Krispy Kreme is focused on reducing debt and delivering fresher doughnuts. The company has been struggling with a high debt load, which has led to the sale of some stores.
Krispy Kreme is focusing on reducing their debt and delivering fresher doughnuts. They are also opening more stores in the near future.
After returning to the public markets this summer, doughnut manufacturer Krispy Kreme Inc. is focused on paying down debt and providing fresher doughnuts.
Krispy Kreme, well known for its glazed doughnuts, became public in July, five years after being acquired by investment company JAB Holding Co and taken private.
The Charlotte, N.C.-based business has spent the last three years buying out franchisees in an effort to enhance the quality of doughnuts sold outside of its so-called hot light theater stores, where customers can see doughnuts being made fresh.
Krispy Kreme’s CFO, Josh Charlesworth.
Krispy Kreme (photo credit: Krispy Kreme)
During that time, Krispy Kreme invested $466 million on 24 franchisees and 469 stores across the world, according to a regulatory filing for its first public offering. According to Chief Financial Officer Josh Charlesworth, roughly 80% of U.S. and worldwide sales now originate from company-owned sites, up from about 50% in the US and about 30% in foreign countries before becoming private.
Krispy Kreme built significant debt by buying out its franchisees and is now seeking to deleverage. According to Mr. Charlesworth, who is also the firm’s chief operational officer, the company received approximately $460 million in its initial public offering last month, which it used to pay down some of its debt. It has $646 million in net debt as of August 8, compared to $795 million at the end of 2020.
Mr. Charlesworth noted that before those purchases, Krispy Kreme doughnuts sold at supermarket and convenience shops were often four to seven days old. Krispy Kreme wants them to be baked fresh every day, much like the ones sold in its hot-light stores. But it didn’t have the logistics to do so since it didn’t have control of its retail network in key areas, according to Mr. Charlesworth.
“We needed to be able to manage the system. “A lot of tiny businesses, franchisees—they simply couldn’t make that sort of shift,” he added. Krispy Kreme’s new hub-and-spoke strategy allows the business to utilize capacity in its retail locations to manufacture doughnuts that are then transported to grocery and convenience shops.
As of July 4, Krispy Kreme has 378 hot-light theater outlets throughout the world and distributed to 7,849 places.
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Mr. Charlesworth said that continuing to pay down debt is a top goal for the business. As of August 8, Krispy Kreme had a leverage ratio of 3.6, which is defined as net debt divided by adjusted earnings before interest, taxes, depreciation, and amortization. In the following year, the firm hopes to decrease that number to 3.0, and in the long run, to 2.0. According to Mr. Charlesworth, the company intends to pay down its debt with cash from activities.
The company’s net revenue for the quarter ended July 4 was $349.2 million, up 43 percent year over year due to increased sales. It recorded a $17.1 million net loss, up from $12.6 million the year before. As of July 4, cash and equivalents were about $37 million, around the same as they were at the start of 2021.
In a note to clients, Bill Chappell, an analyst at financial firm Truist Securities Inc., said, “We continue to believe it will take a few more quarters for the hub & spoke model to gain momentum,” particularly in terms of profitability.
Higher commodity prices, such as wheat and sugar, are putting pressure on Krispy Kreme, as they do on many other businesses. It has raised the price of its doughnuts by 2% each year in previous years, but Mr. Charlesworth said it plans to hike prices by more than that in September to cover rising input costs.
The price increase will apply to the company’s traditional glazed doughnuts, which are offered in singles or in dozens, he added.
Kristin Broughton can be reached at [email protected]
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