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Shareholders? Equity (Unaudited)
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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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-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
(1)Includes
a $i0.035 cash dividend per common share declared in the first quarter of fiscal 2023 and expected to be paid in the second quarter of fiscal 2023.
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”) operates through its omni-channel business model to provide doughnut experiences and produce doughnuts for Doughnut Shops, Delivered Fresh Daily (“DFD”) outlets, and Ecommerce and delivery channels, expanding consumer access to the Krispy Kreme brand.
The Company has ithree reportable
operating segments: 1) U.S., which includes all Krispy Kreme Company-owned operations in the U.S. and Insomnia Cookies shops; 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 franchise operations across the globe, as well as Krispy Kreme Company-owned shops in Canada and 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 2022 and 2023 will reflect the results of operations for the 52-week periods ended January 1, 2023 and December 31, 2023, respectively. The quarters ended April 2, 2023 and April 3, 2022 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 accounting principles generally accepted 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 1, 2023, included in the Annual Report on Form 10-K. The Condensed Consolidated Balance Sheet as of January 1, 2023 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 ended April 2, 2023 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 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 Holding S.A.P.I. 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).
Summary of Significant Accounting Policies
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 1, 2023 included in the Annual
Report on Form 10-K. There have been no material changes to the significant accounting policies during the quarter ended April 2, 2023.
i
Reclassifications
Segment information is prepared on the same basis that the Company’s management reviews financial information for operational decision-making purposes. Effective January
2, 2023, the Company realigned its segment reporting structure such that the Company-owned Canada business has moved from the U.S. and Canada reportable operating segment to the Market Development reportable operating segment. As a result, the U.S. and Canada reportable operating segment has been renamed to the U.S. reportable operating segment. All segment information has been restated to be consistent with current quarter presentation.
Exiting the Branded Sweet Treats Business
During the quarter ended April 2, 2023, the Company made the decision to exit its pre-packaged
Branded Sweet Treats business due in part to its dilutive impact on profit margins, as well as to allow the Company to focus on its fresh doughnuts business. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Significant Events and Transactions” included in Item 2 of Part I of this Quarterly Report on Form 10-Q for further information.
i
Recent Accounting Pronouncements
In
March 2020, the FASB issued Accounting Standards Update (“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 was 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. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform by delaying the effective date of the guidance issued in ASU 2020-04 to December 31, 2024. As described in Note 8, Long-Term Debt, during the quarter ended April 2, 2023the Company
refinanced its debt with interest to be calculated prospectively with reference to the Secured Overnight Financing Rate (“SOFR”), and accordingly adopted this standard, which did not impact the financial statements presented herein.
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. As such, the Company adopted this standard in the quarter ended April 2, 2023 and has disclosed the required information in Note 7, Vendor Finance Programs, other than the rollforward information which is not effective until fiscal years beginning after December 15, 2023. The
Company is currently evaluating the effect of the new guidance on its annual disclosures.
(1)During the quarter ended April 2, 2023the Company recognized inventory write-offs of $i7.1 million primarily related to the decision to exit the Branded Sweet Treats business.
Note 3 — iGoodwill
and Other Intangible Assets, net
Goodwill
i
Changes in the carrying amount of goodwill by reportable segment are as follows:
(1)Reacquired
franchise rights include the impact of foreign currency fluctuations associated with the respective countries.
Amortization expense related to intangible assets included in depreciation and amortization expense was $i7.3 million for the quarters ended April 2, 2023 and April 3, 2022, respectively.
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
$
i26,850
$
i7,833
Finance
leases
i1,421
i284
/
(1)Operating
cash flows from operating leases include variable rent payments which are not included in the measurement of lease liabilities. For the quarters ended April 2, 2023 and April 3, 2022, variable rent payments were $i9.3 million and $i5.0 million,
respectively.
The Company recognized a net gain of $i0.9 million included in Other income, net on the Condensed Consolidated Statement of Operations in the quarter ended April 2, 2023, related to the termination of leases at certain Krispy Kreme shops in the U.S.
where the Company had already recognized impairment of the corresponding right of use assets in a prior period. There were ino lease termination charges in the quarter ended April 3, 2022.
In the quarter ended April 2, 2023, the
Company completed a sale-leaseback transaction whereby it disposed of the land at ione real estate property for proceeds of $i10.0
million. The Company subsequently leased back the property, which is accounted for as an operating lease. The Company recognized a gain on sale of $i9.7 million, which is included in Other income, net on the Condensed Consolidated Statement of Operations for the quarter ended April 2, 2023.
In
the quarter ended April 3, 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 income, net on the Condensed Consolidated Statement of Operations for the quarter ended April 3, 2022.
Note
5 — iFair Value Measurements
i
The following table presents assets and liabilities that
are measured at fair value on a recurring basis as of April 2, 2023 and January 1, 2023:
There
were iino/ 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 April 2, 2023 and fiscal year ended January 1, 2023. 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.
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 April 2, 2023 and January 1, 2023, the total notional amount of commodity derivatives was i2.0
million and i1.7 million gallons of gasoline, respectively. They were scheduled to mature between April 2023 and December 2024 and January 2023 and December 2024, respectively. As of April 2, 2023 and January 1, 2023, the Company recorded an asset of $i0.4
million and $i0.5 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 April 2, 2023 and January 1, 2023, the Company has recorded assets of $i0.3 million and $i10.5
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.
In the quarter ended April 2, 2023, the Company cancelled certain interest rate swap agreements with an aggregate notional amount of $i265.0
million, collecting $i7.7 million in cash proceeds, and entered into new agreements with the same counterparties. The primary difference between these new agreements and the prior versions included the setting of a new payment rate on the fixed component of the swaps (i4.38%).
At the same time, the Company also amended the benchmark interest rate on the floating component of all $i505.0 million hedged notional to one-month SOFR, corresponding to the new interest rate on its refinanced credit facility discussed in Note 8, Long-Term Debt.
Foreign Currency Exchange Rate
Risk
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 April 2, 2023 and January 1, 2023, the total notional amount of foreign exchange derivatives was $i53.9 million and $i59.0
million, respectively. They matured in April 2023 and January 2023, respectively. The Company recorded liabilities of $i1.1 million and $i0.2
million as of April 2, 2023 and January 1, 2023, 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 April 2, 2023 and January 1, 2023, 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 quarters ended April 2, 2023 and April 3, 2022 is as follows:
Derivative Gain/(Loss) Recognized in Income for the Quarter Ended
Location of Derivative Gain/(Loss) Recognized in Income
Loss on foreign currency derivatives
$
(i924)
$
(i363)
Other
non-operating expense/(income), net
(Loss)/gain on commodity derivatives
(i118)
i861
Other
non-operating expense/(income), net
$
(i1,042)
$
i498
/
Note
7 — iVendor Finance Programs
i
The following table presents liabilities related to vendor finance programs which the
Company participates in as a buyer as of April 2, 2023 and January 1, 2023:
The Company has an agreement with a third-party administrator which allows participating vendors to track its payments, and if voluntarily elected by the vendor, to sell payment obligations from the Company to financial institutions as part of the SCF program. The Company’s typical payment terms for trade payables range up to i180
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, the Company has established payable terms ranging up to, but not exceeding, i360 days. When participating vendors elect to sell one or more of the Company’s payment obligations, the Company’s rights and obligations to settle the payables on
their contractual due date are not impacted. The Company has no economic or commercial interest in a vendor’s decision to enter into these agreements and the financial institutions do not provide the Company with incentives such as rebates or profit sharing under the SCF program. The Company agrees 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 Accounts payable on the Condensed Consolidated Balance Sheets and the associated cash flows are included in operating activities in the Condensed Consolidated Statements of
Cash Flows.
Structured Payables Programs
The Company utilizes various card products issued by financial institutions to facilitate purchases of goods and services. By using these products, the Company may receive differing levels of rebates based on timing of repayment. The payment obligations under these card products are classified as Structured payables on the Condensed Consolidated Balance Sheets and the associated cash flows are included in financing activities in the Condensed Consolidated Statements of Cash Flows.
In March 2023, the Company entered into a new credit agreement (the “2023 Facility”) consisting of a $i300.0 million senior secured revolving credit facility and a term loan with a principal amount of $i700.0 million.
The 2023 Facility is secured by a first priority lien on substantially all of the Company’s personal property assets, certain real properties, and all of the Company’s domestic wholly-owned subsidiaries.
The initial proceeds of the 2023 Facility were used, in part, to refinance the loans and commitments under the Company’s existing credit agreement (the “2019 Facility”), and thereupon terminate the 2019 Facility. The loans and commitments under the 2019 Facility were due to mature in June 2024, and the loans and commitments under the 2023 Facility will mature in March 2028.
In addition to refinancing the loans and commitments under the 2019 Facility, loans made pursuant to the 2023 Facility may be used for general corporate purposes of the Company (including, but not limited to, financing working capital needs, capital expenditures, acquisitions, other investments, dividends, and stock repurchases) and for any other purpose not prohibited under the related loan documents.
The terms of the 2023 Facility are substantially similar to those of the 2019 Facility, except for the maturity date and the benchmark interest rate. Borrowings under the 2023 Facility are generally subject to an interest rate of adjusted term SOFR plus a credit spread adjustment of i0.10%
plus (i) i2.25% if the Company’s leverage ratio (as defined in the 2023 Facility) equals or exceeds 4.00 to 1.00, (ii) i2.00%
if the Company’s leverage ratio is less than 4.00 to 1.00 but greater than or equal to 3.00 to 1.00, or (iii) i1.75% if the Company’s leverage ratio is less than 3.00 to 1.00. The Company is required to make equal installments of 1.25% of the aggregate closing date principal amount of the term loans on the last
day of each fiscal quarter (commencing with the second full fiscal quarter following the closing date). All remaining term loan and revolving loan balances are to be due five years from the closing date.
The Company capitalized $i7.5 million of debt issuance costs related to the 2023 Facility, $i5.3 million
of which is related to the term loan and $i2.2 million related to the revolving credit facility. Additionally, the Company recognized $i0.5 million
expenses during the quarter ended April 2, 2023 related to unamortized debt issuance costs from the 2019 Facility associated with extinguished lenders, which are included in Interest expense, net in the Condensed Consolidated Statements of Operations.
Restrictions and Covenants
The 2023 Facility requires the Company to meet a maximum leverage ratio financial test. The leverage ratio was required to be less than 5.25 to 1.00 as of the Test Period (as defined in the 2023 Facility) ending on or about January 1, 2023, which reduces to 5.00 to 1.00 for each Test Period thereafter. The leverage ratio under the 2023 Facility is defined as the ratio of (a) Total Indebtedness (as defined in the 2023 Facility,
which includes all debt and finance lease obligations) minus unrestricted cash and cash equivalents to (b) a defined calculation of Adjusted EBITDA (“2023 Facility Adjusted EBITDA”) for the most recently ended Test Period. The 2023 Facility Adjusted EBITDA for purposes of these restrictive covenants includes incremental adjustments beyond those included in the Company’s Adjusted EBITDA non-GAAP measure. Specifically, the 2023 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.
The 2023 Facility also contains covenants which, among other things, generally limit (with certain exceptions): mergers, amalgamations, or consolidations; the incurrence of additional indebtedness (including guarantees); the incurrence of additional liens; the sale, assignment, lease, conveyance, or transfer of assets; certain investments; dividends and stock redemptions or repurchases in excess of certain amounts; transactions with affiliates; engaging in materially different lines of business; and other activities customarily restricted in such agreements. The 2023 Facility also prohibits the transfer of cash or other assets to the parent company, whether by dividend, loan, or otherwise, but provides for exceptions to enable the parent company to pay taxes, directors’ fees, and operating expenses, as well as exceptions to permit dividends in respect of the
Company’s common stock and stock redemptions and repurchases, to the extent permitted by the 2023 Facility. Subject to certain exceptions, the borrowings under the 2023 Facility are collateralized by substantially all of the Company’s assets (including its equity interests in its subsidiaries). As of April 2, 2023 and January 1, 2023, the Company was in compliance with the financial and other covenants related to the 2023 Facility.
Note 9 — iShare-based
Compensation
Restricted Stock Units (“RSUs”)
The Company and certain of its subsidiaries issue time-vested RSUs under their respective executive ownership plans and long-term incentive plans.
i
RSU activity under the
Company’s various plans during the periods presented is as follows:
The
Company recorded total non-cash compensation expense related to RSUs under the plans of $i4.7 million and $i4.2 million for the quarters ended April 2, 2023 and April 3,
2022, respectively, which is included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
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).
Time-Vested Stock Options
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 1, 2023 and changes during the first quarter of fiscal 2023 is presented below:
The
Company recorded total non-cash compensation expense related to the time-vested stock options of $i0.9 million and $i0.8 million for the quarters ended April 2,
2023 and April 3, 2022, respectively, which is included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
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 i16.2% for the quarter ended April 2,
2023 and i37.0% for the quarter ended April 3, 2022. The Company’s effective income tax rate for the quarter ended April 2, 2023 differed from the respective statutory rates primarily due to disallowed executive compensation expense, the mix of income and taxes attributable to foreign jurisdictions, and a discrete tax benefit unrelated to ongoing operations. The
Company’s effective income tax rate for the quarter ended April 3, 2022 differed from the respective statutory rates primarily due to disallowed executive compensation expense and by the mix of income and taxes attributable to foreign jurisdictions.
Note 11 — iCommitments and Contingencies
Pending
Litigation
In March 2023, an employee filed a lawsuit on behalf of himself and all others similarly situated against the Company, alleging violations of the Illinois Biometric Information Privacy Act. In May 2023, the Company moved for a stay pending resolution of a similar case before the Illinois Supreme Court. The Company believes that it has meritorious defenses to the complaint and will vigorously defend against these claims. At this time the Company is unable to predict the outcome of this matter, the potential loss or range of loss associated with the resolution of this matter,
if any, or any potential effect it may have on the Company or its operations.
Other Legal Matters
The Company also 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 $i11.2 million and $i11.1
million as of April 2, 2023 and January 1, 2023, respectively, a majority of which secure the Company’s reimbursement obligations to insurers under its self-insurance arrangements.
Note 12 — iRelated Party Transactions
The Company has an equity ownership in ithree franchisees, KremeWorks USA, LLC (i20%
ownership), KremeWorks Canada, L.P. (i25% ownership), and Krispy Kreme Doughnuts France SAS (“KK France”) (i33% ownership), with an aggregate carrying value of $i1.8
million and $i1.9 million as of April 2, 2023 and January 1, 2023, respectively.
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:
Net
(loss)/income attributable to Krispy Kreme, Inc.
$
(i301)
$
i4,002
Adjustment
to net (loss)/income attributable to common shareholders
i—
(i374)
Net
(loss)/income attributable to common shareholders - Basic
$
(i301)
$
i3,628
Additional
income attributed to noncontrolling interest due to subsidiary potential common shares
(i10)
(i40)
Net
(loss)/income attributable to common shareholders - Diluted
$
(i311)
$
i3,588
Basic
weighted average common shares outstanding
i168,141
i167,261
Dilutive
effect of outstanding common stock options and RSUs
i—
i2,224
Diluted
weighted average common shares outstanding
i168,141
i169,485
(Loss)/earnings
per share attributable to common shareholders:
Basic
$
i0.00
$
i0.02
Diluted
$
i0.00
$
i0.02
/
Potential
dilutive shares consist of unvested RSUs, 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 quarters ended April 2, 2023 and April 3, 2022, all i3.0 million and i2.8
million time-vested stock options, respectively, 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., International, and Market Development. Unallocated corporate costs are excluded from the Company’s measurement of segment performance. These costs include general corporate expenses.
As discussed
in Note 1, Description of Business and Summary of Significant Accounting Policies, effective January 2, 2023, the Company realigned its segment reporting structure such that the Company-owned Canada business has moved from the U.S. and Canada reportable operating segment to the Market Development reportable operating segment. As a result, the U.S. and Canada reportable operating segment has been renamed to the U.S. reportable operating segment. All segment information has been restated to be consistent with current quarter presentation.
Employer
payroll taxes related to share-based compensation
i25
i55
Other
non-operating expense/(income), net (1)
i999
(i321)
Strategic
initiatives (2)
i13,469
i—
Acquisition
and integration expenses (3)
i91
i517
New
market penetration expenses (4)
i94
i110
Shop
closure (income)/expenses, net (5)
(i679)
i230
Restructuring
and severance expenses (6)
i580
i—
Gain
on sale-leaseback
(i9,661)
(i2,374)
Other
(7)
i2,577
i199
Net
income
$
i1,644
$
i6,458
(1)Primarily
foreign translation gains and losses in each period.
(2)The quarter ended April 2, 2023 consists primarily of costs associated with the decision to exit the Branded Sweet Treats business, including property, plant and equipment impairments, inventory write-offs, employee severance, and other related costs.
(3)Consists of acquisition and integration-related costs in connection with the Company’s business and franchise acquisitions, including legal, due diligence, and advisory fees incurred in connection with acquisition and integration-related activities for the applicable period.
(4)Consists of start-up costs associated with entry into new countries for which the Company’s brands have not previously operated, including the Insomnia Cookies brand entering Canada and the U.K.
(5)Includes lease termination costs, impairment charges, and loss on disposal of property, plant and equipment.
(6)The quarter ended April 2, 2023 consists primarily of costs associated with restructuring of the global and U.S. executive teams.
(7)The quarters ended April 2, 2023 and April 3,
2022 consist primarily of legal and other regulatory expenses incurred outside the ordinary course of business. The regulatory expenses incurred in the quarter ended April 2, 2023 relate to previous business acquisitions.
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 1, 2023, 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
1, 2023, 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. Krispy Kreme operates in over 30 countries with our transformational omni-channel strategy, which focuses on delivering fresh doughnuts such as our iconic Original Glazed® doughnut, which is universally recognized for its hot-off-the-line, melt-in-your-mouth experience, to where our consumers are located and want to have access to them. Global Points of Access are a key metric and we define them as our unique network of fresh Doughnut Shops, partnerships with leading retailers (DFD Doors), 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:
(1)We generated 14.4% organic revenue growth for the quarter ended April 2, 2023.
Significant Events and Transactions
Executing
on our Omni-Channel Strategy
We made strong progress on the execution of our omni-channel strategy to start the year, as we continue to add quality Global Points of Access across our network as we convert markets into fully implemented Hub and Spoke models (refer to “Key Performance Indicators and Non-GAAP Measures” below for more information as to how we define the Hub and Spoke model). We added 573 new Global Points of Access in the first quarter of fiscal 2023 to surpass 12,400 Global Points of Access. The primary driver of the increased Global points of Access during the first quarter was the continued expansion of our DFD network in alignment with our transformation strategy, as we added 534 DFD Doors globally, including 352 DFD Doors to the U.S. segment, 111 to the International segment, and 71 to the Market Development segment. The increase in DFD Doors
is the result of our focus on executing our omni-channel strategy to drive our transformation, and includes our expansion into Quick Service Restaurant (“QSR”) channels such as our test collaboration with McDonald’s, where we have now expanded our offering of doughnuts to over 160 McDonald’s locations in Louisville and Lexington, Kentucky and the surrounding area.
The capital-efficient Hub and Spoke distribution model, which originated within our International segment and now drives our expansion strategy for the U.S. and globally due to its convincing advantages, increases accessibility to our consumers and drives higher profitability and increased margins, evidenced by the adjusted EBITDA margin expansion of 60 basis points to 13.7% for the U.S. segment in the first quarter of fiscal 2023 compared to the same quarter last year. 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 (“APD”), which rose by 8% in the U.S. in the first quarter of fiscal 2023 compared to the same quarter last year.
Growing our Global Presence
Another of our key strategic initiatives is to increase our global presence as we become the Most Loved Sweet Treat Brand in the World. We continue to focus on growing the percentage of our revenues and Adjusted EBITDA generated outside the U.S. We expect to open in at least five new countries in fiscal 2023, with a key focus in Western Europe and select Asian and South American countries. We have recently signed new franchise agreements and have opened or plan to open Krispy Kreme-branded shops in Chile, Costa Rica, Ecuador, France, Jamaica, Kazakhstan, and Switzerland in the near future,
and we expect to have further announcements throughout the year as we grow our global business.
Ecommerce, Brand, and Innovation
Ecommerce represented 19.6% of our Doughnut and Cookie shop sales (excluding DFD) for the first quarter of fiscal 2023, up from 17.4% in the same quarter last year. We continue to expand the delivery radius in several key markets around the world through partnerships with third-party aggregators.
Innovation is a significant driver of frequency as we create and introduce premium, fresh, and buzz-worthy offerings to consumers across our Global Points of Access. High profile initiatives during the first quarter of fiscal 2023 included limited time offerings (“LTOs”) and seasonal activations such as Biscoff® Doughnuts, Valentine’s Day, and St. Patrick’s Day, among many others around the world.
Exiting
the Branded Sweet Treats Business
During the first quarter of fiscal 2023, we made the decision to exit our pre-packaged Branded Sweet Treats business due in part to its dilutive impact on profit margins, as well as to allow us to focus on our fresh doughnuts business. In fiscal 2022, the Branded Sweet Treats business generated approximately $36 million revenues and had a dilutive impact on adjusted EBITDA margins. As a result, we discontinued production at our Concord, North Carolina and Winston-Salem, North Carolina manufacturing facilities and are in process of negotiating the sale of our remaining inventory to existing customers as well as
donating
to local food banks. As such, we recognized approximately $13.4 million non-recurring expenses during the first quarter, including property, plant and equipment impairments, inventory write-offs, employee severance, and other related costs.
Key Performance Indicators and Non-GAAP Measures
We monitor the key business metrics 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 business metrics 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 and Food Trucks, 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 first quarter of fiscal 2023, the first quarter of fiscal 2022, and fiscal 2022, respectively:
(2)Includes Points of Access that were acquired from a franchisee in the
U.S. in the third quarter of fiscal 2022. These Points of Access were previously included in the Market Development segment prior to the acquisition date.
(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. Points of Access in this category are primarily found in international locations, in airports, train stations, etc.
(4)Includes locations in Japan and Canada, which are Company-owned. All remaining Points of Access in the Market Development segment relate to our franchise business.
(5)Includes over 160 McDonald’s test shops located in Louisville and Lexington, Kentucky and the surrounding area as
of April 2, 2023.
As of April 2, 2023, we had 12,410 global points of access, with 1,976 Krispy Kreme and Insomnia Cookies branded shops, 44 Carts and Food Trucks, and 10,390 DFD Doors. During the first quarter of fiscal 2023, we added a net 36 additional shops globally, including 37 Fresh Shops and eight Insomnia Cookie Shops in locations such as Washington, D.C., Indianapolis, Indiana, and Denver, Colorado. In the quarter, one Hot Light Theater Shop was opened in Mayfield Heights, Ohio. As we continue our Krispy Kreme U.S. transformation, we also completed the strategic exit or conversion of certain Hot Light Theater Shops. We added a net 534 new DFD Doors during the quarter as we continue to focus on the expansion of our Hub and Spoke model and our expansion into QSR channels such as our test collaboration with McDonald’s.
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 and Food Trucks, and DFD Doors (“Spokes”) through an integrated network of Company-operated delivery routes, ensuring quality and freshness. Specific to the U.S. segment, certain legacy Hubs have not historically had Spokes. Many Hubs in the U.S. segment are
being converted to add Spokes while certain legacy Hubs do not currently have the ability or need to add Spokes.
The following table presents our Hubs, by segment and type, as of the end of the first quarter of fiscal 2023, the first quarter of fiscal 2022 and fiscal 2022, 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.
We report our financial results in accordance with generally accepted accounting principles in the U.S. (“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, Diluted 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, (iii) shop closures related to restructuring programs such as the shop portfolio optimization program initiated for Krispy Kreme U.S. during fiscal 2022, and (iv) 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 to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q. See “Results of Operations” for our organic growth calculations for the periods presented.
Adjusted EBITDA and Adjusted Net Income, Diluted
We define “Adjusted EBITDA” as earnings before interest expense, net, 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, Diluted” as net (loss)/income attributable to common shareholders, adjusted for interest expense, 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, Diluted 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, Diluted 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, Diluted supplementally.
The following tables present a reconciliation of net income to Adjusted EBITDA and net income to Adjusted Net Income,
Diluted for the periods presented:
Employer
payroll taxes related to share-based compensation
25
55
Other non-operating expense/(income), net (1)
999
(321)
Strategic
initiatives (2)
13,469
—
Acquisition and integration expenses (3)
91
517
New market penetration expenses (4)
94
110
Shop
closure (income)/expenses, net (5)
(679)
230
Restructuring and severance expenses (6)
580
—
Gain
on sale-leaseback
(9,661)
(2,374)
Other (7)
2,577
199
Amortization of acquisition related intangibles (8)
7,273
7,246
Loss
on extinguishment of 2019 Facility (9)
472
—
Tax impact of adjustments (10)
(4,656)
(1,078)
Tax specific adjustments (11)
(557)
—
Net
income attributable to noncontrolling interest
(1,945)
(2,456)
Adjustment to adjusted net income attributable to common shareholders
—
(374)
Adjusted net income attributable to common shareholders - Basic
$
15,271
$
13,253
Additional
income attributed to noncontrolling interest due to subsidiary potential common shares
(10)
(40)
Adjusted net income attributable to common shareholders - Diluted
$
15,261
$
13,213
Basic
weighted average common shares outstanding
168,141
167,261
Dilutive effect of outstanding common stock options and RSUs
1,850
2,224
Diluted weighted average common shares outstanding
169,991
169,485
Adjusted
net income per share attributable to common shareholders:
Basic
$
0.09
$
0.08
Diluted
$
0.09
$
0.08
(1)Primarily
foreign translation gains and losses in each period.
(2)The quarter ended April 2, 2023 consists primarily of costs associated with the decision to exit the Branded Sweet Treats business, including property, plant and equipment impairments, inventory write-offs, employee severance, and other related costs.
(3)Consists of acquisition and integration-related costs in connection with the Company’s business and franchise acquisitions, including legal, due diligence, and advisory fees incurred in connection with acquisition and integration-related activities for the applicable period.
(4)Consists of start-up costs associated with entry
into new countries for which the Company’s brands have not previously operated, including the Insomnia Cookies brand entering Canada and the U.K.
(5)Includes lease termination costs, impairment charges, and loss on disposal of property, plant and equipment.
(6)The quarter ended April 2, 2023 consists primarily of costs associated with restructuring of the global and U.S. executive teams.
(7)The quarters ended April 2, 2023 and April 3, 2022 consist primarily of legal and other regulatory expenses incurred outside the ordinary course
of business. The regulatory expenses incurred in the quarter ended April 2, 2023 relate to previous business acquisitions.
(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 expenses related to unamortized debt issuance costs from the 2019 Facility associated with extinguished lenders as a result of the March 2023 debt refinancing described in Note 8, Long-Term Debt to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
(10)Tax
impact of adjustments calculated applying the applicable statutory rates. The quarters ended April 2, 2023 and April 3, 2022 also include the impact of disallowed executive compensation expense.
(11)The quarter ended April 2, 2023 consists of a discrete tax benefit unrelated to ongoing operations.
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 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 periods below:
Fresh Revenues from Insomnia Cookies and Hubs without Spokes (2)
(414,432)
(404,430)
(414,899)
Sales from Hubs with Spokes
595,131
567,440
470,919
Sales
per Hub (millions)
4.6
4.5
4.0
International:
Sales from Hubs with Spokes (3)
$
369,003
$
365,916
$
332,995
Sales
per Hub (millions) (4)
9.8
9.8
8.4
(1)Includes the exited Branded Sweet Treats business 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.
(4)International
Sales per Hub comparative data has been restated in constant currency based on current exchange rates.
In our International segment, where the Hub and Spoke model originated, Sales per Hub was $9.8 million, consistent with the $9.8 million generated in the full fiscal year 2022, and up from the $8.4 million generated in the full fiscal year 2021. The International segment illustrates the benefits of leveraging our Hub and Spoke model as the most efficient way to grow the business, as shown by the consistent Sales per Hub despite global supply chain disruptions and the challenging macroeconomic conditions negatively impacting consumer demand. In the U.S. segment, we had Sales per Hub of $4.6 million, up from $4.5 million generated in the full fiscal year 2022 and up from $4.0 million generated in the full fiscal year 2021. U.S 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 our International segment. As we further extend the Hub and Spoke model into existing and new markets around the world, 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 April 2, 2023 and the quarter ended April 3, 2022:
Net
income attributable to noncontrolling interest
1,945
0.5
%
2,456
0.7
%
(511)
-20.8
%
Net (loss)/income attributable to Krispy Kreme, Inc.
$
(301)
-0.1
%
$
4,002
1.1
%
$
(4,303)
-107.5
%
Royalties
and other revenues: Royalties and other revenues decreased $0.2 million, or 2.4%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023, and were impacted by the acquisition of 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 April 2, 2023 compared to the quarter ended April 3, 2022:
(in
thousands, except percentages)
U.S.
International
Market Development
Total Company
Total net revenues in first quarter of fiscal 2023
$
281,344
$
90,288
$
47,318
$
418,950
Total
net revenues in first quarter of fiscal 2022
247,919
87,201
37,412
372,532
Total Net Revenues Growth
33,425
3,087
9,906
46,418
Total
Net Revenues Growth %
13.5
%
3.5
%
26.5
%
12.5
%
Less: Impact of shop optimization closures
(3,187)
—
—
(3,187)
Adjusted
net revenues in first quarter of fiscal 2022
244,732
87,201
37,412
369,345
Adjusted Net Revenue Growth
36,612
3,087
9,906
49,605
Impact
of acquisitions
(3,080)
—
893
(2,187)
Impact of foreign currency translation
—
3,308
2,471
5,779
Organic
Revenue Growth
$
33,532
$
6,395
$
13,270
$
53,197
Organic Revenue Growth %
13.7
%
7.3
%
35.5
%
14.4
%
Total
net revenue growth of $46.4 million, or approximately 12.5%, and organic revenue growth of $53.2 million, or approximately 14.4%, was driven by the continued and successful execution of our growth strategy deploying our omni-channel approach globally. We have continued to increase availability through new Global Points of Access, including capital-light DFD Doors, and via Ecommerce and delivery. Additionally, we have continued to take pricing actions to offset cost inflation, including in the first quarter of fiscal 2023.
U.S. segment net revenue grew $33.4 million, or approximately 13.5%, and organic revenue increased $33.5 million, or approximately 13.7%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023. Organic
growth was driven by an additional 684 Points of Access compared to the first quarter of fiscal 2022, higher Ecommerce and delivery revenues, growth in DFD APD, as well as a strong performance in Insomnia Cookies, partially offset by a decrease in Branded Sweet Treats revenue as we made the decision to exit the business in the first quarter of fiscal 2023. Our organic growth has also been supplemented by effective pricing increases, leading to an increase in the average transaction size, but offset some by transaction declines.
Our International segment net revenue grew $3.1 million, or approximately 3.5%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023, in spite of foreign currency translation impacts of $3.3 million from a strengthening U.S. dollar. International
organic revenue grew $6.4 million, or approximately 7.3%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023, driven by Points of Access increasing by 385, or 12%, compared to the first quarter of fiscal 2022.
Our Market Development segment net revenue increased $9.9 million, or approximately 26.5%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023, in spite of the impacts of certain foreign currencies devaluing against the U.S. dollar. When adjusted for the impacts of acquisitions and foreign currency, Market Development organic revenue grew $13.3 million, or approximately 35.5%,
from the first quarter of fiscal 2022 to the first quarter of fiscal 2023, driven by strong performance in our international franchise markets, Canada, and Japan, including benefits from DFD expansion.
Product and distribution costs (exclusive of depreciation and amortization): Product and distribution costs increased $21.7 million, or 22.6%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023, largely attributable to the same factors as our revenue growth. Product and distribution costs as a percentage of revenue increased by approximately 230 basis points from 25.8% in the first quarter of fiscal 2022 to 28.1% in the first quarter of fiscal 2023. This increase was primarily
driven by $7.6 million inventory write-offs and employee severance expenses associated with the exit of the Branded Sweet Treats business, and was also impacted by inflationary pressures on commodities and logistics costs in the first quarter of fiscal 2023.
Operating expenses: Operating expenses increased $22.7 million, or 13.4%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023, driven mainly by labor cost inflation and investments to support growth. Operating expenses as a percentage of revenue increased approximately 40 basis points, from 45.3% in the first quarter of fiscal 2022 to 45.7% in the first quarter of fiscal 2023, primarily due to the labor cost inflation, particularly internationally.
This has been partially offset by efficiency benefits in the U.S. from DFD expansion as we execute our Hub and Spoke transformation.
Selling, general and administrative expense: Selling, general and administrative (“SG&A”) expense increased $7.8 million, or 14.4%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023. As a percentage of revenue, SG&A expense increased approximately 30 basis points, from 14.4% in the first quarter of fiscal
2022 to 14.7% in the first quarter of fiscal 2023, primarily driven by strategic investments in global leadership.
Marketing expenses: Marketing expenses decreased $0.3 million, or 3.0%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023, primarily driven by the timing of promotional activity.
Other income, net: Other income, net of $5.3 million in the first quarter of fiscal 2023 was primarily driven by a gain on a sale-leaseback transaction of $9.7 million, partially offset by $5.4 million of property, plant and equipment impairments associated with the decision to exit the Branded Sweet Treats business. Other income, net of $2.6 million in the first quarter of fiscal 2022
was primarily driven by a gain on a sale-leaseback transaction of $2.6 million. Refer to Note 4, Leases to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information.
Depreciation and amortization expense: Depreciation and amortization expense increased $0.1 million, or 0.4%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023. As a percentage of revenue, depreciation and amortization expense decreased approximately 80 basis points, from 7.5% in the first quarter of fiscal 2022 to 6.7% in the first quarter of fiscal 2023, primarily
driven by lower capital spend associated with capital-light DFD expansion, as well as the impact of asset write-offs related to the U.S. shop optimization closures in fiscal 2022.
Interest expense, net:Interest expense, net increased $4.6 million, or 63.1%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023. The increase was primarily driven by increases in the benchmark interest rates associated with the unhedged portion of our variable rate long-term debt. The increase also includes $0.5 million expenses related to our debt refinancing discussed in Note 8, Long-Term Debt to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Income
tax expense: Income tax expense decreased $3.5 million or 91.7% from the first quarter of fiscal 2022 to the first quarter of fiscal 2023. The decrease was primarily driven by lower pre-tax results, a decrease in disallowed executive compensation expense, and a discrete tax benefit unrelated to ongoing operations. Income tax expense was also impacted by the mix of income between the U.S. and foreign jurisdictions.
Net income attributable to noncontrolling interest: Net income attributable to noncontrolling interest decreased $0.5 million or 20.8%, from the first quarter of fiscal 2022 to the first quarter of fiscal 2023, driven by less earnings allocated to certain consolidated subsidiaries, particularly
Awesome Doughnut, WKS Krispy Kreme, and Insomnia Cookies.
Results of Operations by Segment – Quarter ended April 2, 2023 compared to the Quarter ended April 3, 2022
The following table presents Adjusted EBITDA by segment for the periods indicated:
U.S. segment Adjusted EBITDA increased $6.1 million, or 18.9%, with margin expansion of 60 basis points to 13.7% in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022, driven primarily by the efficiencies from Hub and Spoke expansion and improvements from the Krispy Kreme U.S. portfolio optimization of our Hubs without Spokes. We also
effectively offset commodity inflation and labor pressures by implementing pricing increases, including during the first quarter of fiscal 2023.
International
segment Adjusted EBITDA decreased $3.7 million, or 21.3%, with margin decline of 480 basis points to 15.0% in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022, primarily driven by cost inflation.
Market Development segment Adjusted EBITDA increased $4.5 million, or 35.9%, with margin expansion of 250 basis points to 35.9% in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022, driven mainly by strong margin improvement in our Company-owned Japan and Canada businesses from Hub and Spoke efficiencies. Strength in international franchise revenues also more than offset inflation and the strong U.S. dollar.
Corporate expenses within Adjusted EBITDA increased $0.9 million, or 6.9%, from the first quarter of fiscal 2022 to the first quarter of fiscal
2023 aided by strategic investments in global leadership.
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 SCF programs and structured payables programs. 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 1, 2023, we had the following future obligations:
•An aggregate principal amount of $748.8 million outstanding under the 2019 Facility;
•Non-cancellable future minimum finance lease payments totaling $47.1 million; and
•Purchase commitments under ingredient and other forward purchase contracts of $118.5 million.
As of April 2, 2023, our outstanding principal amount
under our 2023 Facility was $790.0 million. The increase from the 2019 Facility balance as of January 1, 2023 included impacts from the debt refinancing completed during the quarter, as well as draws to fund payments on our commercial trade financing obligations. Refer to Note 8, Long-Term Debt to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information.
We had cash and cash equivalents of $29.7 million and $35.4 million as of April 2, 2023 and January 1, 2023, respectively. 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 on business acquisitions, 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:
Net cash provided by/(used for) financing activities
1,808
(6,627)
Cash
Flows Provided by Operating Activities
Cash provided by operations totaled $10.4 million for the first quarter of fiscal 2023, a decrease of $18.0 million compared with the amount for the first quarter of fiscal 2022. Cash provided by operations decreased primarily due to a decline of approximately $28.4 million from changes in operating assets and liabilities, primarily as a result of reductions to accounts payable and accrued liabilities balances, partially offset by our receipt of $7.7 million cash proceeds from the settlement of interest rate swap derivative contracts discussed in Note 6,
Derivative Instruments to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
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 (the SCF programs discussed in Note 7, Vendor Finance Programs to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q). In an effort to normalize payment terms, we have reduced outstanding balances under the SCF programs
during the first quarter of fiscal 2023, contributing to the reduction to accounts payable noted above.
Cash Flows Used for Investing Activities
Cash used for investing activities totaled $16.4 million for the first quarter of fiscal 2023, a decrease of $10.0 million compared with the first quarter of fiscal 2022. The decrease is primarily due to a net $7.0 million increase in proceeds from sale-leaseback transactions discussed in Note 4, Leases to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, as well as a reduction of cash spent on property and equipment purchases
aided by capital-light DFD expansion.
Cash provided by financing activities totaled $1.8 million for the first quarter of fiscal 2023, an increase in financing of $8.4 million compared with the first quarter of fiscal 2022. The increase in financing was primarily due to draws on our 2023 Facility used in part to fund payments to reduce our vendor finance program obligations including the SCF programs and structured payables.
Payments on our structured payables resulted in a net $41.5 million change in cash flows related to structured payables programs (net payments on structured payables of $25.7 million in the first quarter of fiscal 2023 compared to net proceeds from structured payables of $15.8 million in the first quarter of fiscal 2022). Refer to Note
7, Vendor Finance Programs to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information.
In
March 2023, we refinanced our existing credit agreement (the 2019 Facility) and entered into the 2023 Facility consisting of a $300.0 million senior secured revolving credit facility and a term loan with a principal amount of $700.0 million. The loans and commitments under the 2019 Facility were due to mature in June 2024, and the loans and commitments under the 2023 Facility will mature in March 2028. Refer to Note 8, Long-Term Debt to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information.
Under the terms of the 2023 Facility, we are subject to a requirement to maintain a leverage ratio of less than 5.25 to 1.00 as of the Test Period (as defined in the 2023 Facility) ending on or about January
1, 2023, which reduces to 5.00 to 1.00 for each Test Period thereafter. The leverage ratio under the 2023 Facility is defined as the ratio of (a) Total Indebtedness (as defined in the 2023 Facility, which includes all debt and finance lease obligations) minus unrestricted cash and cash equivalents to (b) a defined calculation of Adjusted EBITDA (2023 Facility Adjusted EBITDA) for the most recently ended Test Period. Our leverage ratio was 3.56 to 1.00 as of the end of the first quarter of fiscal 2023 compared to 3.41 to 1.00 as of the end of fiscal 2022, primarily due to the increase in long-term debt.
We were in compliance with the financial and other covenants related to the 2023 Facility as of April 2, 2023 and expect to remain in compliance over the next 12 months. If we are unable to meet the 2023 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 2023 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 1, 2023.
New
Accounting Pronouncements
Refer to Note 1, Description of Business and Summary of Significant Accounting Policies 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 quarter of fiscal 2023, 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 SOFR (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 SOFR 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 $790.0 million of outstanding debt under the 2023 Facility as of April 2, 2023, which we account for as cash flow hedges. Based on the $285.0 million of unhedged outstanding as of April 2, 2023, a 100 basis point increase in the one-month SOFR would result in a $2.9 million increase in interest expense for a 12-month period, while a 100 basis point decrease would result in a $2.9 million decrease in interest expense for a 12-month period based on the daily average of the one-month SOFR through the fiscal quarter ended April 2, 2023.
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 27% of our total net revenues through the quarter ended April 2, 2023. A substantial majority of these revenues, or approximately $112.0 million through the quarter ended April 2, 2023, 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
$11.2 million in our total net revenues through the quarter ended April 2, 2023.
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 SEC’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 April 2, 2023, we completed 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 April 2, 2023 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 11, 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.
Item 1A. Risk Factors
With the exception of the changes discussed below, there have been no other 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 1, 2023.
If we or our franchisees or licensees are unable to protect our consumer and employee data and other regulated, protected,
or personally identifiable information, we or our franchisees could be exposed to data loss, litigation, regulatory fines, and other liability, and our reputation could be significantly harmed.
Our business requires the collection, transmission, and retention of large volumes of consumer and employee data, including credit and debit card numbers and other personally identifiable information, in various information technology systems that we and our franchisees maintain, and in those maintained by third parties with whom we contract to provide services. The integrity and protection of that data is critical to us. Any failure to comply with legal and industry rules and/or requirements could significantly harm our brand, reputation, business, and results of operations. We also rely on independent service providers for payment processing,
including credit and debit cards. If these independent service providers become unwilling or unable to provide these services to us, or if the cost of using these providers increases, our business could be harmed.
We are, and may increasingly become, subject to other various laws, directives, industry standards, and regulations, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. The information, security, and privacy requirements imposed by governmental regulation are increasingly demanding. In the U.S., various federal and state regulators have adopted, or are considering adopting, laws and regulations concerning personal information and data security and have prioritized privacy and information security violations for enforcement actions. For example, the Illinois Biometric Privacy Act (“BIPA”) regulates the collection, use, safeguarding, and storage
of biometric information. BIPA provides for substantial penalties and statutory damages and has generated significant class action activity. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to personal information than federal, international, or other state laws, and such laws may differ from each other, all of which may complicate compliance efforts. State laws are changing rapidly and there is discussion in the U.S. Congress of a new comprehensive federal data privacy law to which we would become subject if it is enacted, which may add additional complexity, variation in requirements, restrictions, and potential legal risks, require additional investment of resources in compliance programs, impact strategies and the availability of previously useful data, and could result in increased compliance costs or changes in business practices and policies.
We are also
subject to international laws, regulations, and standards in many jurisdictions, which apply broadly to the collection, use, retention, security, disclosure, transfer, and other processing of personal information. For example, we are subject to the General Data Protection Regulation (“GDPR”), which was adopted by the European Union effective May 2018, and the U.K. GDPR and U.K. Data Protection Act of 2018, which retains the GDPR in the U.K.’s national law. These laws include obligations and restrictions concerning data transparency and consent, the overall rights of individuals to whom the personal data relates, the transfer of personal data out of the European Economic Area (“EEA”) or the U.K., security breach notifications, and the security and confidentiality of personal data. Our failure to adhere to or successfully implement appropriate processes to adhere to international data privacy requirements could expose us and our franchisees to financial penalties
and legal liability. Our and our franchisees’ systems may not be able to satisfy changing requirements or may require significant additional investments or time to do so.
Because the interpretation and application of laws, regulations, standards, and other obligations relating to data privacy and security are still uncertain, it is possible that these laws, regulations, standards, and other obligations may be interpreted and
applied in a manner that is inconsistent with our data processing practices and policies. If our practices are not consistent, or are viewed as not consistent, with changes in laws, regulations,
standards, or new interpretations or applications of existing laws, regulations, and standards, we may also become subject to fines, audits, inquiries, whistleblower complaints, adverse media coverage, investigations, lawsuits, loss of export privileges, severe criminal or civil sanctions, or other penalties. Although we endeavor to comply with our public statements and documentation, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policies and other statements that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair, or misrepresentative of our actual practices. Any concerns about our data privacy and security practices, even if unfounded, could damage the reputation of our businesses and discourage potential users from our products and services. Any of the foregoing could have an adverse effect on our business,
financial condition, results of operations, and prospects.
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 April 2, 2023, 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 May 11, 2023.
