales from Hubs with Spokes
563,722
475,334
331,019
Sales
per Hub (millions)
4.5
4.0
3.5
International:
Sales from Hubs with Spokes (3)
$
362,978
$
332,995
$
230,185
Sales
per Hub (millions)
10.0
9.1
6.4
(1)Includes legacy wholesale business revenues and Branded Sweet Treat Line revenues.
(2)Includes Insomnia Cookies revenues and Fresh Revenues generated by Hubs without Spokes.
(3)Total International net revenues is equal to Fresh Revenues from Hubs with Spokes for that business segment.
In our International segment, where the
Hub and Spoke model is most developed, Sales per Hub reached $10.0 million, up from $9.1 million in the full fiscal year 2021 and $6.4 million in the full fiscal year 2020. The International segment illustrates the benefits of leveraging our Hub and Spoke model in the most efficient way to grow the business, as shown by the its quick recovery from the impacts of the COVID-19 pandemic and growth in profit margins. In the U.S. and Canada segment, we reached Sales per Hub of $4.5 million, up from $4.0 million in the full fiscal year 2021 and $3.5 million in the full fiscal year 2020. U.S. and Canada growth was driven by our efforts to increase the number of DFD Doors served by our Hubs and to increase APD for the DFD Door portfolio, as the segment makes progress toward optimizing the model to look more like International. As we further extend the Hub and Spoke model into existing and new markets around the world, increase innovation, and selectively take pricing actions,
we expect to see this measure continue to grow.
The following comparisons are historical results and are not indicative of future results which could differ materially from the historical financial information presented.
The
following table presents our unaudited condensed consolidated results of operations for the quarter ended October 2, 2022 and the quarter ended October 3, 2021:
Net
income attributable to noncontrolling interest
1,216
0.3
%
1,907
0.6
%
(691)
-36.2
%
Net loss attributable to Krispy Kreme, Inc.
$
(13,056)
-3.5
%
$
(5,659)
-1.7
%
$
(7,397)
-130.7
%
Product
sales: Product sales increased $35.9 million, or 10.7%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022. Approximately $5.3 million of the increase in product sales was attributable to shops acquired from franchisees. However, product sales growth was partially offset by $11.5 million attributable to foreign currencies weakening against the U.S. dollar.
Royalties and other revenues: Royalties and other revenues decreased $1.2 million, or 13.8%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, reflecting the impact of franchise acquisitions, including KK Canada in the fourth quarter of fiscal 2021 and a U.S. franchisee in the third quarter of fiscal 2022.
The following table presents a further breakdown of total net revenue and organic revenue growth by segment for the quarter ended October 2, 2022 compared to the quarter ended October 3, 2021:
(in thousands except percentages)
U.S.
and Canada
International
Market Development
Total Company
Total net revenues in third quarter of fiscal 2022
$
252,609
$
91,934
$
32,979
$
377,522
Total
net revenues in third quarter of fiscal 2021
225,807
87,262
29,730
342,799
Total Net Revenues Growth
26,802
4,672
3,249
34,723
Total
Net Revenues Growth %
11.9
%
5.4
%
10.9
%
10.1
%
Impact of acquisitions
(6,809)
—
1,917
(4,892)
Impact
of foreign currency translation
—
8,890
2,564
11,454
Organic Revenue Growth
$
19,993
$
13,562
$
7,730
$
41,285
Organic
Revenue Growth %
8.9
%
15.5
%
26.0
%
12.0
%
Total net revenue growth during the third quarter of fiscal 2022 of $34.7 million, or approximately 10.1%, and organic revenue growth of $41.3 million, or approximately 12.0%, was driven by increasing availability through new Global Points of Access, mostly capital-light DFD Doors, and
via Ecommerce. Additionally, pricing action was taken early in the third quarter of fiscal 2022 in the U.S. (with additional DFD pricing taken towards the end of the third quarter) and the U.K. to offset labor and commodity inflation impacts.
U.S. and Canada segment net revenue growth was driven by a combination of continued execution of our omni-channel strategy and franchise acquisitions, including KK Canada and a U.S. franchisee. U.S. and Canada net revenue grew $26.8 million, or approximately 11.9%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022 while U.S. and Canada organic revenue increased $20.0 million, or approximately 8.9%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022.Organic growth was driven by successful seasonal
offerings, such as our Pumpkin Spice LTO, coupled with continued expansion of fresh Points of Access, particularly low capital DFD Doors which have increased by 500 (and with a 3.1% increase in APD) compared to the third quarter of fiscal 2021. We also operated an additional 21 Insomnia Cookies shops compared to the third quarter of fiscal 2021. Our organic growth has also been supplemented by effective pricing increases taken in the second half of fiscal 2021 and again during the third quarter of fiscal 2022, leading to significant increase in the average transaction size, but offset some by transaction declines.
Our International segment net revenue grew $4.7 million, or approximately 5.4%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, in spite of foreign currency translation impacts of $8.9 million
from a strengthening U.S. dollar. International organic revenue grew $13.6 million, or approximately 15.5%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, driven by the substantial expansion of DFD Doors and new shop openings, with fresh Points of Access increasing by 630, or 22.4%, to 3,439 compared to the third quarter of fiscal 2021. Growth was strong in Mexico, Australia, and New Zealand. We still saw organic growth in the U.K. and Ireland despite a challenging consumer environment, with inflationary pressures contributing to a decline in consumer traffic in our shops.
Our Market Development segment net revenue increased $3.2 million, or approximately 10.9%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, in spite of the impacts of franchise acquisitions such as KK Canada and certain foreign currencies
devaluing against the U.S. dollar. When adjusted for the impacts of acquisitions and foreign currency, Market Development organic revenue grew $7.7 million, or approximately 26.0%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, driven by focused growth in our international franchise markets and Japan, including benefits from DFD expansion.
Product and distribution costs (exclusive of depreciation and amortization): Product and distribution costs increased $10.7 million, or 11.6%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, attributable to the same factors as our revenue growth. Product and distribution costs as a percentage of revenue increased by approximately 30 basis points from 26.9% in the third quarter of fiscal 2021 to 27.2% in the third quarter of fiscal 2022. This
increase was primarily driven by inflationary pressures on commodities and logistics costs in the third quarter of fiscal 2022, as well as increased promotional activity in the U.S. and Canada. We significantly reduced the level of discounting for Krispy Kreme U.S. and Canada towards the end of the third quarter of fiscal 2022, which led to a reduction of product and distribution costs as a percentage of revenue in September.
Operating expenses: Operating expenses increased $20.3 million, or 12.9%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, driven mainly
by labor cost inflation, as well as investments to support growth. Operating expenses as a percentage of revenue increased approximately 110 basis points, from 45.9% in the third quarter of fiscal 2021 to 47.0% in the third quarter of fiscal 2022, primarily due to the labor cost inflation, particularly internationally, coupled with transaction volume declines for KKUK. This has been partially offset by efficiency benefits from DFD expansion as we execute our Hub and Spoke transformation.
Selling, general and administrative expense: Selling, general and administrative (“SG&A”) expense increased $1.9 million, or 3.5%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022.
As a percentage of revenue, SG&A expense decreased approximately 90 basis points, from 15.4% in the third quarter of fiscal 2021 to 14.5% in the third quarter of fiscal 2022, primarily due to lower share-based compensation expenses associated with forfeitures, as well as economies of scale from our top-line revenue growth.
Other expenses/(income), net: Other expenses, net of $3.0 million in the third quarter of fiscal 2022 was primarily driven by impairment and lease termination costs, net of a gain from a sale-leaseback transaction. As part of our omni-channel transformation, we continued portfolio optimization efforts for Krispy Kreme U.S. and Canada during the third quarter of fiscal 2022, which included deciding to exit additional lower margin shops in the U.S. We expect additional impairment and lease termination costs related to this project in
the remainder of fiscal 2022.
Depreciation and amortization expense: Depreciation and amortization expense increased $2.5 million, or 9.6%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, primarily driven by increased capital spend and assets placed into service to support the Hub and Spoke model evolution.
Income tax expense: The income tax expense of $0.3 million in the third quarter of fiscal 2022 was driven by disallowed executive compensation expense and the mix of income between the U.S. and foreign jurisdictions.
Net income attributable to noncontrolling interest: Net income attributable to noncontrolling interest decreased $0.7 million or 36.2%, from the third quarter
of fiscal 2021 to the third quarter of fiscal 2022, driven by less earnings allocated to certain consolidated subsidiaries, particularly WKS Krispy Kreme.
U.S. and Canada Adjusted EBITDA increased $2.0 million, or 10.0%, with margin relatively flat at 8.7% in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021. The adjusted EBITDA margin was driven by cost increases in labor and commodities. This has been partially offset by efficiency benefits from DFD expansion as we execute our Hub and Spoke transformation, an improvement in margin for our Branded Sweet Treat Line, margin growth for Insomnia Cookies aided by better leverage of labor expenses, and the beneficial impact of pricing increases. At the same time, we reduced the level of discounting for Krispy Kreme U.S. and Canada towards the end of the third quarter of fiscal 2022, seeing a beneficial impact on adjusted EBITDA margins in September. Additionally, we believe the legacy U.S. and Canada optimization efforts discussed in “Significant
Events and Transactions” above will yield improvement to margins in fiscal 2023 and 2024.
International Adjusted EBITDA decreased $3.4 million, or 15.7%, with margin decline of approximately 490 basis points to 19.9% from the third quarter of fiscal 2021 to the third quarter of fiscal 2022, due to cycling record performance a year ago upon the re-opening from COVID-19, cost pressures from labor and commodities, adverse impacts from foreign currency translation, and a challenging consumer environment in the U.K.
Market Development Adjusted EBITDA increased $1.3 million, or 14.6%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022 driven by top-line growth of our international franchise markets, which more than offset the impact of acquisitions and foreign currency fluctuations.
Corporate expenses within Adjusted
EBITDA increased $2.8 million, or 30.3%, from the third quarter of fiscal 2021 to the third quarter of fiscal 2022 primarily due to an increase in costs associated with our operation as a public company.
The following table presents our unaudited condensed consolidated results of operations for the three quarters ended October 2, 2022 and the three quarters ended October 3,
2021:
Product sales: Product sales increased $112.9 million, or 11.4%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022. Approximately $18.2 million of the increase in product sales was attributable to shops acquired from franchisees. However, product sales growth was partially offset by $24.6 million attributable to foreign currencies weakening against the U.S. dollar.
Royalties and other revenues: Royalties andother revenues decreased 1.4 million, or 5.7%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, reflecting the impact of franchise acquisitions, including KK Canada in the fourth quarter of fiscal 2021 and a U.S. franchisee in the third quarter of fiscal 2022.
The
following table presents a further breakdown of total net revenue and organic revenue growth by segment for the three quarters ended October 2, 2022 compared to the three quarters ended October 3, 2021:
(in thousands except
percentages)
U.S. and Canada
International
Market Development
Total Company
Total net revenues in first three quarters of fiscal 2022
$
756,196
$
272,988
$
96,115
$
1,125,299
Total
net revenues in first three quarters of fiscal 2021
679,195
243,005
91,594
1,013,794
Total Net Revenues Growth
77,001
29,983
4,521
111,505
Total Net Revenues Growth %
11.3
%
12.3
%
4.9
%
11.0
%
Impact
of acquisitions
(21,738)
—
6,130
(15,608)
Impact of foreign currency translation
—
18,843
5,769
24,612
Organic Revenue Growth
$
55,263
$
48,826
$
16,420
$
120,509
Organic
Revenue Growth %
8.1
%
20.1
%
17.9
%
11.9
%
Total net revenue growth of $111.5 million, or approximately 11.0%, and organic revenue growth of $120.5 million, or approximately 11.9%, was driven by the continued and successful execution of our growth strategy of deploying our omni-channel approach globally. We have continued
to increase availability through new Global Points of Access and the omni-channel model, particularly the expansion of Spokes, including DFD Doors, for existing Hubs with Spokes during the first three quarters of fiscal 2022.
U.S. and Canada net revenue grew $77.0 million, or approximately 11.3% from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, and was impacted by U.S. franchise acquisitions (17 shops in the first quarter of fiscal 2021 and six additional shops in the third quarter of fiscal 2022) and the acquisition of KK Canada. U.S. and Canada organic revenue grew $55.3 million, or approximately 8.1%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, driven by significant expansion of the DFD business in strategic markets, increased leverage of Ecommerce and delivery channels, Krispy Kreme and Insomnia Cookies new shop openings,
and successful LTOs.
Our International segment net revenue grew $30.0 million, or approximately 12.3%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, in spite of foreign currency translation impacts of $18.8 million from a strengthening U.S. dollar. International organic revenue grew $48.8 million, or approximately 20.1%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, driven mainly by substantial expansion of DFD Doors, new shop openings, and successful LTOs.
Our Market Development segment net revenue grew $4.5 million, or approximately 4.9%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, in spite of the impacts of franchise acquisitions and certain foreign currencies devaluing against the
U.S. dollar. Market Development organic revenue grew $16.4 million, or approximately 17.9%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, driven by focused expansion in Japan and international franchise markets.
Product and distribution costs (exclusive of depreciation and amortization): Product and distribution costs increased $42.4 million, or 16.5%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, largely in line with and attributable to the same factors as our revenue growth. Product and distribution costs as a percentage of revenue increased by approximately 120 basis points from 25.4% in the first three quarters of fiscal 2021 to 26.6% in the first three quarters of fiscal 2022. The increase was primarily driven by inflationary pressures on commodities and logistics costs in the first three
quarters of fiscal 2022.
Operating expenses: Operating expenses increased $57.5 million, or 12.4%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, driven mainly by franchise acquisitions, labor cost inflation, and labor investments to support growth. Franchise acquisitions, which result in additional operating expenses that are needed to run Company-owned operations versus franchises, contributed to the increase. Operating expenses as a percentage of revenue increased approximately 60 basis points, from 45.6% in the first three quarters of fiscal
2021 to 46.2% in the first three quarters of fiscal 2022 with decreased performance for Hubs without Spokes for Krispy Kreme U.S. and Canada coupled with transaction volume declines for KKUK. This has been partially offset by efficiency benefits from DFD expansion as we execute our Hub and Spoke transformation.
Selling, general and administrative expense: SG&A expense decreased by $3.2 million, or 1.9%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022. As a percentage of revenue, SG&A expense decreased approximately 190 basis points, from 16.1% in the first three quarters of fiscal 2021 to 14.2% in the first three quarters of fiscal 2022. The decrease was driven by higher IPO costs recognized in the first three quarters
of fiscal 2021, a decrease of our employee compensation accrual in the second quarter of fiscal 2022, as well as economies of scale from our top-line revenue growth.
Other expenses/(income), net: Other expenses, net of $1.8 million in the first three quarters of fiscal 2022 was primarily driven by impairment and lease termination costs, partially offset by gains from sale-leaseback transactions. Other income, net of $4.4 million in the first three quarters of fiscal 2021 was primarily driven by one-time COVID-related business interruption insurance proceeds of approximately $3.5 million in the U.K. and Ireland.
Depreciation and amortization expense: Depreciation and amortization expense increased $9.5 million, or 12.8%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, primarily
driven by increased assets placed into service to support the Hub and Spoke model evolution.
Interest expense - related party: Interest expense with related parties decreased $10.4 million, or 100.0% from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, driven by paying off our Related Party Notes in full with KK GP during the second quarter of fiscal 2021.
Income tax expense: Income tax expense of $5.7 million in the first three quarters of fiscal 2022 was driven by the mix of income between the U.S. and foreign jurisdictions, disallowed executive compensation expense, the recognition of previously unrecognized tax benefits, and a discrete tax benefit related to a legal settlement in the second quarter
of fiscal 2022.
Net income attributable to noncontrolling interest: Net income attributable to noncontrolling interest for the first three quarters of fiscal 2022 decreased $1.6 million, or 24.1%, from the first three quarters of fiscal 2021, driven by less earnings allocated to certain consolidated subsidiaries, particularly WKS Krispy Kreme.
(1)Refer to “Key Performance Indicators and Non-GAAP Measures” above for a reconciliation of Adjusted EBITDA to net loss.
U.S. and Canada Adjusted EBITDA increased $5.8 million,
or 7.6%, with margin decline of approximately 40 basis points to 10.8% from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022. This decrease in margin was driven by cost increases in labor and commodities and underperformance in our Hubs without Spokes, partially offset by the positive impacts from an increase in our Points of Access in our Hubs with Spokes and pricing increase in the third quarter of fiscal 2022. Additionally, we believe the legacy U.S. and Canada optimization efforts discussed in “Significant Events and Transactions” above will yield improvement to margins in fiscal 2023 and 2024.
International Adjusted EBITDA decreased $5.6 million, or 9.3%, with margin decline of approximately 480 basis points to 20.2% from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, due primarily to an increase in labor and commodity costs compared to timing
of price increases, adverse foreign currency translation impacts, as well as a challenging consumer environment in the U.K. Adjusted EBITDA in the first three quarters of fiscal 2021 was also impacted positively by $3.5 million business interruption insurance proceeds related to COVID-19 in the U.K. Despite these factors, we have seen positive impacts on Adjusted EBITDA margin from Points of Access expansion and efficiencies from our Hub and Spoke model evolution.
Market Development Adjusted EBITDA increased $2.4 million, or 7.9%, from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022 driven by top-line growth of our international franchise markets and Japan. This growth more than offset the impact of acquisitions and foreign currency translation.
Corporate expenses within Adjusted EBITDA increased $7.9 million, or 30.3%, from
the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022 driven by an increase in costs associated with our operation as a public company.
Capital Resources and Liquidity
Our principal sources of liquidity to date have included cash from operating activities, cash on hand, amounts available under our credit facility, and commercial trade financing including our “Supply Chain Financing Program” or the “SCF Program.” Our primary use of liquidity is to fund the cash requirements of our business operations, including working capital needs, capital expenditures, acquisitions and other commitments.
Our future obligations
primarily consist of our debt and lease obligations, as well as commitments under ingredient and other forward purchase contracts. As of January 2, 2022, we had the following future obligations:
•An aggregate principal amount of $696.3 million outstanding under the 2019 Facility;
As of October 2, 2022, our outstanding principal amount under the 2019 Facility was $750.5 million. The increase from the balance as of January 2, 2022 is due to a net draw of $80.5 million on the revolving credit facility, which was used in part to fund quarterly term loan repayments of $26.3 million.
We had cash and cash equivalents of $38.6 million as of January 2, 2022 and $28.1 million as of October 2,
2022. We believe that our existing cash and cash equivalents and debt facilities will be sufficient to fund our operating and capital needs for at least the next twelve months. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, the timing and extent of spending to acquire franchises, the growth of our presence in new markets and the expansion of our omni-channel model in existing markets. We may enter into arrangements in the future to acquire or invest in complementary businesses, services and technologies. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity
or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations and financial condition would be adversely affected.
Cash Flows
We generate significant cash from operations and have substantial credit availability and capacity to fund operating and discretionary spending such as capital expenditures and debt repayments. Our requirement for working capital is not significant because our consumers pay us in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the vendor of such items. The
following table and discussion present, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities:
Cash provided by operations totaled $70.7 million for the first three quarters of fiscal 2022, a decrease of $28.1 million compared with the amount for the first three quarters of fiscal 2021. Cash provided by operations decreased due to a decline of $24.6 million from changes in operating assets and liabilities, largely as a result of increases in inventories and other current and noncurrent assets. These effects were also partially offset by operating results producing a smaller net loss in the first three quarters of fiscal 2022 compared to the first three quarters of fiscal 2021.
We have undertaken broad efforts to improve our working capital position and cash generation, in part by negotiating longer payment terms with vendors. We have an agreement with a third-party administrator which allows participating vendors to track our payments, and if voluntarily elected by the vendor,
to sell payment obligations from us to financial institutions as part of our SCF Program. Our typical payment terms for trade payables range up to 180 days outside of the SCF Program, depending on the type of vendors and the nature of the supplies or services. For vendors under the SCF Program, we have established payable terms ranging up to, but not exceeding, 360 days. When participating vendors elect to sell one or more of our payment obligations, our rights and obligations to settle the payables on their contractual due date are not impacted. We have no economic or commercial interest in a vendor’s decision to enter into these agreements and the financial institutions do not provide us with incentives such as rebates or profit sharing under the SCF Program. We agree on commercial terms with vendors for the goods and services procured, which are consistent with payment terms observed at other peer companies in the industry, and as the terms are not impacted by the
SCF Program, such obligations are classified as trade payables. Our increased use of the SCF programs has continued through the quarter ended October 2, 2022.
Cash used for investing activities totaled $87.7 million for the first three quarters of fiscal 2022, a decrease in investment of $29.0 million compared with the first three quarters of fiscal 2021. The decrease is primarily due to $33.9 million cash used for acquisitions of franchised shops in the first three quarters of fiscal 2021 (compared
to $17.3 million cash used for acquisitions completed in the first three quarters of fiscal 2022), in addition to $5.7 million of proceeds from sale-leaseback transactions completed in the first three quarters of fiscal 2022. We also decreased our cash paid for purchases of property and equipment as a percentage of net revenue in the first three quarters of fiscal 2022 compared to the first three quarters of fiscal 2021, aided by capital-light DFD expansion.
Cash Flows Provided by Financing Activities
Cash provided by financing activities totaled $14.2 million for the first three quarters of fiscal 2022, a reduction in financing of $13.1 million compared with the first three quarters of fiscal 2021. The reduction in financing was primarily due to decreasing our reliance on equity financing in the first three quarters of fiscal 2022 compared to the first three
quarters of fiscal 2021, in addition to our payment of $12.5 million of issuance costs in connection with the IPO during the first quarter of fiscal 2022.
The reductions in financing were partially offset by $35.8 million of cash inflows related to structured payables programs (net proceeds on structured payables of $7.7 million in the three quarters ended October 2, 2022 compared to net payments on structured payables of $28.1 million in the three quarters ended October 3, 2021). We utilize various card products issued by financial institutions to facilitate purchases of goods and services. By using these products, we may receive differing levels of rebates based on timing of repayment. The payment obligations under these cards products are classified as structured payables on our Condensed Consolidated Balance Sheets and the
associated cash flows are included in the financing section of our Condensed Consolidated Statement of Cash Flows.
Debt
Our long-term debt obligations consist of the following:
On
June 13, 2019, we entered into a credit agreement (the “2019 Facility”). The 2019 Facility provides for senior secured credit facilities in the form of $700.0 million in aggregate principal of term loans and $300.0 million of revolving capacity. Borrowings under the 2019 Facility are subject to an interest rate of one-month LIBOR plus 2.25% if our Total Net Leverage Ratio (as defined in the 2019 Facility) equals or exceeds 4.00 to 1.00, 2.00% if our Total Net Leverage Ratio is less than 4.00 to 1.00 but greater than or equal to 3.00 to 1.00 or 1.75% if our Total Net Leverage Ratio is less than 3.00 to 1.00, as determined under the 2019 Facility. We are required to make equal installments of 1.25% of the aggregate closing date principal amount of the term loans on the last business day of each fiscal quarter. All remaining term loan and revolving loan balances are to
be due five years from the initial closing date.
Under the terms of the 2019 Facility, we are subject to a requirement to maintain a Total Net Leverage Ratio of less than 5.25 to 1.00 as of October 2, 2022, which reduces to 5.00 to 1.00 by April 2, 2023. The Total Net Leverage Ratio under the 2019 Facility is defined as the ratio of (a) Total Indebtedness (as defined in the 2019 Facility, which includes all debt and finance lease obligations) minus unrestricted cash and cash equivalents to (b) a defined calculation of Adjusted EBITDA (“2019 Facility Adjusted EBITDA”) for the most recently ended Test Period (as defined in the 2019 Facility). The 2019 Facility Adjusted EBITDA for purposes of these restrictive covenants includes incremental adjustments beyond those included in our Adjusted EBITDA non-GAAP measure. Specifically,
the 2019 Facility Adjusted EBITDA definition includes pro forma impact of EBITDA to be received from new shop openings and acquisitions for periods not yet in operation, certain acquisition related
synergies and cost optimization activities and incremental add-backs for pre-opening costs. Our Total Net Leverage Ratio was 3.67 to 1.00 as of the end of the third quarter of fiscal 2022 compared to 2.99 to 1.00 as of the end of fiscal 2021, primarily due to an increase in gross debt.
We were in compliance with the financial and other covenants related to the 2019 Facility as of October 2,
2022 and expect to remain in compliance over the next 12 months. If we are unable to meet the 2019 Facility financial or other covenants in future periods, it may negatively impact our liquidity by limiting our ability to draw on the revolving credit facility, could result in the lenders accelerating the maturity of such indebtedness and foreclosing upon the collateral pledged thereunder, and could require the replacement of the 2019 Facility with new sources of financing, which there is no guaranty we could secure.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity with GAAP.
The preparation of the Condensed Consolidated Financial Statements requires the use of judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on our Condensed Consolidated Financial Statements. Actual results could differ from the estimates made by management.
There have been no material changes to our critical accounting policies and estimates as compared to those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K for the year ended January
2, 2022.
New Accounting Pronouncements
Refer to Note 1 to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, for a detailed description of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Effects of Changing Prices – Inflation
We are exposed to the effects of commodity price fluctuations in the cost of ingredients of our products, of which flour, sugar and shortening are the most significant. During the first three quarters of fiscal 2022, we have continued to experience headwinds from commodity inflation globally. We have undertaken efforts to effectively manage inflationary cost increases through rapid inventory turnover and reduced inventory waste, increased focus on resiliency of our supply chains, and an ability to adjust pricing of our products. Additionally, from time to time we may enter into forward contract
for supply through our vendors for raw materials which are ingredients of our products or which are components of such ingredients, including wheat and soybean oil.
We are also exposed to the effects of commodity price fluctuations in the cost of gasoline used by our delivery vehicles. To mitigate the risk of fluctuations in the price of our gasoline purchases, we may directly purchase commodity futures contracts.
Interest Rate Risk
We are exposed to changes in interest rates on any borrowings under our debt facilities, which bear interest based on the one-month LIBOR (with a floor of zero). Generally, interest rate changes could impact the amount of our interest paid and, therefore, our future earnings and cash flows, assuming other factors are
held constant. To mitigate the impact of changes in LIBOR on interest expense for a portion of our variable rate debt, we have entered into interest rate swaps on $505.0 million notional of our $750.5 million of outstanding debt under the 2019 Facility as of October 2, 2022, which we account for as cash flow hedges. Based on the $245.5 million of unhedged outstanding as of October 2, 2022, a 100 basis point increase in the one-month LIBOR would result in a $2.5 million increase in interest expense for a 12-month period, while a 100 basis point decrease would result in a $2.3 million decrease in interest expense for a 12-month period based on the daily average of the one-month LIBOR through the fiscal quarter ended October 2, 2022.
The Financial Conduct Authority in the U.K. intends
to phase out LIBOR by the end of 2023. We have negotiated terms in consideration of this discontinuation and do not expect that the discontinuation of the LIBOR rate, including any legal or regulatory changes made in response to its future phase out, will have a material impact on our liquidity or results of operations.
Foreign Currency Risk
We are exposed to foreign currency translation risk on the operations of our subsidiaries that have functional currencies other than the U.S. dollar, whose revenues accounted for approximately 29% of our total net revenues through the three quarters ended October 2, 2022. A substantial majority of these revenues, or approximately $322.6 million through the three quarters ended October 2,
2022, were attributable to subsidiaries whose functional currencies are the Canadian dollar, the British pound sterling, the Euro, the Australian dollar, the New Zealand dollar, the Mexican peso, and the Japanese yen. A 10% increase or decrease in the average exchange rate of the Canadian dollar, the British pound sterling, the Euro, the Australian dollar, the New Zealand dollar, the Mexican peso, and the Japanese yen against the U.S. dollar would have resulted in a decrease or increase of approximately $32.3 million in our total net revenues through the three quarters ended October 2, 2022.
From time to time, we engage in foreign currency exchange and credit transactions with our non-U.S. subsidiaries,
which we typically hedge. To date, the impact of such transactions, including the cost of hedging, has not been material. We do not engage in foreign currency or hedging transactions for speculative purposes.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of October 2, 2022, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
There
were no changes during the fiscal quarter ended October 2, 2022 in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
In the ordinary course of conducting our business, we have in the past and may in the future become involved in various legal actions and other claims. We may also become involved in other judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our businesses. Some of these matters may involve claims of substantial amounts. These legal proceedings may be subject to many uncertainties and there can be no assurance of the outcome of any individual proceedings. We do not presently anticipate any material legal proceedings that, if determined adversely to us, would have a material adverse effect on our financial position, results of operations or cash flows. See Note 10, Commitments and Contingencies, to the Condensed Consolidated
Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for information regarding certain legal proceedings in which we are involved.
Shareholder Derivative Suit
On December 3, 2021, a shareholder of the Company brought a shareholder class and derivative action complaint against the members of the Company’s Board of Directors, the Company, JAB Holdings B.V. (“JAB”), and certain entities related to JAB (JAB and the related entities, collectively the “JAB Entities”). The plaintiff alleges that the members of the
Company’s Board breached their fiduciary duty by allowing the JAB Entities to conduct a creeping takeover of the Company and that the JAB Entities aided and abetted those breaches.
On December 16, 2021, the court denied the plaintiff’s request for an emergency temporary restraining order to prohibit further acquisitions of the Company’s stock by the JAB Entities. On March 14, 2022, the Company entered into a letter agreement with the JAB Entities that, among other things, (i) requires JAB to provide notice at least 30 days prior to an acquisition of voting rights, directly
or indirectly, that would exceed 45% of the Company’s total outstanding voting stock, (ii) restricts directors who are employees or designees of the JAB Entities from involvement in the consideration of such acquisition by the Company’s Board of Directors, (iii) permits the JAB Entities to enter into future cash-settled total return swap agreements provided that the JAB Entities must comply with the 30-day notice requirement before acquiring shares from or entering into a voting arrangement with the counterparty and that the JAB Entities do not try to influence the voting decisions of the counterparty. The terms of this agreement shall remain in effect for one year from the date of signing, subject to extension by JAB in its sole discretion.
On March
29, 2022, the parties filed a stipulation and order to dismiss the action with prejudice as moot and begin negotiation for an award of attorneys’ fees and reimbursement of expenses. On October 31, 2022, the Company paid $0.2 million as its share of the full resolution of this matter, for which the related liability due has been reflected in the accompanying Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
With the exception of the changes discussed below, there have been no material changes from the risk factors disclosed in “Risk Factors” in Part 1, Item 1A of the
Company’s Annual Report on Form 10-K for the year ended January 2, 2022.
We will become increasingly reliant on a single vendor for distribution of materials and supplies in the U.S. and a portion of Canada. If the vendor fails to provide these materials and supplies per the agreement, our and our franchisees’ ability to make doughnuts could be negatively affected.
To consolidate our third-party logistics operations, we have entered into an exclusive distribution agreement (the “Distribution Agreement”) with BakeMark USA LLC, a Delaware limited liability company (“BakeMark”). The Distribution Agreement, among other things, grants BakeMark exclusive rights to distribute ingredients, packaging, and supplies to Company-owned and franchise shops in the U.S., except for New York City and British Columbia, Canada. Exclusivity
is granted on a regional basis once BakeMark commences distribution to Company-owned and franchise shops in each of the territories, with all regions expected to be served by BakeMark on or before March 15, 2023. The initial term ends on December 31, 2028, and renews automatically on an annual basis unless either the Company or BakeMark elect not to continue the arrangement.
As BakeMark distribution progresses, we will become increasingly reliant on BakeMark to distribute materials and supplies. If BakeMark experiences economic or operational challenges, this could cause disruptions to our supply chain in the U.S. and Canada. We cannot control the factors that may cause such challenges, and we may not be able to find an alternative distribution
channel in a timely manner to prevent disruptions to our operations, which might even require that we temporarily stop production in the affected shops until other arrangements are taken. Additionally, the cost of a replacement distribution
channel may also affect the financial performance of these shops. Severe disruption to BakeMark could result in a material and adverse impact on our business and our consolidated financial position, results of operations, and cash flows.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income/(Loss), (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes
to Condensed Consolidated Financial Statements.
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Charlotte, North Carolina on November 15, 2022.