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    Krispy Kreme Inc (DNUT)

    Q4 2023 Earnings Summary

    Reported on Jan 15, 2025 (Before Market Open)
    Pre-Earnings Price$13.83Last close (Feb 12, 2024)
    Post-Earnings Price$12.72Open (Feb 13, 2024)
    Price Change
    $-1.11(-8.03%)

    What went well

    • Krispy Kreme is engaged in ongoing and productive discussions with McDonald's about expanding their partnership in the U.S., which could significantly increase distribution and sales through the quick service restaurant channel.
    • The company is experiencing strong consumer demand, especially for sharing and gifting occasions, with phenomenal growth in e-commerce sales, indicating sustained growth potential in 2024.
    • Krispy Kreme is proactively investing in capacity and expanding their Delivered Fresh Daily (DFD) program, including securing new sites in Miami, Twin Cities, and L.A., demonstrating confidence in future growth and expansion opportunities.

    What went wrong

    • Sluggish Q1 sales growth and reliance on a significant rebound in later quarters to meet full-year guidance, with potential risks if the anticipated rebound does not materialize. For Q1, the company expects net revenue growth of only 2% to 4%, which is below the full-year guidance of 5% to 7%.
    • Significant commodity cost inflation, notably a 20% increase in sugar prices and labor cost increases driven by California wage hikes, which could pressure margins in 2024. The company expects mid to high single-digit inflation overall, with sugar prices inflating in excess of 20%, and labor costs experiencing high single-digit to low double-digit inflation.
    • Uncertainty around the expansion of the McDonald's partnership, with no increase in the number of restaurants testing Krispy Kreme products since Q3, raising concerns about the success of this growth initiative. The number of McDonald's restaurants testing remains at around 160, unchanged from the previous quarter, despite earlier indications of expansion plans.

    Q&A Summary

    1. McDonald's Partnership Expansion
      Q: Any update on expanding McDonald's partnership?
      A: Discussions with McDonald's are ongoing and productive regarding an expanded partnership. Currently, around 160 restaurants are testing doughnuts, unchanged since Q3. A further update will be provided when available.

    2. CapEx Guidance and QSR Investments
      Q: Does CapEx include QSR partnership investments?
      A: CapEx guidance of 7% to 8% of revenue includes investments in manufacturing capacity to support DFD and potential QSR expansions, like McDonald's. New sites in Miami, Twin Cities, and L.A. have been secured to accelerate openings and meet demand. These investments are not specifically dependent on McDonald's but support overall growth. CapEx spending is expected to be fairly uniform throughout the year.

    3. Commodity Inflation and Hedging
      Q: How much of commodities are hedged?
      A: About 75% of hedgeable commodities are now covered. Expect mid- to high single-digit inflation in 2024, with over 20% inflation on sugar and low double-digit inflation on cartons. Deflation expected on wheat and edible oils. Labor costs in California expected to increase high single-digit to low double-digit.

    4. Q1 Sales Outlook and Growth
      Q: Why are Q1 sales below trend?
      A: Soft start due to harsh weather in parts of the U.S. in January and lapping a strong 14.4% comp last year. Organic growth expected to be 3% to 6% in Q1. Committed to disciplined growth to meet full-year guidance. Excited for Valentine's Day, a key sales day.

    5. Insomnia Cookies Impact and Strategic Review
      Q: Sales guidance without Insomnia Cookies?
      A: Insomnia Cookies grew 16.3% in 2023 and is expected to grow double-digit in 2024. Impact on top line is roughly 100 to 200 basis points. A strategic review is underway; more details will be shared when possible.

    6. International Revenue per Door Decrease
      Q: Why is international revenue per door decreasing?
      A: Decrease due to 2022 U.K. HFSS regulations requiring relocation within stores, causing immediate productivity drop. Also, adding more convenience store locations like Oxxo in Mexico, which have lower sales per door. Expect average revenue per door to remain fairly flat internationally.

    7. U.S. Expansion Priorities for QSR Rollout
      Q: Which areas are priorities for U.S. expansion?
      A: Prioritizing areas like Miami, Twin Cities, L.A., New England, and Upstate New York to expand coverage. Existing network can cover about 6,000 McDonald's restaurants; additional hubs needed to cover remaining 7,000 to 8,000 locations. Plans are in place to open in these areas to support DFD and potential QSR partnerships.

    8. Modernization of Doughnut Making and Delivery
      Q: How are you modernizing doughnut making and delivery?
      A: Implementing digitization and automation, including an automated line in New York for filling, topping, and packing doughnuts. Piloting logistics improvements with third-party providers in D.C. and L.A. over 4 to 6 months to enhance efficiency and maintain quality.

    9. No Throttling of U.S. Operations
      Q: Are you slowing U.S. growth awaiting McDonald's deal?
      A: No throttling back. DFD continues as a core growth driver, with new doors added, including in the U.S. Focused on high-quality, sustainable growth, ensuring best points of access and preparing for QSR and other channels without slowing current operations. Many shops are underutilized and can increase production.

    10. Revenue Growth vs. Points of Access
      Q: Will new points of access have lower volumes?
      A: Underlying performance is good, but mix effects impact forecasting due to different market situations. In markets like Mexico, expansion into convenience stores like Oxxo may have lower sales per door but broaden reach. Expansion into quick-service industry may affect volumes at existing points of access.

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