CHARLOTTE, NC. — Krispy Kreme, Inc.’s partnership with McDonald’s is only the beginning. As the company develops its hub-and-spoke infrastructure to serve McDonald’s outlets nationwide, it will seek to serve such retailers as Walmart, Target and Kroger nationally as well.
Joshua Charlesworth, president and chief executive officer, said during an Aug. 8 conference call to discuss second-quarter results that the McDonald’s relationship is “a bit of a catalyst” for Krispy Kreme, enabling its delivered fresh daily (DFD) business to expand more quickly.
“Our biggest opportunity is to make it easier for people to buy our fresh donuts,” he said. “We are doing this by increasing availability through our donut shops, online and by delivering fresh daily to grocery convenience stores and quick-service restaurants and the pace of our expansion is accelerating…With existing customers, such as Walmart, which still only lists us in about 25% of their stores, we are exploring the opportunity to go nationwide. We have agreed to expand with Target, a new customer this year.”
During the call, Charlesworth offered additional details about the planned rollout of Krispy Kreme donuts nationally at McDonald’s restaurants.
“Starting in Chicago, we expect to serve fresh donuts in more than 1,000 McDonald’s restaurants by the end of the year, add 5,000 in 2025 and 6,000 in 2026 bringing us to more than 85% of the US footprint,” he said.
Key to the successful execution of the plans is the buildout and expanded utilization of the company’s 151 US hubs with spokes. Currently the hubs serve an average of 50 points of access apiece.
“We expect this to increase to over 100 by 2026, improving efficiency and profitability,” Charlesworth said.
Additionally, the company has a stated goal to add 30 new hubs by the end of 2026 in support of its expansion plans.
“We’re on track to achieve this goal and have 17 of the 30 hubs already underway, including Seattle, Minneapolis and Philadelphia,” Charlesworth said.
The near-term priority for the company is to serve its largest customers, but Charlesworth said additional opportunities exist longer term.
“It’s really a great combination,” Charlesworth said. “C-stores and other smaller locations, smaller lower traffic locations, are actually still very helpful to us … So, we still see a role for those to play, but naturally, we’re focused on those big national partners that the McDonald’s program unlocks for us.”
In the quarter ended June 30, Krispy Kreme sustained a loss of $5.49 million, compared with net income of $223,000, equal to less than 1¢ per share on the common stock, in the second quarter last year. Sales were $438.9 million, up 7% from $408.9 million.
Adjusted net income in the second quarter was $9.11 million, or 5¢ per share, down 20% from $11.4 million, or 7¢, in the second quarter last year. The decrease was attributed principally to increased depreciation and amortization linked to “the strategy of making fresh donuts more available and Insomnia Cookies’ continued expansion.”
Adjusted EBITDA in the quarter was $54.7 million, up 12% from $48.8 million. EBITDA margins widened 60 basis points to 12.5% from 11.9%. The improvement reflects “optimization” of the company’s hub-and-spoke strategy together with efficiencies gained, lower compensation costs and other cost controls, Krispy Kreme said.
Krispy Kreme lowered its guidance for adjusted earnings per share to 24¢ to 28¢ per share, down 3¢ from its previous guidance of 27¢ to 31¢. Organic sales growth was revised downward to 6% to 8% from 5% to 7%. Management attributed both decreases as well as other guidance updates to the sale of a stake in Insomnia Cookies. The company anticipates net sales of $1.65 billion to $1.69 billion for the year and adjusted EBITDA of $215 million to $220 million.
Investor response to the results and the update were positive. The company’s shares were up $1.24, or 13%, in trading Aug. 8 on Nasdaq, closing at $10.44. Shares remained well below the stock’s 52-week high of $17.84.
In the United States alone, Krispy Kreme adjusted EBITDA was $32.7 million in the second quarter, up 16% from a year earlier. The company said EBITDA margins widened by 80 basis points to 11.3% thanks to labor and waste optimization and productivity benefits associated with the hub-and-spoke model. Promotional activity and McDonald’s startup costs were offsets.
International margins tightened because of sluggish volumes in the United Kingdom. Management said it was taking steps to improve UK performance and noted global points of access to Krispy Kreme increased 2,981, or 23%, from a year earlier, to 15,853 at the end of the second quarter.