Kreme

Krispy Kreme (DNUT -4.84%)
Q4 2023 Earnings Call
Feb 13, 2024, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. My name is Mandeep and I will be your conference operator today. At this time, I would like to welcome everyone to the Krispy Kreme fourth quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions] I would now like to turn the call over to Ms. Stephanie Daukus, vice president of investor relations. Ms.

Daukus, please go ahead.

Stephanie Daukus — Vice President, Investor Relations

Thank you. Good morning, everyone, and welcome to Krispy Kreme’s fourth quarter and full year 2023 earnings call. Thank you for joining us today. Our earnings release and associated earnings presentation, which we will be referencing during the call, are available on our investor relations website at investors.krispykreme.com.

Joining me on the call this morning are Josh Charlesworth, chief executive officer; and Jeremiah Ashukian, chief financial officer. After prepared remarks, there will be a question-and-answer session. Before we begin, I would like to remind you that this call contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events, or future financial performance. Forward-looking statements involve a number of inherent risks and uncertainties, and we caution investors that these risks could cause actual results to differ materially than those contained in any forward-looking statements.

These factors and other risks and uncertainties are described in detail in the company’s Form 10-K filed with the SEC for the year ended January 1, 2023, and in the other filings we make from time to time with the SEC. Forward-looking statements made today are only as of today. The company assumes no obligation to publicly update or revise any forward-looking statements except as may be required by law. Additionally, today’s call will include certain non-GAAP financial measures.

A reconciliation between non-GAAP financial measures and their closest comparable GAAP measure can be found in our fourth quarter 2023 earnings press release and Form 8-K filed today with SEC and is also available at our investors.krispykreme.com website. With that, I’ll turn the call over to Josh.

Josh Charlesworth — Global President, Chief Operating Officer

Good morning, everyone, and thank you for joining us today. I’m so excited for what is ahead of us at Krispy Kreme. Our strategy is clear to make our fresh doughnuts available in more places and keep reminding people of the joy that is Krispy Kreme, not just to eat, but to share and give to others. We make great progress on this in 2023 with strong consumer demand and increased access to our fresh doughnuts in both existing and new markets around the world.

We also improved profitability as we grew, demonstrating the productivity benefits of our unique Hub and Spoke operating model. As we move forward in 2024, we will continue to offer new and exciting specialty premium doughnuts, upgrade our digital commerce capabilities, and expand the availability of our doughnuts around the world, including in our newer sales channels like club stores and quick service restaurants. We will also increase our efforts to modernize the making and moving of doughnuts to ensure we deliver high quality profitable growth. Let me summarize today’s key messages.

We continued to deliver double-digit organic revenue growth with all markets and channels growing sales. We expanded profit margins by leveraging existing production hubs to support our growth, especially in the U.S. where operating leverage was strongest. Our ongoing strategy is to scale the business efficiently by adding more fresh points of access.

There are now more than 14,100 places where you can buy our melt-in-your-mouth fresh doughnuts in 39 countries. And our focus on operating excellence means that we’re building both a bigger and better Krispy Kreme business. And finally, we are introducing our 2024 outlook with organic growth expected to translate into adjusted EBITDA expansion, reflecting our intent to drive increasingly profitable growth. We delivered 13.2% organic revenue growth in the fourth quarter, ahead of our guide, and 12.2% organic revenue growth for the full year.

This performance reflected strong consumer demand, with people choosing to celebrate Halloween, Thanksgiving and the holiday season with premium priced specialty doughnuts from Krispy Kreme, including a Scooby-Doo Dozen and our first ever Elf doughnut collection celebrating the 20th anniversary of the family favorite holiday movie. Tie-ins like this helped create tremendous excitement for the brand in 2023 and we finished the year with over 40 billion media impressions, reflecting how well Krispy Kreme’s fresh and innovative doughnuts resonated with the consumer. Ecommerce also continues to play a bigger role within our business, growing over 25% in the fourth quarter, driven by new loyalty members which now total over 15 million, as well as operational improvements to our website, app and in-shop availability. Organic growth was also driven by adding new points of access, which increased by 743, a much stronger fourth quarter expansion than in prior years, reflecting the growing demand from existing and new partners who want to make everybody’s favorite fresh doughnuts available to their customers.

The same goes for new countries, with Krispy Kreme opening in Ecuador and France in the fourth quarter to add to Jamaica, Kazakhstan, Switzerland, Chile and Costa Rica which were all added earlier in the year. The continued expansion of our hub-and-spoke model delivered productivity growth and increased profitability in the fourth quarter, with adjusted EBITDA margin improving 40 basis points to 14.2%. The hub-and-spoke model is becoming more productive as we add more points of access without adding significantly more production hubs. We ended 2023 with 2300 more points of access than in 2022, mostly through delivered fresh daily displays in grocery and convenience stores, and we did this while adding net one production hub.

The resulting increased utilization of our production hubs, most of which can still make twice as many doughnuts as they do today, made them more efficient and profitable. We also completed the optimization of our production hubs without spokes in 2023, closing legacy doughnut shops which were not well suited to the strategy. Our fourth quarter and full year results exemplify the success and power of our hub-and-spoke model. And in 2024 I look forward to us becoming a bigger and better Krispy Kreme by continuously improving our business operations as we grow.

And the No. 1 reason why someone may not buy a Krispy Kreme Doughnut continues to be access and convenience. With more than two million locations where we could in theory sell Krispy Kreme, at least in the markets we have targeted, the opportunity to expand availability is big. We have previously shared our long-term goal of opening at least 75,000 points of access around the world, yet this still represents less than 3% of the total addressable market and we are adding new customers all the time, such as Costco and international markets and McDonald’s in the US, where we have been conducting an extended test in Kentucky for much of 2023.

Our relationship with McDonald’s remains strong with discussions ongoing about further expansion and we look forward to providing updates on our quick-service restaurant plans through 2024. We also expect to launch Krispy Kreme in three to five new countries in 2024 with several priority markets identified in Europe, as well as Brazil where we just announced an exciting new partnership with the convenience store chain AmPm. We have perfected the art of making our original glazed doughnut over the last 87 years and bringing joy to our consumers across the world. Yet there remains the opportunity to modernize the way we make and move our doughnuts, bringing efficiency to the process while maintaining consistent high quality and service levels.

We have started 2024 by making changes to our global leadership team to reflect these opportunities. Angela Yochem, we are adding a new chief information officer with deep digital technology experience across multiple industries. Our global chief supply chain officer, Sherif Riad, formerly of Mondelēz, has stepped into the team, as has our U.S. business leader, Javier Rancaño, who has extensive QSR operations experience.

As a leadership team, we are focused on quality fresh doughnuts in every channel, every day, expanding the use of automated doughnut making and processing, and continuously improving our doughnut delivery capabilities as we support more and more points of access. An example of this is a pilot we are just starting on select routes in LA and DC to deliver our fresh doughnuts through a third party logistics provider still using dedicated Krispy Kreme trucks and drivers. As we focus on our core strategy of producing, selling and distributing fresh doughnuts daily, we continue our strategic review of Insomnia Cookies. With that, I will turn it over to Jeremiah to give further insight on our financial performance and provide an outlook for 2024.

Jeremiah Ashukian — Chief Financial Officer

Thanks Josh, and good morning, everyone. As Josh mentioned, we reported strong double-digit fourth quarter organic growth and improved profitability for the year, demonstrating the productivity benefits of our Hub and Spoke model. In the fourth quarter, we grew double digit on both the top and bottom line on a percentage basis, resulting in adjusted EBITDA margin expansion of 40 basis points year over year to 14.2%. We saw growth in all our markets driven by high impact global brand activations and seasonal offerings, increased points of access and premiumization efforts.

Adjusted EBITDA grew 14.7%, outpacing our revenue growth for the second consecutive quarter as we continue to realize cost efficiencies across the global business through both productivity efforts, increased utilization of our hubs. For the full year, the business performed largely aligned with expectations as we delivered 12.2% organic growth, increased adjusted EBITDA by 11% and expanded margins. Organic growth accelerated to 13.2% in the fourth quarter. Notably, we saw growth across all our segments in 2023 on top of strong performance in 2022.

In the U.S. segment, organic revenue grew 13.7% in the fourth quarter, driven by record holiday season as specialty doughnut offerings drove incremental sales through all channels, especially DFD, and had positive impact on our sales. We also observed increased transaction values due to growth of our e-commerce channel. All of this was underpinned by our strategy of growing points of access which grew 17.7% year over year with more than 300 DFD Doors added in Q4 versus Q3 and over 1,000 Doors added versus 2022.

At Insomnia Cookies, we observed strong organic growth of 16.3%, as well as sequential margin improvement from Q3. That said, margins in the business remain pressured given the elevated cost of cocoa. The Hub and Spoke model, first established in the UK and Australia, is now well underway in the U.S., with several cities seeing marked improvements in profitability during the year as we added more points of access to the existing hubs. This, as well as our ability to leverage pricing to offset inflation, explains the increase in sales per hub of 8.9% year over year and the subsequent 120 basis point adjusted EBITDA margin improvement for the year.

In the International segment, organic revenue grew 9% year over year as we expanded points of access and leveraged global campaigns over the holiday season to drive volume of our specialty doughnuts. Most notably, we executed our Elf specialty doughnuts in nine markets worldwide, leveraging a single set of marketing materials, seeing great results in Mexico and the UK. Mexico was a substantial contributor to growth this quarter. We have nearly doubled points of access in Mexico through existing partners such as Oxxo, with meaningful room to continue expanding in the country.

We also saw successful growth in new partners such as Costco in Australia, which continues to prove to be an efficient customer. Adjusted EBITDA improves sequentially in a quarter to 20.6% with margin expansion in both Australia and Mexico. Profitability continues to be pressured in the UK and we’re taking actions to improve productivity. In the Market Development segment, organic revenue grew 19.2% in the fourth quarter as we continue our international expansion by opening 126 more points of access through a combination of theaters, Fresh Shops and DFD Doors.

We opened in two new markets, Ecuador and France, and expect that these two countries alone can support more than 2,000 further points of access. Most notably, Paris represented a record breaking launch in the fourth quarter. This shop was our best performing shop worldwide on a sales basis in December. Market Development adjusted EBITDA grew 21.1% in the fourth quarter with margins expanding by 120 basis points to 35.4%.

Margin improvements were primarily driven by continued Hub and Spoke efficiencies in our equity owned Japanese and Canadian markets. As we continue to expand globally, we expect to see high returns in international franchises. The JV structure of the French market is a prime example of our capital light model approach, which enables earnings flow through at significant margins while providing the option to take equity ownership of the market in the future. As you heard from Josh earlier, we announced our future entry into Brazil using a similar approach.

For the year ending 2023, we delivered $0.27 in adjusted earnings per share, driven by improvements in adjusted EBITDA that were offset by higher than expected depreciation and amortization as we continued to accelerate expansion both domestically and globally at Insomnia Cookies and made choiceful investments in anticipation of accelerated growth in the U.S. DFD business. We also saw increased annual interest expense as a result of the higher interest rate environment. As a result, we saw adjusted diluted earnings per share finish lower than our original expectations.

Our business fundamentals remain strong and we are confident in our ability to grow EPS despite remaining in the somewhat higher interest rate environment in 2024. As mentioned on previous calls, in 2023 we deployed some of our operating cash flow to strategically reduce our use of vendor financing, which had an impact on net cash from operations. Over the year we reduced vendor financing by roughly $82 million, which will provide a long-term tailwind of $3 million to $5 million on an annualized basis to adjusted EBITDA beginning in mid-2024. Despite these efforts, we are able to hold leverage flat through 2023, finishing the year at 4.1 times.

We have a healthy balance sheet having extended our maturities to 2028 in the first quarter of 2023. We closed the year with just under $40 million in cash and have access to ample liquidity through a revolver with an undrawn capacity of $159 million. We remain focused on the long-term health of the business and setting up our capital structure to support growth through a strong balance sheet. We expect to delever in 2024 primarily through the growth of adjusted EBITDA and running the business with an eye toward efficiency and capital expenditures, as well as managing working capital.

Over the long-term we remain on track to be between 2.0 times and 2.5 times net leveraged in 2026. As we look forward to 2024 we’re providing our outlook for the full year, which assumes a nominal impact from foreign exchange and contemplates all operations including Insomnia Cookies. For the full year 2024 we expect to deliver net revenue growth of 5% to 7%, organic revenue growth of 6% to 8%, adjusted EBITDA growth of 8% to 11%, and adjusted diluted earnings per share of between $0.27 and $0.31. After reporting strong double-digit fourth quarter and full year organic growth in excess of our full year guide, we remain confident in our 2024 guidance and our ability to drive operating leverage as we become more coordinated as a global company.

We believe we are well positioned for sustainable, high quality growth in the years to come leveraging the tools which helped us deliver a great finish to the year in 2023. As it relates to the first quarter despite the harsh weather in broad parts of the U.S. in January and lapping record breaking sales in the first quarter of 2023 we expect net revenue growth of 2% to 4%. We also expect adjusted EBITDA to grow in line with the revenue growth.

We will closely monitor and adapt to changes in the market and consumer environment. And I remain confident about the profitable growth potential of our business in 2024, and we are excited for a great year to come. With that, I’ll turn it over to Josh for his closing remarks.

Josh Charlesworth — Global President, Chief Operating Officer

Thanks Jeremiah. In summary, we are expanding availability by adding high quality productive points of access, driving operating leverage through the efficiency of our operating model, and maximizing capital return both by leveraging existing capacity and making selective investments in geographies which have limited access to Krispy Kreme today. All in I look forward to us building a bigger and better Krispy Kreme in the years ahead. Operator, let’s now open it up to Q&A, please.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Sara Senatore with Bank of America. Please go ahead.

Jessica Schaefer — Bank of America Merrill Lynch — Analyst

Hi. Good morning. This is Jessica Schaefer on for Sara Senatore. Thank you.

So for last quarter, you said you were in advanced discussions about expanding the McDonald’s partnership and were making investments in the U.S. But it looks like the 160 or so restaurants testing the doughnuts have been unchanged since 3Q. So – and I know that the press release alluded to more growth in the quick service restaurant channel, but I wanted to see if there’s any more color you could provide on that agreement? And I do have a couple more questions, but I figure I can ask them one at a time.

Josh Charlesworth — Global President, Chief Operating Officer

Sure. Good morning, Jessica. Yes. Obviously word is out on the success of our delivered fresh daily doughnut program, several customer opportunities in existing and new channels around the world.

Regarding quick service restaurants in the U.S. our focus does continue to be on McDonald’s. Discussions are ongoing and productive about an expanded partnership, and we’ll provide an update on that one when we have it. OK.

What was your second question?

Jessica Schaefer — Bank of America Merrill Lynch — Analyst

All right. So in the U.S. and international markets revenue growth was slightly less than points of access growth. I know you think in terms of growth in sales per hub, but as we try to forecast sales going forward, how should we think about new points of access? Is it fair to assume that they’ll have lower volumes than the existing base of points of access? And if so is that driven by the type of door and will that change if you accelerate expansion into the quick service industry?

Josh Charlesworth — Global President, Chief Operating Officer

Well, it’s interesting. Obviously the three international markets there of UK, Australia and Mexico all in different situations. The UK, Australia much more developed in the grocery store customer mix. Mexico really, really starting out with a big opportunity in convenience stores.

So you get a constant mix effect there. Underlying performance is good, but you’re going to get these mix effects for the forecasting, especially in Mexico with the big opportunity with the Oxxo convenience store chain.

Jessica Schaefer — Bank of America Merrill Lynch — Analyst

OK. Thank you. And could you remind us how much of your commodity basket you have locked in?

Jeremiah Ashukian — Chief Financial Officer

Yes. I can take that, Jessica. And we started to put on cover on commodities early in 2023. We do expect to see mid- to high-single digit inflation overall for 2024.

Most of our commodities are now covered, so about 75% of them are covered of the commodities that we actually can cover. As it made sense for us from a pricing perspective or just a security of supply perspective. It’s a bit of a mixed bag within that kind of high single digit, mid- to high-single digit inflation number among our cost structure as we’re forecasting inflation in excess of 20% on things like sugar, where the market remains around 10-year highs, and low-double digit inflation on things like cartons, which is a commodity we can’t hedge. But we do expect to see some deflation on key commodities like wheat and edible oils.

I think it’s important to note out just outside of commodities from a labor perspective we do believe that we’ll be subject to the wage increases in California. And as a result we continue to expect to see high-single digit to low-double digit inflation on labor in 2024.

Jessica Schaefer — Bank of America Merrill Lynch — Analyst

OK. All right. Thank you so much for your time.

Josh Charlesworth — Global President, Chief Operating Officer

Thank you.

Operator

Our next question comes from the line of John Ivankoe with J.P. Morgan. Please go ahead.

Luke Jobe — JPMorgan Chase and Company — Analyst

Hey, team. This is Luke Jobe for John Ivankoe. Just wondering if you could give some language around specific changes to kind of the current process or model that we’re focused on with specification to modernization of the doughnut making process and kind of especially delivery within that? Thanks.

Josh Charlesworth — Global President, Chief Operating Officer

Sure. Thanks, Luke. I’ll take that. Yes, you picked up on our efforts to modernize the way we make and move our doughnuts.

That goes all the way from the sort of digitization of the process through to the automation of the doughnut making itself, and then all the way on to upskilling our doughnut transportation. All in, we’re working to ensure the freshest doughnuts every time delivered as efficiently as possible. We’ve shared before the automation efforts. We have a line running in New York, which is now automatically filling, topping and even packing the doughnut.

We’re looking to perfect that and then roll it out as time goes on. And then, regarding the logistics in particular, the rapid expansion of DFD means that we’re becoming more – logistics are becoming more and more important. So we announced on today’s call that we have a pilot covering select routes in D.C. and LA, and that’s expected to take about four to six months.

And the purpose of that is to work with a third-party provider to see if we can maintain quality and service while being able to access new capabilities that they can bring and over time improve our operations and indeed bring more efficiency. So it’s an effort end-to-end to continuously improve doughnut making and moving, and we’ll provide updates as we learn more.

Luke Jobe — JPMorgan Chase and Company — Analyst

Great. Thanks.

Josh Charlesworth — Global President, Chief Operating Officer

You bet.

Operator

Our next question comes from the line of Bill Chappell with Truist. Please go ahead.

Davis Holcombe — Truist Securities — Analyst

Hi. Good morning. This is Davis Holcombe on for Bill Chappelle. Thanks for taking our question.

I just wanted to know as we saw that your guidance this year for fiscal year 2024 includes operations from Insomnia Cookies. But we were wanting to know if you could provide a little bit of color on what the sales guide would be without the inclusion of Insomnia cookies.

Jeremiah Ashukian — Chief Financial Officer

Yes, I mean, No. 1, we’re pleased with the performance of Insomnia as the business continues to grow profitably and improve sequentially in terms of EBITDA, adjusted EBITDA improvement. We opened a record number of cookie bakeries in 2023. We also talked about the growth rate at Insomnia at 16.3% on the earnings call as well.

There continues to be lots of opportunity on this business to expand both the U.S. and internationally. We do expect it to continue to grow double-digit in 2024, but just given the fact that we’re in the process. As we said in Q3, we’re conducting a strategic review and we look forward to sharing more news about it that we can.

I think in the last earnings call, I did let everybody know that we operate or the impact on Insomnia would have a roughly 100 to 200 basis point impact on the top line though.

Davis Holcombe — Truist Securities — Analyst

Excellent. Thanks for the color. I’ll pass it on.

Operator

Our next question comes from the line of Aisling Grueninger with Piper Sandler. Please go ahead.

Aisling Grueninger — Piper Sandler — Analyst

Hi. Good morning. So capex came in as a percent of revenue for at – for 2023 at 7.2%. And the new 2024 outlook, you’re targeting 7% to 8%.

We’re just wondering how concrete of a number that is. Does that include any incremental investments you would need to make if, let’s say, a QSR partnership was to come to fruition in 2024?

Josh Charlesworth — Global President, Chief Operating Officer

Yes, good morning, Aisling. And so, our confidence in the DFD opportunity around the world, and especially in the U.S. including QSR, is such that we have thoughtfully started making additional investments in manufacturing capacity to support it. For example, we’ve secured new sites in Miami, Twin Cities and LA, all conversions of existing buildings looking to accelerate time to opening to keep up with demand.

To clarify though, the investments we’re making, they’re in broad support of the expansion of DFD overall. So they’re not dependent specifically, for example, on McDonald’s, but they’re investments that we very much believe make a lot of sense for our business going forward in terms of bringing Krispy Kreme to more people in those new channels.

Aisling Grueninger — Piper Sandler — Analyst

Great, thanks for that. My second question is on, I think we touched on this before, but it’s in Slide 18 of your presentation. It’s about average revenue per door per week for international. Just what’s the dynamics behind, it’s been the decrease year over year.

Is it just opening these DFD doors in less prime locations than the earlier locations? Or just any color would help? Thanks.

Jeremiah Ashukian — Chief Financial Officer

Yeah, it’s a great question. APDs internationally were impacted in 2002 by the UK regulations that were put in place. It’s called HFSS, which required us to move where the locations were in the stores, which had an immediate step down in terms of productivity. Moving forward, the APD per door has been impacted by adding more convenience type locations, which Josh mentioned, around places like Oxxo in Mexico, which on average is smaller footprint, which could be a lower kind of dollar per door.

So, overall kind of the mixed effect there will have a pull on. We believe that the APD will remain fairly flat-ish internationally kind of moving forward.

Aisling Grueninger — Piper Sandler — Analyst

Great.

Josh Charlesworth — Global President, Chief Operating Officer

It’s worth clarifying on the U.S., because actually interesting, with APDs growing strongly, we’re seeing that we’re actually bringing on even more productive new customers and locations, showing that – there is a lot of white space opportunity in the U.S. and it’s interesting international. Mexico, an example where we are leaning in on a convenience store, in the US is a lot of grocery stores, mass club stores, for example, big opportunities there. So the APD will evolve over time with different types of customers, but all in we’re seeing continuously productive doors ones that support our margin expansion plans.

Aisling Grueninger — Piper Sandler — Analyst

Great. Thank you so much for that. I’ll pass it back.

Josh Charlesworth — Global President, Chief Operating Officer

Thank you.

Operator

Again, the floor is now open for your questions. [Operator instructions] Our next question comes from the line of Dan Guglielmo with Capital One Securities. Please go ahead.

Dan Guglielmo — Capital One Securities — Analyst

Hey, everyone. Thank you for taking my questions. Just going back to the U.S. expansion of hubs, you mentioned Minnesota, California, Florida, and I think New England and Upstate New York were also opportunities.

So just thinking through kind of those are there certain areas you see as priorities right now? And are there certain markets that you need to get open before doing like a national QSR rollout?

Josh Charlesworth — Global President, Chief Operating Officer

Well, a QSR rollout with a customer like, for example, McDonald’s 13,000, 14,000 restaurants in the U.S. we could cover about 6000 restaurants just with our existing network. So your question goes to the 7,000, 8,000 assuming you’re taking McDonald’s as the benchmark that we would need to cover in areas where mostly it’s those areas you described in the country where Krispy Kreme isn’t today. Our plans are anyway over time to open up in those places and reference to either Miami, Twin Cities, LA, New England, all the ones you referenced, Upstate New York, they’re all in our plans.

Naturally those that we have already maxed out capacity or we’ve identified sites are the ones we’re prioritizing in the short term. But they all make sense for us and so we’re actually looking across the country in all those locations as we build out our plans for DFD and QSR in the future.

Dan Guglielmo — Capital One Securities — Analyst

Great, thank you. And then, just as a follow-up to that, it’s kind of like a modeling question just around the capex spend. So the 7% to 8% of revenue guidance for 2024 just thinking about the expansion, I think, you had said $3 million to $6 million for some of those hubs. Is there a cadence we should be thinking about quarter to quarter for the year? Is it going to be pretty evenly spread throughout or should it be back weighted, just trying to get some help there.

Thank you.

Josh Charlesworth — Global President, Chief Operating Officer

On the capex, I mean, the hubs themselves are coming online probably a little more back weighted.

Jeremiah Ashukian — Chief Financial Officer

Yes.

Josh Charlesworth — Global President, Chief Operating Officer

The capex itself though phases differently, doesn’t it Jeremiah?

Jeremiah Ashukian — Chief Financial Officer

Yes, I mean, there is a cash flow from capex that will happen here because we’ve spent or at least decided to deploy capital last year in an effort to get some of these up and running earlier in the year. From a modeling perspective, I mean, for the most part we will follow a fairly uniform spend of capex throughout the year as we have in previous years. So, it’s a fairly consistent number when you think about percent of revenue that will bounce between 7% and 8% for the quarters, it will just bounce up and down between those numbers, more or less.

Dan Guglielmo — Capital One Securities — Analyst

OK. Thank you.

Operator

Our next question comes from the line of Andrew Wolf with C.L. King. Please go ahead.

Andrew Wolf — C.L. King and Associates — Analyst

Thanks. Good morning. First, I wanted to ask about the first quarter sales being below trend and tie that to the year because obviously you are looking for a big rebound to more like 6% to 8% to get to the 5% to 7% for the year, for the Q2 through Q4, a little more in line with what, I think, The Street was expecting. So could you just kind of flesh out a little bit what you’re seeing in the quarter? How much you think is pure weather? Is there anything else going on? Do you have sort of non weather impact in markets either in the U.S.

or Canada or even the other segments that sort of point to sort of some more normalized growth supporting the rebound for the rest of the year?

Jeremiah Ashukian — Chief Financial Officer

Yes, thanks Andrew. I can take that. I think I’ll probably start off by just saying we’re actually pleased with the fact that we’ll continue to post growth in Q1 after a record Q1 in 2023 and 14 consecutive quarters of organic growth. I think the last time we didn’t grow in a quarter was during COVID and as a result of some of the UK shutdown or slowdown.

Organic growth in the quarter is actually close to 3% to 6% given we’ll be lapping the discontinuation of BST. As you mentioned, like many others, we saw harsh weather in broad parts of the U.S. in January, leading to lower revenues and a softer start to the year, which also comes up against the comp of 14.4% last year, but also a couple of one offs to your point. One at Insomnia Cookies, we have a lap against extended delivery zones that will be in our base, which provided some tailwind last year, and then two in market development.

We had a one off shift in the timing of some equipment sales in our market development franchise business, which resulted in a higher sales being recognized in 1Q last year. That said, we’re excited for Valentine’s Day tomorrow, which is one of our biggest sales days of the year, not to mention other key specialty doughnut offerings over the course of the year. We’re definitely committed to discipline growth in pursuit of the full year guide that are laid out. And we will when you think about from a cadence point of view, lap some other things as we get into Q2 that may go the other way, most notably the NCR outage that we had in the U.S.

in Q2, 2023, which will help us kind of recover back in Q2.

Josh Charlesworth — Global President, Chief Operating Officer

Yes. I’ll add is, we’re looking forward to quality, sustained growth through 2024. And Q4 showed once again that the consumer just loves our doughnuts, especially for sharing and gifting at special occasions and celebrations like Valentine’s that Jeremiah mentioned, even when priced at a premium. And we see that in all sales channels with really quite phenomenal growth recently in e-commerce in particular.

So our consumer is engaging with the brand more than ever. And that’s the key backdrop to understanding Krispy Kreme.

Andrew Wolf — C.L. King and Associates — Analyst

OK. And if I can just add another follow-up just related also to sales. Now, I assume for the year you only have the 160 or so McDonald’s stores in there. But I guess for the U.S.

specifically, is there any less of a push on sales in any way? Whether it’s not putting up stores you might have put hubs that you might have put up because you’re deferring, and is there any impact on your – what’s in the guidance because you’re kind of throttling any part of the U.S. operations back in anticipation of either McDonald’s or another QSR?

Josh Charlesworth — Global President, Chief Operating Officer

There’s no throttling back. It’s absolutely the case that the DFD continues to be a core driver of our growth. Indeed, as I mentioned a moment ago, the Q4 addition of Doors around the world, including the U.S. at a time which has traditionally been problematic for our customers, they want to put in other seasonal items.

This year, they wanted to put in our items and prioritized listing new Doors for Krispy Kreme. So definitely no throttling back. At the same time, we are very focused on improving the quality of our operations, ensuring high quality, sustainable growth, working as I mentioned, on making moving doughnuts in continuously better ways. So that naturally means we’re very thoughtful as we grow to make sure we have the best points of access, strong hubs, making sure they’re set up for future growth.

As also mentioned, with many of the doughnut shops still heavily underutilized, they’re able to make more than twice the amount of doughnuts that they do today most of those lines getting ready for growth with QSR and other new channels is a lift. And so, we’re making sure that everywhere we grow, it’s in a way that ensures high quality doughnuts presented freshly to consumer in every channel, while maintaining productivity and efficiency. So yes, we’re certainly working hard on the system, but we’re not as such throttling back.

Andrew Wolf — C.L. King and Associates — Analyst

Thank you. That’s a really helpful color. I’ll pass it on. Thank you.

Josh Charlesworth — Global President, Chief Operating Officer

You bet. Thanks, Andrew.

Operator

I would now like to turn the call over to Josh Charlesworth for closing remarks.

Josh Charlesworth — Global President, Chief Operating Officer

Well, thank you, everybody. Thank you for your interest in Krispy Kreme today. And of course, thank you to all our Krispy Kremers for their hard work in 2023 and your ongoing commitment to bring joy to our customers through Krispy Kreme. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Stephanie Daukus — Vice President, Investor Relations

Josh Charlesworth — Global President, Chief Operating Officer

Jeremiah Ashukian — Chief Financial Officer

Jessica Schaefer — Bank of America Merrill Lynch — Analyst

Luke Jobe — JPMorgan Chase and Company — Analyst

Davis Holcombe — Truist Securities — Analyst

Aisling Grueninger — Piper Sandler — Analyst

Dan Guglielmo — Capital One Securities — Analyst

Andrew Wolf — C.L. King and Associates — Analyst

More DNUT analysis

All earnings call transcripts

Krispy Kreme (DNUT -6.55%)
Q3 2023 Earnings Call
Nov 09, 2023, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. My name is Dennis, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Krispy Kreme third quarter 2023 earnings call. [Operator instructions] I would now like to turn the call over to Ms.

Stephanie Daukus, vice president of investor relations. Ms. Daukus, please go ahead.

Stephanie Daukus — Vice President, Investor Relations

Thank you. Good morning, everyone, and welcome to Krispy Kreme’s third quarter 2023 earnings call. Thank you for joining us today. Our earnings release and associated earnings presentation are available on our investor relations website at investors.krispykreme.com.

Joining me on the call this morning are Mike Tattersfield, president and chief executive officer; Josh Charlesworth, global president and chief operating officer; and Jeremiah Ashukian, chief financial officer. After prepared remarks, there will be a question-and-answer session. Before we begin, I would like to remind you that this call contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events, or future financial performance. Forward-looking statements involve a number of inherent risks and uncertainties, and we caution investors that these risks could cause actual results to differ materially from those contained in any forward-looking statements.

These factors and other risks and uncertainties are described in detail in the company’s Form 10-K filed with the SEC for the year ended January 1, 2023, and in the other filings we make from time to time with the SEC. Forward-looking statements made today are only as of today. The company assumes no obligation to publicly update or revise any forward-looking statements, except as may be required by law. Additionally, today’s call will include certain non-GAAP financial measures.

A reconciliation between non-GAAP financial measures and their closest comparable GAAP measures can be found in our third quarter 2023 earnings press release and Form 8-K filed today and is also available at investors.krispykreme.com. With that, I’ll now turn the call over to Mike.

Mike Tattersfield — President and Chief Executive Officer

Thank you, Stephanie. Good morning, and thank you, everyone, for joining us today. We had quite a bit of news this quarter at Krispy Kreme with our upcoming CEO succession and our exploration of strategic alternatives for Insomnia Cookies. To frame the call, I want to talk about our history.

Afterwards, I’ll pass the mic to Josh to dive into our strategy and Jeremiah to cover our financial results and outlook for the remainder of the year. Krispy Kreme has been a loved sweet treat brand since Vernon Rudolph first started making donuts in 1937. Since joining the company in 2016, we’ve taken Krispy Kreme on a transformation to become focused as a donut company always creating freaking awesome donuts. Vernon’s recipe and its hot fresh donuts is how he built the brand.

We further developed the brand, unlocking the power of a truly omnichannel brand. And importantly, we now deliver 100% of our donuts fresh daily, up from 50% since 2016. Also since 2016, we’ve nearly tripled the number of access points where consumers can buy fresh donuts daily and increase the geographies where we operate by roughly 50% as we are now in 37 countries. We learned that we need to be where consumers want us and develop our points of access beyond the fresh and theater shops to include delivery fresh daily to grocer, convenience, and we are now unlocking new channels, such as club and quick-service restaurants.

We have profitably reshaped our global ownership network via our hub-and-spoke model and also acquired Insomnia Cookies five years ago to help us strengthen our e-commerce and digital platform. Digital orders now represent approximately 20% of consolidated retail sales. Finally, we have continuously invested in innovation and focused the brand on gifting, sharing, and premiumization for our consumers worldwide. We know and believe there’s nothing we can’t do with a donut.

And as always, at the core of our company is our purpose to touch and enhance the lives through the joy that is Krispy Kreme, which guides our culture and sets our direction to becoming the most loved sweet treat brand in the world. As I reflect back, none of this would have been possible without our more than 23,000 global Krispy Kremers, our leaders in our culture to drive growth and results daily. This team has transformed our business from a legacy retail and wholesale operation to a fresh, nimble, unique omnichannel business that has more than proven itself. I’m truly grateful and thankful to every Krispy Kremer.

Turning to Insomnia Cookies, I mentioned our announcement to explore strategic alternatives for the company to enhance both brands’ growth trajectories and enable Krispy Kreme to focus on our core strategy of producing, selling, and distributing fresh donuts daily. We thank Insomnia for their tremendous partnership in building upon our e-commerce and digital capabilities, all while we help grow the Insomnia business here in the U.S. to roughly 250 cookie bakeries, as well as we expand globally into the U.K. and Canada.

Regarding the CEO transition, for some time now, I’ve been in conversations with the board regarding my succession plan. Given the progress we’ve made on our strategy, the phenomenal team and culture we have in place, it was the right time to promote Josh to CEO effective January 1. I’m also excited to transition to a senior advisor role and Krispy Kreme ambassador, where I’ll support Josh and continue to spread the joy that is Krispy Kreme. Josh has played a critical role in Krispy Kreme’s growth for the last six years, has been a tremendous partner to me, and I love his passion for the brand and our Krispy Kremers.

All of this gives me confidence in our future success. Josh, I couldn’t be happier to transition this role to you and look forward to watching more of your accomplishments as CEO. Now toward Q3. Our results this quarter demonstrate the continued strength of our team, our business model, and the power of our brand.

We delivered growth on both the top and bottom line, in line with our plans, while delivering adjusted EBITDA margin expansion through our hub-and-spoke model. Our global expansion continued as we made our donuts available in two markets: Switzerland and Kazakhstan; And Insomnia Cookies expanded internationally into Canada and the United Kingdom. With that said, I’ll now turn it over to Josh for a review of our strategy and to discuss the momentum we’ve seen so far in the fourth quarter. Josh, congratulations once again.

Turn on that hot light, amigo.

Josh Charlesworth — Global President, Chief Operating Officer

Thanks, Mike. It’s such a privilege and honor to be asked to lead this great team that you’ve brought together to represent this incredible brand, which means so much to so many people, and above all to support all our Krispy Kremers around the world as we seek to firmly establish Krispy Kreme as the world’s most loved sweet treat. And on a more personal note, thank you, Mike, for the many years of support you have given me, including this period of CEO transition. And I’m very pleased that you’ll be staying on as a member of the Krispy Kreme board.

I’m so excited for what is ahead of us at Krispy Kreme. Our strategy is clear: make our fresh donuts available in more places and keep reminding people of the joy that is Krispy Kreme, not just to eat, but to share, and give to others. We have made so much progress in leveraging the power of the Krispy Kreme brand under Mike’s leadership, now selling over 1.6 billion fresh donuts a year in over 13,000 points of access around the world. And yet, we have so much further to go.

Our existing points of access represent less than 1% of the places a customer could, in theory, buy Krispy Kreme donuts, and our purchase frequency is less than three times a year despite the many occasions and celebrations where our consumers can and do enjoy our donuts. We’ve laid out a great strategy, and we will remain focused on maximizing our global growth opportunity, leveraging our profitable omnichannel fresh donut business. The key elements being, one, expand availability of fresh donuts through more points of access in both new countries and new sales channels, such as quick-service restaurants; two, increase purchase frequency by continuing to strengthen our premium offerings for special occasions and improving e-commerce and loyalty programs; three, drive end-to-end productivity in our donut supply chain through operating excellence and automation; and four, improve capital efficiency by leveraging excess capacity in our fresh donut production hubs to supply more capital-light points of access. And we are pleased with our progress so far.

Our third quarter results were excellent with organic growth just under 10%, Adjusted EBITDA margins up by 50 basis points, and points of access increasing 14% to 13,394. The 522 points of access that we added in the quarter were across multiple markets, including 453 new deliver fresh daily merchandising displays or DFD doors, 59 fresh shops, and four hot light theaters. The new DFD doors include OXXO convenience stores in Mexico; Woolworths grocery stores in Australia; and Costco Wholesale stores in the U.K., Australia, and Canada, reflecting the increasing diversity of our customer mix. This also demonstrates our ability to expand DFD across multiple channels in several markets around the world.

The 186 DFD doors we added in the U.S., including two more new Kroger divisions with Dillons in Kansas and Pick ‘n Save in Wisconsin, and we also saw significant growth with Publix. We now have just over 6.500 DFD doors in the U.S. with average weekly sales up 12% year over year in the third quarter. We’re also confident that the quick-service restaurant channel is an exciting DFD opportunity for Krispy Kreme, not just in the U.S., but around the world.

And we are making investments in the U.S. that reflect our confidence in further scaling our deliver fresh daily network. While nothing has been finalized, we are excited about our continued partnership with McDonald’s, and we are in advanced discussions about expanding the relationship. Turning to the consumer, we saw, even on our seasonally low summer months, strong engagement with the Krispy Kreme brand, driven by premium price specialty donuts and marketing activation.

Our limited-time donut collections generated billions of media impressions, significantly increased average transaction values, and drove strong overall growth. For example, our partnership with M&Ms in the summer, which included a one-of-a-kind donut packed with M&Ms Minis, was a huge hit in 17 markets around the world. Our brand continues to grow and over index with valuable younger consumers with 18- to 34-year-olds now representing 40% of our U.S. consumer base, up from 33% a year ago.

This is a big contributor to the success of our strawberry glazed donut partnership with Hailey Bieber, which sold out quickly every day we ran it in early September. These partnerships demonstrate our ability to reach beyond seasonal occasions with creative and innovative marketing approaches, especially with our more social media and digital-savvy consumers. As we move into the peak holiday season, we have seen growth accelerate so far in the fourth quarter, thanks to a record overall performance in the buildup to Halloween, especially in the U.S., where we brought mystery and monsters to life with a Scooby-Doo dozen. Looking ahead, we expect to maintain this momentum, driven by more premium specialty donut collections inspired by the holidays and pop culture.

Selling the same fresh donuts, both our beloved Original Glazed and our premium offerings, that we make in our production hubs through more points of access is at the heart of our unique hub-and-spoke operating model, making Krispy Kreme more accessible and convenient to more consumers and the hubs themselves more productive and profitable. This quarter, we increased the number of U.S. hubs with spokes from 143 to 148 by adding delivery routes to existing locations. Our trailing 12-month sales per hub KPI was up 9% year over year to $4.8 million, helping drive U.S.

fresh margins up over 100 basis points compared to the same quarter a year ago. We are seeing continued success in replicating the hub-and-spoke model and leveraging growth in deliver fresh daily doors across several cities, notably Charlotte, Dallas, Denver, Houston, and Miami, which have had some of the largest increases in DFD doors this year. As evidenced by our third quarter results, our strategy continues to produce positive and tangible results, and I’m excited for the future as we continue to pursue establishing Krispy Kreme as the world’s most loved sweet treat. I’ll turn the call over now to Jeremiah.

Jeremiah Ashukian — Chief Financial Officer

Thanks, Josh, and good morning, everyone. The third quarter finished in line with our expectations as we delivered growth on both the top line and adjusted EBITDA with improved performance throughout the business. We delivered our strongest third quarter adjusted EBITDA growth since our return to the public markets. And if trends maintain, we continue to track toward the mid- to high end of our full-year revenue and adjusted EBITDA guidance.

Net revenue grew 7.9% to $407.4 million, driven by successful execution of marketing activations, pricing actions, and further expansion of our omnichannel approach globally and across all segments. Organic revenue grew 9.6% to $400.3 million. As a reminder, organic revenue excludes impacts of acquisitions, foreign currency, and the branded sweet treats business. Growth, pricing, and the shift away from branded sweet treats resulted in product and distribution costs decreasing by 230 basis points year over year.

GAAP net loss was $40.3 million in the quarter due to the forecasted effective tax rate and attributable noncash income tax expense. Importantly, we continue to expect an adjusted tax rate of between 24.5% and 26% for the full-year 2023. Adjusted EBITDA grew 13.5% year over year to $43.7 million, exceeding the revenue growth rate. In turn, adjusted EBITDA margins expanded across all reportable segments, increasing 50 basis points year over year to 10.7%, demonstrating our ability to improve operating leverage through pricing and productivity initiatives.

Diluted adjusted net income declined 3.6% year over year to $4.4 million. Adjusted EPS remained flat compared to last year at $0.03 despite net interest expense increasing 44% to $3.9 million. The increase was primarily driven by higher benchmark interest, as well as reducing our reliance on vendor financing. Turning to the segment results.

In the U.S. segment, organic revenue grew 10.2% to $258.6 million, driven by effective premiumization opportunities and decreased discounting, leading to an increased average transaction size. Adjusted EBITDA increased 8.8% year over year, and margins expanded 30 basis points to 8.6%. Margin expansion was primarily driven by hub-and-spoke efficiencies and mitigating commodity inflation and labor pressures.

With the pricing taken from earlier in the year, we continue to be focused on waste mitigation in both materials and labor efficiency, and we’re making improvements in both those areas. We expect that these structural improvements should set up for persistent margin expansion moving forward, combined with benefits from our hub-and-spoke system maturing. And finally, Insomnia margins improved sequentially due to pricing actions taken in the quarter to address input costs. In the international segment, organic revenue increased 8.2% year over year, driven by increased pricing and points of access growth.

Notably, Mexico continues to grow double digits and accelerated both sequentially and year over year, driven by strong e-commerce and hub-and-spoke expansion. Adjusted EBITDA increased 17.3%, expanding 30 basis points year over year and has returned to over 20%, primarily driven by declines in product and distribution costs as a percent of revenue due to the effective pricing increases. We saw strong operating leverage in the U.K. given actions taken to deploy cost-control initiatives and introducing a nine-pack format in DFD.

In the market development segment, organic growth increased 9.1%, which was partially offset by the timing of equipment sales to franchisees. Notably, Canada grew more than 30% as points of access growth accelerated. Adjusted EBITDA increased $1.6 million or 13.3% with margin expansion of 220 basis points to 32.6%, driven mainly by strong margin improvement in our company-owned Canadian and Japanese businesses from hub-and-spoke efficiencies, combined with fewer lower-margin equipment sales to franchisees. Moving to the balance sheet.

We have a healthy balance sheet with ample liquidity and expect leverage to close the year below four times. We are focused on the long-term health of the business and setting up our capital structure to support growth through a strong balance sheet as we explore strategic alternatives. For Insomnia Cookies, we expect to use any proceeds to fund our growth agenda and strengthen our financial positioning, which includes paying down debt and a continuation of a reduction in the usage of vendor financing. Over the longer term, we remain on track to be between two times and 2.5 times net leverage in 2026.

Capital expenditures increased to 8.4% of revenues in the third quarter, driven by new store openings and foreign exchange rates. As we continue to invest behind our growth of our omnichannel strategy looking forward and as Josh mentioned, the fourth quarter is seasonally our strongest, and we’ve observed a strong October with low double-digit organic sales growth, proving that underlying demand remains robust. Today, we are reaffirming our full-year guidance ranges for revenue and adjusted EBITDA and continue to trend toward the mid- to high end of the range. Additionally, I want to specifically call out the changes to interest expense and capital expenditure assumptions.

We are updating our outlook for interest expense to be between $47 million and $51 million due to the prevailing interest rate environment, as well as our strategic reduction of vendor financing. In addition, we’re updating capital expenditures which we now expect to land between 7% and 8% of full-year revenues, largely due to strategic investments and growth of our U.S. deliver fresh daily network and foreign currency rates. In summary, we had a strong third quarter and are seeing momentum in the fourth quarter, and we’re excited about the future growth opportunities in our business.

With that, we will open up the call for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Your first question is from the line of John Ivankoe with J.P. Morgan. Please go ahead.

John Ivankoe — JPMorgan Chase and Company — Analyst

Hi. Thank you. I guess, the question is on U.S. margins, and I know in the past we’ve talked about DFD profitability really being looked at at a market level.

And I wonder if there’s any more intelligence or thinking around doing it at a root level or count level or even day-of-the-week level if there’s an opportunity for you to actually drive some margin maybe beyond what we saw in the third quarter out of that business in general. And secondly, I think there’s been some allusion that Krispy Kreme may use — potentially use third-party delivery into some DFD accounts as opposed to using your trucks and your drivers. Is that an initiative that is currently being tested or explored or something that we could talk about on this call? Thank you.

Jeremiah Ashukian — Chief Financial Officer

Yeah. Thanks, John. Appreciate the question around margins. I’ll open up and say we were pleased with kind of what we saw this quarter with respect to U.S.

margins. We were up 30 basis points, obviously, in the U.S. with the U.S. fresh business up over 100 basis points for the quarter, really driven by some of that hub-and-spoke efficiency that you referenced but also despite needing to absorb performance-based accruals.

So we still have bonuses this year that we expect to pay where we’re declining those bonuses or decreasing those accruals last year. With respect to your question around — looking at the business differently, we’ll constantly kind of tinker with and explore looking at different ways to investigate how to view the business. And maybe I’ll pass to Josh to kind of elaborate more.

Josh Charlesworth — Global President, Chief Operating Officer

I think the primary focus that we look at for the health of the DFD business is the quality of the doors themselves, and then we make sure that the routes that we service them with are as efficient as possible. So the average sales per week of the door, which is over $600 a week, and again this quarter grew 12% after multiple quarters of strong growth demonstrates that we’re continuing to add productive doors and keep an eye on the existing base. Generally, it’s scale and density in a city that drives the profitability of the DFD routes. Routes that do 15-plus stops, get in, get out quickly, high-quality doors, short driving times is the focus.

In terms of between different customers and what have you, we do see a c-store be a little higher margin than grocery, but that’s more reflecting the product portfolio. There’s more loose donuts that we sell in the c-stores. And actually, in grocery stores at the moment, we have an initiative to add more cabinets that create greater display of those loose donuts. We’ve added over 120 this year.

We see that as an opportunity to even improve the margin in the grocery stores. So we do do a lot of analysis around it, and that’s how we think about it. But the real quality of the doors and those routes is the primary thing across the different cities.

John Ivankoe — JPMorgan Chase and Company — Analyst

And in terms of perhaps considering a different route — or style of distribution versus doing it in-house, them potentially using the existing distribution capabilities of a third party, for example, in various markets, is that an opportunity?

Josh Charlesworth — Global President, Chief Operating Officer

It could be. The routes that we have today are all run by ourselves. As we’ve built out this model over the last couple of years, we’ve wanted to move quickly. We’ve wanted to protect quality.

The most important thing is these donuts, which, obviously, fresh daily, always displayed in the highest, best way, and then drive the profitability through the high-quality doors and the efficient routing. But that doesn’t say that looking forward third party couldn’t play a role, particularly as we look to scale DFD in the U.S. The quick-service restaurant opportunity is clearly significant. And to scale at that magnitude, we will need to be flexible in different models.

But right now, we’re focused on our in-house logistics model and making sure that those donuts are amazing, well served, high service levels, and the system remains strong throughout.

John Ivankoe — JPMorgan Chase and Company — Analyst

Thank you.

Operator

Your next question is from the line of Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Bank of America Merrill Lynch — Analyst

Great. Thank you. Hopefully, you can hear me. I have a question about the McDonald’s announcement.

It’s twofold. One is, is that the capex increase? Is that the sort of reason for that? Or are there other initiatives that you’re also supporting? And maybe you could give a little color on that. And then with respect to McDonald’s, are there findings that you can share about things like pack size or loose donuts, what you know about the customers per your earlier comments about the relative profitability of different DFD doors. Just wondering if there’s anything — any insights that you can share from the early test.

Thanks.

Jeremiah Ashukian — Chief Financial Officer

Yeah. Thanks, Sara. Maybe I’ll address the capex question, and I’ll flip it to Josh to address the McDonald’s question. Obviously, we continue to focus our spend on the highest returns.

Capex did tick up this quarter to about 8.4% as we continue to invest behind growth and expansion of our U.S. DFD network. But we also saw in our experience in the impact of foreign exchange rates on international investments in the quarter and obviously on a year-to-date basis, which also contributed to some of the tick-up this this quarter. Josh, do you want to cover the McDonald’s DFD?

Josh Charlesworth — Global President, Chief Operating Officer

Sure thing, Jeremiah. Hi, Sara. Yeah, regarding McDonald’s itself, nothing has been finalized, but the opportunity to expand DFD through existing and new channels, including QSR, is clear. And we are discussing the potential for an expanded partnership with McDonald’s in the U.S.

The learning has been very interesting through the pilot that we’ve done with them throughout the year in Kentucky, and that is a nature of a lot of the discussions with McDonald’s right now, ongoing analysis and discussion with them, covering the operational execution, making sure the donuts always arrive at the right time, right quality, understanding then indeed are the requirements that would be needed to scale beyond Kentucky, and of course, commercial viability of the whole thing. I mean, our confidence in the U.S. DFD opportunity, including now QSR, is what’s grown. It’s such that we’ve decided to thoughtfully start making additional investments.

We’re just getting going, but those investments will be about — around manufacturing; capacity to support, scale growth because to your point around what have we learned from it, what we’ve learned is that these QSR outlets behave in a very similar way from our point of view to a DFD door. We’re able to provide a donut donor experience. The portfolio is relatively limited, but that doesn’t mean it couldn’t be added to over time. We’ve seen that both the loose donuts and the pre-packed donuts are well received.

And so from our point of view, it’s behaving very well in and substantiates the brand as we scale it. And as I’ve mentioned before, we don’t see sort of cannibalization of our base business in other DFD doors or indeed in our retail locations. And we’re excited for it. Our confidence has clearly grown enough to really start thinking about where we’d invest to support that kind of scale.

Sara Senatore — Bank of America Merrill Lynch — Analyst

Thank you.

Operator

Your next question is from the line of Brian Mullan with Piper Sander. Please go ahead.

Brian Mullan — Piper Sandler — Analyst

Hey, thank you. Just a question on Insomnia. I believe you’re expecting about $230 million of revenue from that business this year. How should we think about the store-level margins associated with that revenue? And related to that, maybe what’s a good way to think about the G&A and the D&A allocation we can try to come up with a good sense of adjusted EBITDA? If you’d be willing to share any color, that would be great.

Jeremiah Ashukian — Chief Financial Officer

Yeah, Brian, I can take that question. Look, number one, we’re super pleased with the business performance as it continues to grow, and the profitability is improving sequentially. There also continues to be a lot of opportunities for growth expansion, both in the U.S. and internationally, as we’re seeing great engagement early on in both Canada and the U.K.

in the early stages. I don’t want to kind of speculate too much or at least kind of share too much, just given the fact that we’re in a process right now and some of the other questions around financials, and I’ll probably leave it at that.

Brian Mullan — Piper Sandler — Analyst

OK, understood. Thank you. Just to follow up, just related to the potential — or not the potential, but you’re going to be expanding production capacity in the U.S. In the past, you said it’s a 10% to 15% increase in hubs to be able to serve an additional 8,000 to 10,000 DFD doors on top of the capacity you have.

So just how do you want us thinking about the cost to build each additional new hub? Maybe how long would it take you to build? And how many hubs are you thinking you can get to next year in your planning?

Josh Charlesworth — Global President, Chief Operating Officer

OK. I’ll take that. Hi, Brian. Yeah, actually, just stepping back a moment, as it relates to supporting the whole DFD opportunity in the U.S., including QSR, we can add about 6,000 points of access from the existing production hubs with minimal investment.

You’re just talking trucks, drivers, that kind of thing. But clearly, we want to go beyond that, which is what you’re talking about. We want to start investing and increase capacity in underserved markets around the country as well. That can be new markets like New England or Upstate New York, Minnesota but also markets where we’re near full capacity with very strong businesses, like California and Florida.

So yeah, as you talked about going beyond the 12,000 points of access that we can do from our existing hubs, we would add about 10% to 15% of hubs on top of our existing network, and that would serve about another 8,000 points of access. So 20,000 points of access all in, obviously exciting opportunity. Now it’s interesting these production hubs in the future, we’ll be building them to support more off-premise DFD sales than the hubs that we have today. So they’re going to have additional donut-making lines.

They’ll have larger load-out logistics areas. So we’re going to evolve to support what is clearly a rapidly growing DFD opportunity for us. And with 10% to 15% more hubs works out at about 25, 35 new hubs over the next few years, about 3 million to 6 million a hub. Timing depends on a number of factors.

As I said, there’s nothing finalized with McDonald’s, so we’ll continue to update you on our plans as we have more information.

Brian Mullan — Piper Sandler — Analyst

OK. Thank you very much.

Operator

Your next questions from the line of Andrew Wolf with C.L. King. Please go ahead.

Andrew Wolf — C.L. King and Associates — Analyst

Great. Thank you. I just wanted to ask the restaurant Industry at large generally had a weak summer, especially August and September, and then it bounced back in October. Was the cadence of sales, certainly within the shops and the hubs, was that similar? And was — and also, how was the DFD? Was there any similarity to sort of the restaurant industry at large in your sales cadence?

Jeremiah Ashukian — Chief Financial Officer

Yeah. Thanks, Andrew. Seasonally, Q3 is actually one of our softest periods traditionally, and Q4 is one of our strongest. So we’re kind of seeing that cadence right in line with our expectations.

So growth obviously in the quarter was right in line with what we’d expected it to be. In the U.S. specifically, we are pleased with the growth we’re seeing in the U.S. and how the underlying business is holding up, given some of the price we’ve taken, as it grew double digits for the fourth consecutive quarter.

With respect to DFD, all of our channels grew, DFD being one of the largest growth contributors at over 20% in Q3. Of that growth in DFD, half was driven by points of access, and half was driven by price and premiumization and bringing specialty donuts into the channel. And we’re actually maintaining productivity in existing doors, which is a good sign for us as well. So —

Josh Charlesworth — Global President, Chief Operating Officer

It’s really interesting, the seasonality of us versus the industry you referenced. Obviously, to the earlier question, we’re learning about QSR restaurants and the way they behave this year. And obviously, the summer season and the ones we’ve been servicing is quite big. It’s a big part of the year for us.

It can be a low, obviously related to weather factors and what have you and less holidays during that period. It was actually really exciting that we’re able to bring a lot of excitement around the brand in the low season with M&Ms. Pumpkin spice was a fantastic promotion in the U.S., and I mentioned the Hailey Bieber influencer, strawberry glaze promotion as well. So to be able to create that excitement at this premium specialty donuts in the low season was great.

And that applied to the donut shops, e-commerce, in particular, and DFD, where we supplied those specialty donuts across all three. Now looking ahead, of course, we’ve got more holidays, more excitement around the brand to think about our high season. And hence, the good start with Halloween was really good to see as well.

Andrew Wolf — C.L. King and Associates — Analyst

Great. Just one follow-up on the comments on the maintenance of sales productivity at DFD doors. It’s good to hear. Is that on a dollar basis or on a unit basis? I guess what I’m specifically asking about, it sounds like the premiumization is going well, but is there like an elasticity issue at all? Or is it about what you expect? And so I guess it would end up being the same.

Would it translate to any change in shrink in terms of product that didn’t get bought?

Jeremiah Ashukian — Chief Financial Officer

Yeah, I think so. I can take that, Andrew. And as I mentioned, half of the growth was driven by price. And when you look at the existing doors, they’re maintaining that productivity on a unit basis.

So we’re not seeing significant elasticities, and they’re definitely in line with what we would have expected to see.

Josh Charlesworth — Global President, Chief Operating Officer

And the specialty donuts, there’s a lot of demand for them. So in many ways having those become a bigger part of the portfolio is good for productivity because they sell out faster.

Andrew Wolf — C.L. King and Associates — Analyst

Got it. OK, terrific. Thank you.

Operator

[Operator instructions] Your next question is from the line of Bill Chappell with Truist. Please go ahead.

Bill Chappell — Truist Securities — Analyst

Thanks. Good morning. Just two questions on Insomnia and the announcement intro quarter on there. I guess, one, as you’re thinking about potentially strategic alternatives, can you maybe quantify what that business did for organic sales in the U.S.

for the quarter and what that would mean for the year? And then second, just kind of the — a little more color behind the thought process of that. And from the IPO on, you had been pretty firm about saying it was a key part of the business, and it was something that you could really nurture and build. And this seems like the timing in terms of maximizing value for it when there’s a lot of noise about GLPs and what have you is not ideal. So just trying to understand kind of what went behind it and what your thought process is on timing and stuff like that, as well as kind of what it would take away in terms of the total organic growth.

Thanks.

Mike Tattersfield — President and Chief Executive Officer

Hey, Bill. This is Mike. Five years ago, we took on the business of Insomnia. One of the key things that we really looked at is how do we capitalize on the delivery and e-commerce capability of that brand and then how do we help that brand start to expand itself and get scaled in the U.S.

and potentially outside of the U.S. So what we’ve seen and you’ve seen today, where 20% of our retail sales overall is being driven by delivery, we check that box, right? So when you start to see we’re there now at a 250-cookie-shop basis — bakery basis in the U.S. They’re starting to unlock in the international, both in the Canada and the U.K. They have a tremendous growth story.

Krispy Kreme has a tremendous growth story in front of us. The reason to look at strategic alternatives is to just explore and enhance that growth potential that we have there. So that’s why the timing is the right timing right now. That’s why we chose this today.

Jeremiah Ashukian — Chief Financial Officer

Yeah, and let me — I can pick it up in terms of how we’re feeling overall in the top line is I kind of mentioned a few questions ago that, again, we’re super pleased with how the business is performing, both on top line as well on — as well as on profitability, sequentially and year over year. With respect to the process, we’re super pleased with the strong level of interest we’ve seen already from very high-quality parties and remain focused on the transaction which will generate a strong return on investment in the business that we made and realize value for our shareholders. And we’ll share more news as we have it with you all. With your question around the overall growth impact, we expect it to have a 100-basis-point to 200-basis-point overall impact on the total growth of the business.

But we feel like the Krispy Kreme business has proven that it can accelerate and therefore offset some of that. In terms of GLP question, maybe I’ll flip it to Josh, and he can address your GLP concern.

Josh Charlesworth — Global President, Chief Operating Officer

Yeah, the Krispy Kreme consumer remains strong, and the trends are strong. We don’t see any impact of — from the use of these drugs that you mentioned. It’s not surprising. More than 70% of our donuts are sold in sharing sizes, usually at special occasions and celebrations.

They’re often given to others. Krispy Kreme is an infrequent purchase. It’s typically bought less than three times a year. And actually, the majority of our sales are from donuts that are under 200 calories each.

So we know our customers well. We actually do conduct regular brand research on the purchase barriers. The latest research just from a couple of weeks ago shows that, once again, it’s actually accessibility that remains the No. 1 barrier to purchase of a Krispy Kreme, the availability and convenience of those donuts for our customers.

Health considerations remain a low priority and actually are unchanged from the prior survey. So the consumer remains strong, and the trends remain strong for Krispy Kreme. And the growth ambition for Krispy Kreme, as we’ve talked a lot about today, driven by both points of access, expansion in multiple channels, and the engagement around the brand, such as all these specialty premium donuts that we’ve seen so much success with recently, is why we’re not concerned around the impact on the overall performance from taking out Insomnia. In fact, we see the opportunity to reinvest the proceeds behind the growth and drive the brand — the Krispy Kreme brand on further.

Bill Chappell — Truist Securities — Analyst

Got it. And maybe I wasn’t clear, I was talking more about the GLP concern on the valuation that you might get for Insomnia, but so be it. In terms of just clarifying, so if you take out Insomnia and it takes out 100 basis points to 200 basis points of the total company, would that mean it’s probably about a 300-basis-point impact on the U.S. business since it is U.S.? Just trying to understand our numbers as we go forward and kind of the organic growth you’re thinking.

Jeremiah Ashukian — Chief Financial Officer

Yeah, I think it might make sense to take that off-line, just to debrief in the follow-up conversation. But I think you’re probably close-ish in terms of your estimation of the impact on the business in the U.S.

Bill Chappell — Truist Securities — Analyst

Great. Thanks so much.

Operator

At this time, there appear to be no further questions in the queue. I will now turn the call back to Mike Tenders Field for any closing remarks.

Mike Tattersfield — President and Chief Executive Officer

Yeah. So thank you, everyone, for your time. On a personal note, this marks my final earnings call as CEO of Krispy Kreme. As I said before, I couldn’t be happier to transition this role to Josh.

I love his passion for the brand, our Krispy Kremers, and freaking awesome donuts. It just gives me the utmost confidence in our continued success, and I look forward to watching how he and the team will accomplish. Again, thank you, all, for all the investors and your continued support of the company, and gracias to all my Krispy Kremers around the world who inspired me throughout my time here. Lots of love.

Ciao, Mike.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Stephanie Daukus — Vice President, Investor Relations

Mike Tattersfield — President and Chief Executive Officer

Josh Charlesworth — Global President, Chief Operating Officer

Jeremiah Ashukian — Chief Financial Officer

John Ivankoe — JPMorgan Chase and Company — Analyst

Sara Senatore — Bank of America Merrill Lynch — Analyst

Brian Mullan — Piper Sandler — Analyst

Andrew Wolf — C.L. King and Associates — Analyst

Bill Chappell — Truist Securities — Analyst

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