Q2 2024 Earnings Summary
- The McDonald's partnership is a major catalyst for accelerating growth in Krispy Kreme's Delivered Fresh Daily (DFD) business. The rollout is on track, with plans to be in more than 1,000 McDonald's restaurants by the end of 2024, and to add about 5,000 more in 2025, serving nearly 85% of McDonald's U.S. footprint by 2026.
- Expansion with other big national partners like Walmart and Target is progressing well, leveraging Krispy Kreme's underutilized infrastructure. They are in discussions with Walmart to go nationwide, and have recently expanded with Target in Phoenix and Atlanta, with plans for Los Angeles, Detroit, and several other cities as they build out the network alongside the McDonald's rollout.
- Increased utilization of existing production hubs is driving improved margins and profitability in the U.S. The expansion leverages underutilized production capacity, leading to organic growth and margin improvement as seen in the second quarter. The densification of their distribution network is resulting in flow-through to the bottom line.
- Krispy Kreme is facing challenges in the U.K. market, with slower growth and disappointing profitability due to regulatory changes affecting product placement in stores and a challenging macroeconomic environment.
- Significant investments are required for the nationwide rollout with McDonald's, including costs for dedicated teams, production line upgrades, and training, which may pressure margins and increase operational expenses in the near term.
- The company's growth plans are heavily dependent on the successful execution of the McDonald's partnership; any delays or issues in the rollout could negatively impact Krispy Kreme's expansion and profitability.
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McDonald's Rollout Progress
Q: Is the McDonald's rollout plan still on track?
A: Management confirmed the McDonald's partnership is progressing well. They plan to expand beyond the Kentucky pilot to Chicago this fall, then through the Midwest, expecting to be in over 1,000 McDonald's restaurants by the end of 2024. They aim to add around 5,000 locations by 2026, adding generally evenly through 2025. -
Operating Expenses and Margins
Q: Will operating expense growth align with revenue growth?
A: Management stated they are investing ahead with dedicated rollout teams and upgrades to production lines. They expect to manage costs prudently and deliver margin expansion as the McDonald's network ramps up, serving nearly 85% of the brand's U.S. footprint by 2026. -
Expansion with Walmart and Target
Q: Will hub expansion reduce additions of low-volume stores?
A: Management explained that the McDonald's expansion is a catalyst allowing them to grow their Delivered Fresh Daily business faster. They are focusing on high-quality national partners like Walmart, Target, and Kroger. Discussions are progressing, with recent expansions in Phoenix and Atlanta, and plans for Los Angeles, Detroit, and other cities. While convenience stores remain helpful for logistics, the focus is on big national partners unlocked by the McDonald's program. -
UK Market Challenges
Q: How is Krispy Kreme performing in the UK?
A: Management acknowledged the UK has been a challenge but noted that most of their nearly 40 international markets are performing well. The UK is still growing but at a slower rate, with disappointing profitability. The team is creating local buzz with specialty donuts, including celebrating the TV show Friends, and plans to upgrade the core donut range in Q3. -
Regulatory Impact in the UK
Q: Are regulatory changes still affecting UK performance?
A: Management confirmed they are lapping the initial impact of regulatory changes affecting merchandising of sweet treats. These changes have had a structural effect on the market. They are focusing on upgrading core donuts and introducing specialty offerings to adapt to the conditions. -
US Hiring and Labor Environment
Q: Will you need more staff for US expansion?
A: Management is gearing up for expansion, primarily needing extra drivers. Early expansion is serviced by existing hubs, requiring minimal additional labor. Recruitment is important but not a big concern, as they have been able to recruit great talent. The labor environment has eased, and they are not facing previous challenges in hiring drivers. -
Chicago McDonald's Rollout
Q: Why is Chicago the next city for McDonald's expansion?
A: Management stated Chicago was chosen due to existing capacity, with three hubs and spokes already in place, including a hub with more than one production line. Starting where they have capacity made sense, and they are guided by McDonald's preferences.