Krispy Kreme, Inc. (DNUT) Earnings Call Transcript & Summary

Hey, good afternoon, everybody. My name is Todd Brooks, CL King's Restaurant and Packaged Food Analyst. And I'd like to thank you again for joining us at the 19th Annual Sale Team Best Ideas Conference. This upcoming session is going to be a fireside chat with Mike Tattersfield, the CEO of Krispy Kreme. As you know, Krispy Kreme returned to the public markets in early July. And as a buy-rated stock at CL King with a $24 price target. If you have a question for the management team, we'd love to work into the discussion, just dropping into the chat box on your presentation screen. And I'll do my best to work all the questions we get into the discussion. We're thrilled Mike is able to join us today for one of his first conference presentations, since the company came public again, Mike, thanks for taking the time.

It's my pleasure. I'm here in our [Scarlett] Support Center, look behind me. But I like the zone, all right? So let's get it going.

There we go. Let's do it. If we could start with -- and I think this is just helpful from an audience standpoint. Lot of people know Krispy Kreme from the prior time, it was a public entity, JV on the company for a period of, I think, a little over 4-years. You and a lot of the senior team were involved with the brand, while it's a JV. Can you just kind of walk through, kind of, hard decisions, hard work that needed to be made to transform the model during that period that really positions Krispy Kreme to take advantage of the growth opportunity that's out there in front of the brand globally?

Yes. So it's a really, really good, kind of, a helpful way to lean in. One of the things -- it's an 84-year-old company, right? So it's got a history and a lot of folks probably even some of your investors are active in the brand beforehand. So what's different now, which I think is really interesting, right? We're not a retailer, we're not a restaurant company, right? If you think about those things, we're really a Donut operating company, that's the mindset that we came in. And what we really wanted to do is because we wanted to reach customers to where they are via an omnichannel model, right? So if you think about it, we leverage these amazing experiential Donut shops that we have and then built a model to get fresh Donut capability to where customers are either that's in the wholesale chain, either we build fresh shop capacity. So we're not, you know, where donors can be delivered to a location that doesn't produce Donuts, but they're freshly delivered there every day, and it has a Krispy Kreme front. It can unlock e-commerce. And you really use that as a play, which is different than our past. It's an international company. You hear a lot about the Krispy Kreme from being a predominantly a US company, right? It's where it's from, it's North Carolina. Some of the best learnings of the omnichannel actually happen in our international business. They were first of trying to produce not necessarily having an abundance of theater Donut shops, but making sure that those Donut shops actually produce fresh Donuts to where customers are. So different. In our past, we were a franchisor, right? We still franchise, but we do that by countries. And the difference now is that we actually ask the countries to run an omnichannel model. So you're not just building up Donut shops everywhere, you're actually trying to figure out what's the capacity of the doing donut production and then how do you bring that to the customers. And you use that kind of fresh model to bring it to them. And that's one big element of the brand. Today, we own or control 73% around the world of our business. In the US, that is about 85% of the system is under a control from us as a donut company. That means 48 out of the top 50 markets are under that ability to run that omnichannel model. In a franchise system, it gets complicated from the size of where you want to go and the speed of where you want to take things through. And it's not such a big organization when you think about it. There -- you know, sometimes people have this misconception, it's an enormous company, it's an enormous brand. Don't get me wrong. But we only have 300 producing donut shops in the United States. I love that aspect, right? Because that's where you really do the integrity of the brand and make sure you invest in that, but it isn't about building donuts shops else anywhere -- everywhere right? Where people say, aren't you going to build more donut shops, you can sell more coffee. We actually like selling donuts. 93% what we did from sales in the retail jobs were donuts. The majority of those are sold in dozens right? So people use our brand for occasions primarily, right? Whether it's the office occasion or the gathering at home or birthday celebrations along those lines. So it's really transforming even how our marketing play happens. But if the real benefit to what we've really done is, in the past, the business did have a wholesale business. They used to put it in a lot of grocers. Now today, every donut that goes through our omnichannel is fresh, right? So when we make it from our production capability and send it to a wholesale or a grocer convenience chain, that came from our producing shopper a few of the factory locations that we have. And we've learned that model really well, primarily some of our international businesses that we purchased and acquired, because we wanted to see how to scale that faster, as well as seeing this is truly a global brand. It works in an omnichannel model, when you actually think about the business that way, it translates itself very much to a global company. Today, we're in 31 countries, right? So you can continue to grow in a significant amount of other countries, but our focus right now is to grow within the 31 as our primary focus right now is still an opportunity to continue to grow. So there's a little bit of a snapshot of really elevating the brand and really focusing on donuts and being a donut operating company, which is different than being a franchisee or a franchisor type of company in its past.

That's really helpful. And I want to drill down a little further, because I think it's an important chain -- change, and I don't know that people fully realize. The legacy wholesale business that you have that DFD business. You've all made a decision that we have to transfer -- delivered fresh daily model to extend the fresh concept through the whole distribution in the hub-and-spoke system versus trying to represent the brand with a shelf stable or not a fresh product every day type of model. Can you talk about what daily fresh delivery unlocks from an opportunity standpoint? And as you think about adding doors and partners for daily fresh delivery, talk about adding the right partners versus every partner? And how important that will be to growing that business?

It's a great question, right? So if you think about it, you want to be a donut company then do donuts incredibly well, right? So why don't you make sure you do them fresh versus in our history in case folks didn't know, there was at times that we would have in a grocer donuts that were 5 days old. That is not a really good donut experience. So the mindset of trying to get the whole system so you have that control of the production to get that right and then create the right -- the route, the proper routing system to get to the right grocers. Today, in the US, for example, we're a little north of 5,000 doors where we deliver fresh daily too, right? And that's the -- it's not every single grocer, it's not -- and even when we choose a grocer, it won't be every single one of their shops, right? So it's very select, scarcity still matters. So today, as you think about a [growth story] going forward, we call those DFD doors, right, where it's delivered fresh daily points of access, right? So if you can start to think about what's the point of access, we've laid out that we can grow between 800 to 1,000 points of access on an annual basis. From the producing or the -- I mean, we get there from hubs. And the hubs if you want to think about it simplistically is our donut producing shops and some of it might be a factory depending on if it's a large urban center. We're only going to open up 10 to 15 of those on a yearly basis. So the importance of getting fresh really matters. So the same hub produces the donut. It can be sold in that donut shop or it can go through the points of access, which is that fresh shop or the grocer and convenience shop, right? So think -- or even e-commerce. So that automatically now the customer has a very clear understanding of what that is and what that means. And it really unlocks more access to customers where they want it, and it's a much more simpler capital perspective of -- instead of opening up donut shops everywhere, right? How can you open up a donut cabinet or a merchandising stand in the right grocer where you want it to be? Scarcity still matters, right? That's how you can still keep -- what keeps Krispy Kreme and folks' mind is it's not simple for our customers always to find our theater shops. There's only 300 in the US, and there's only 100 around the world. So you can imagine what scarcity means in countries, right? There's -- you might have an average of 10 in a country of have 1 billion people, right? So you have to then figure out how are you going to then build those -- that discipline of a donut company. And so the scarcity, even as we build out in a 10 to 15, let's take the assumption that half of those are in the US, you're only going to be able to add so many points of access to that growth model. And if the US has 125,000 convenience and grocer doors, we won't be in that to do the fresh business. We might be between -- somewhere between long-term, I mean, really long-term. You can look that we might have 5% to 8% of those type of doors. So you're really thoughtful about where you want to choose the business with, how you're going to execute that. And you don't want to really overdevelop the donut operating company. So it's a very disciplined approach of how to do this. Fresh matters.

That's so helpful. Thank you. You touched on this earlier, and I think a lot of concepts still need to prove that their global concepts, and it's on the come and operating in 31 countries. Krispy Kreme's proven it's a beloved global brand. So it plays worldwide. I think, if we could spend a little time and looking at the international segment and because it's so instructive for what a hub-and-spoke model could be here in the States as we keep rolling out additional points of access. Can we talk about the international segment and hubs there that are doing twice what the hubs with folks do in the US and what that means? Just from a profitability standpoint and really it will highlight as we get more points of access in the US, the margin opportunity that's really here in the model?

Yes. So it's pretty interesting. When you look at the development of the Krispy Kreme model, right? It really is -- in its history, right, we're just opening up donut shops. And as they went international, some of the franchise partners really started to think about this hub-and-spoke system. And today, in the international markets, the hub mean we're the donut, the theater shop, really expands to its spokes, which is that grocery business or refresh shops or even e-commerce. They run on average about $8 million revenue per hub. The US is about 3.6%, the international's number of spoke systems have around 71 spokes per hub. The American system has about 45 per hub. The real difference is the international development happened in large urban metropolitan areas, right? So the ability to get a route system much easier and natural to really maximize that hub opportunity, so that frequency and [dry] to do the revenue and the margin in those hubs is pretty clear. That doesn't mean that the US can't grow its spoke system. But the opportunity for the US to have a hub that, kind of, matches up with international in the US type of market might be New York City, might be Chicago, might be LA. But St. Louis will not match up to the density of what London is or Mexico City, right? So the difference between the US of a $3.6 million hub versus an $8 million hub in Sydney or in London, it doesn't mean that the US can also drive margin. It just will have less folks and the tipping point starts to happen, is it a 50 spokes per hub in the US, is it 52, 53. And in fact, the US, there's more than -- it's about 50% of the hubs or shops don't have spokes, they never will, right? Because they were built and designed as a shop one place that never was going to have an efficient route system. There's still actually productive donut shop, but we're in the business of actually building a omnichannel model. So when we open up a theater shop now, we actually think about it from its actual growth trajectory. All of that, we learned so much from the international business, particularly the UK and Ireland and Australia and New Zealand that really solidified with great partnerships and not in -- that's where how many doors do they do with Tesco. How many doors do they do with a 7-Eleven or Woolworths. So they're very selective about how to do that. And it just shows you the opportunity as you see in the margins in the international business are extremely healthy. We have some of those in the US as well with the opportunity to continue to grow.

That's great. Thank you. Along the lines of, kind of, white space opportunity as you look to growth potential and you look at, kind of, within the existing 31 country footprint versus other potential large geographies out there that Krispy Kreme is not in there now. How do you want to gauge or manage the growth? I think in the top 10 US markets, you have less than 1,000 points of access right now? And the opportunity to build out those markets that you're already in, is sitting out there, you've got countries and opportunities to build out globally. You've got Japan, which you acquired back in 2020. So you've got these existing white space opportunities to really focus on. But then you added some of these large consumer-driven markets where a branded suite treat like Krispy Kreme could perform wildly well into China or Russia or something like that? How are you and the team, kind of, gauging what the path of growth is infill existing versus new markets?

So you hit on a few points there. I think one of the real interesting pieces is the accessibility or the -- how people gravitate towards the brand is global, right? We've seen it work in multi-continent, and then we've really seen it come to life instead of just building a typical only a donut shop to build that omnichannel model, right, with that experiential model and then building a distribution system that basically gets donuts to where the customers are and making sure you build that out today. So the discipline is actually we start saying how many hubs are we going to build a year, right? 10 to 15. How many points of access are we going to do on a yearly basis? 800 to 1,000. How do we prioritize those hubs, those points of access, right, which is in the US, one of the reasons to acquire the system is now that we can -- we were very underpenetrated in 8 of the top 10 markets in the United States of America, right? So we need to start building -- most of them do have a hub, but they didn't have a route, right? So it's really building out those points of access within the United States, really important. There is about roughly 2,000 points of access growth just in those top 10 markets. So that will be one of our clear focal points of doing that exceptionally well. There's still another 1,000 points plus of points of access outside of those top 10 markets. So priority will be the core in the US. Another priority will be how do we continue to develop the omnichannel model as well in the 30 countries outside the United States, right? So you can -- you've got to develop that hub-and-spoke model. So take the 10 to 15, probably half of those are going into the international, half of those are going into the US, half of the 800 are going into international, half of them are going into the US. And then you'll selectively start to build the capacity of the 32nd country or the 33rd country, right? But you want to be real disciplined because the opportunities are there, right? And the opportunities can be there, whether we choose to participate as an equity venture or we can choose to do that with a franchise partner, who's incredibly skilled like Americana, who just opened up our 31st country in Egypt, right? And the whole premise though from now on, the development agreements, everything we're going to do is around omnichannel, right? So they're just not trying to build out how many theater donut shops can I build out. It's like no, you're building a donut company, right? So here's exactly how we're going to do that. Here's the routes, here's this and make sure we have the right economics. So it's that discipline that's different. But it's really about keeping a hold of that 10 to 15 hubs per year and 800 to 1,000 and then prioritizing on the countries that we're in, and then also seeing what the opportunity is there. Because clearly, there's some big countries that we're not in China, we're not in Brazil. We're not really in Western Europe, right? There's a lot of opportunity you can do there, but it will become -- find the right partner and then figure out if we'll invest with them or really help them really establish the brand.

It's a great way to frame it, because I think it starts to give you visibility into the runway that you have to continue to drive this organic growth in the business. I think you've -- your longer-term target is, kind of, 9% to 11% revenue growth slows down to 12% to 14% EBITDA growth. And I guess as you think about this duration of the organic growth, it's -- you're not going for the quick grab and trying to drive this outsized growth rate, it's thoughtful around those, kind of, guardrails of 800 to 1,000; 10 to 15 hubs and you'll prioritize based on where the best opportunity, whether it's US or international?

Yes. I mean, you laid out the -- this year, we're on organic revenue growth of 10% to 12%, right? You can see that as we think about longer term, we're looking at 9% to 11%. And then you have the -- how you get to 12% to 14% EBITDA growth, right? When you start plugging in the points of access, the 9% to 11% is really driven by frequency, right? And the frequency you can use by really interesting innovation. You can use by what's the marketing, which we're a socially driven media brand, right, which is are we being relevant? Can we talk about the right things that transcend. When we try to be a coffee company, there's a lot of coffee competitors out there. People weren't necessarily listening to what Krispy Kreme has to say. When you talk about donuts we get their attention, right? So it's then being very focused on what is it that we do, so that innovation in the brand are extremely focused on driving the frequency. The biggest unlock of frequency those, how do you drive e-commerce, right? And how does that become really an engine that really can move forward. So when you're doing 19% of your sales today in e-commerce and how do you continue to build that, and you can see in urban centers, they're starting to think about dark kitchens, you know, as another access point in the omnichannel journey, right? So when you start to see the capability of, well, you guys are really leveraging those hubs and doing it really wisely as long you can get the fresh capacity out there. And that's how we think about that 9% to 11%. That's a pretty strong engine. When you build the point of access, which is another piece. So once you get those 800 to 1,000 points of access, and it broadens the reach for the customer, right? So they might not be visiting you as much as you'd like them to, because they're out of your delivery zone or whatever it is, but then they suddenly got into a grocer or a convenience shop that they could pick up the donuts. That then drives them or connects with them to our retail business, as well, because what we'll learn and evolve to the marketing by channel will be different, right? You can do a hot light experience in our retail experiential shop. That's a pretty unique experience. You'll have different product lines. You could have a -- but you can also translate some of those exact products [indiscernible] to all of the chain, right? In the past, in our wholesale business, for example, the only product that was sometimes 5 days old was the original glaze, right? Now you can actually grab all of your production that you're making. And if it's Valentine's Day, if you've been to some of our shops on Valentine's there's a pretty mad rush onto getting to our shops. If you could alleviate that by bringing it to the wholesale channel and making sure you can pick up your dozen there. It just gives customers another access point, which then just continues to connect them to the brand. So a really big important piece for us is frequency and the point of access and how they play.

And maybe just quickly highlight what the frequency is now? So that people get a sense of how impactful that extra visit a year would be? Or an extra occasion would be?

Yes. So I mean our average visit, which is really interesting, is about 2.5x a year, right? A higher frequency guess might be 4 and then some of our loyalty folks are around 6, right? It is not -- we're a dozen business. It is not an everyday occasion. What we try to make sure is that they're being always used for celebrations, connecting and when people use that, whether it's church or religious ceremony or whatever else you want to do your birthdays, weddings. We will continue to build upon that, right? How do we maximize, as well as those unique days that happen in the world, right? Whether it's a Valentine's Day, Mother's Day, et cetera, right? You're into the gifting business, which is pretty interesting as we start to really build that up. So all of these things, which is that frequency driver, even simplicity of getting -- we've got 10 million folks across the globe that are loyalty members, right? So you can really start connecting to them very uniquely by channel and then building the loyalty occasions, because folks that want to celebrate birthdays, they'll sign up in advance, right? They'll do it a certain way. Can we get customized and we'll build customization one day where you can see you can actually do pretty unique things. In fact, we're customizing and testing some things out in a couple of markets across the world right now, where we can actually do celebrations and other aspects of the brand. So I think the opportunity, we still see the brand being used in those, kind of, celebration occasions, gathering, it's a dozens business. How do you then try to grow that in a very thoughtful way. People, you know, the Sweet Treat space is interesting, Todd, because everybody is like, well, are they going to change how it's like, oh, listen, 84-years ago, our founded did something amazing. It created this really unique special recipe that delivered the original glaze. We think that's pretty unique in its own right. How do we maintain that, right? And then how do we evolve that? Because people will do a Sweet Treat. They just want to make sure it's worth it, right? So we've got to make sure that we're worth it in those occasions. And if we can do that, you'll get the right -- if you increase e-commerce, if increase access to move from 2.5% to 3.5% is significant, right? That means that they chose instead of a birthday cake, they chose us, right? There could be so many different occasions of what happens. And I think it's really being there when people want to make that choice. And I think that matters, right? People are going to make celebration choices. I'm not sure we're going to pass the Alfalfa sprouts to do the celebration, not picking on the Alfalfa folks, but you really want to make sure how we can be involved and how does that brand and you could see me again passing about this, because we aspire to be the most loved Sweet Treat brand in the world. So that means about in those occasions, right? Whether it's just a little -- whether we're giving back to the community when they need it, right? Because trust me, when people are struggling, one of the things that can lift them up is just give them a dozen donuts, right? That's something that really connects with them. And I've had the pleasure of doing that across the United States, even in other countries, even during COVID. So it's a pretty unique approach is how I see the brand.

Absolutely. I think we've got time to squeeze one more in, and I think it's part of the omnichannel discussion. So I want to talk about the branded sweet treats launch last year. Just walking through, kind of, the shelf-stable product, but having it be reflective of the Krispy Kreme experience. Can you just talk to, kind of, the launch of Walmart and expanding that out now both production-wise and distribution-wise?

Yes. So think about it, I spent the whole time talking about this fresh donut experience, right? This whole omnichannel, and how many hubs and where we're going to do hubs and spokes in the 800 points of access to 1,000. But at the end of the day, you have populations that you'll never serve, right? In fact, you won't be able to get to the majority of the population, because you're trying to do scarcity in a very thoughtful way. So we knew that and so we started to work on an opportunity with the branded Sweet Treat line, which means it's a very high bar, because you're comparing yourself to the original blaze donut. But we came up with a donut inspired or cake line that we launched through Walmart. So it's a flash frozen and then sent to their 4,700 doors in Walmart. And that made us a national brand for the first time in United States, right? So then we've now grown that to about 6,500 doors, right, which is now unlocking Albertsons and its 17 banners. We invested -- opened up manufacturing capability. So we have increased that by 200%. But that's just within 2 million -- it wasn't a significant capital spend. But it's really -- the most important thing of this is you've got a really interesting opportunity from a new category, which is under our branded Sweet Treat line, Krispy Kreme, right? So that holds us up to a very high standard. And it's about the discipline of growing it, just like we'll have to be very disciplined about growing the hub and spoke. We'll be very disciplined about growing the branded Sweet Street line. And you can look at that in the United States, but if you start even thinking for folks that don't know my home country is, Mexico, right? So we had $130 million Mexicanos that there's only 10 producing shops in the country of Mexico. So even if you put all the route system and their spokes, there you're not going to cover the majority of Mexicans. The only way you're going to get access to them is that branded Sweet Treat line, and it actually serves as a different occasion. It's that kind of snack, it's different. And in fact, our Krispy Kreme customers told us they actually want that. They think of it as something that's additive to the brand, right? That's the thing you always have to pay attention. So there's 9 SKUs today, we're really disciplined about SKU and SKU proliferation. Those SKUs have done incredibly well, all 9 of them, it's really hard when you're in Walmart and all 9 do well. And normally, that's not -- that doesn't happen. And it's really now up to us to how do we think about line extensions and do we stay within the 9, but flip out the 1 or 2 laggards to ourselves, and then continue to figure out what is it that's unique and innovative, because the category in the space, it's pretty boring and pretty stable. If you think about that in the grocer or in the convenience shop where people are a little donuts or whatever they are, right, where they're competing. And you want to have something that's disruptive where people try and they go, it's just as incredible. And they're going to match it up to exactly what we sell in our fresh shops, right? So we know that. And then you've got to have is it creative enough? Is it innovative enough? Can you do some really interesting pieces in that segment, which are unique, and we will, right? You can see our creative innovation piece will apply to that category as well. So we see it as a -- we're slowly building. We can see somebody asked me the other day, when do you think your ACV is going to be it's -- it will be a lot more than it is today. We're just starting, right? So you can see that the potential is -- it's a big category, it's a $7 billion category. How will we get into that business and what do we think we can become a pretty significant player. And you just need to show the discipline of building this brand just as we do everything else in Krispy Kreme with them, really focused on quality and execution. But we see a tremendous runway, not just in the US, but also international.

That's fantastic. So we're up against our deadline here. I want to really thank Mike for taking the time to join us at this year's Best Ideas Conference.

You're still owing your time.

And you did, your slot has been exhausted [by] friends. So welcome clients to reach out to me to follow-up on the name, if they want to discuss it further. And I just want to thank everybody for taking the time to join us today. And thanks, again, Mike, for making the time to do this. I appreciate it.

[indiscernible] fill on. See you guys, enjoy the day. Take care.

Do well. Bye.