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

Thank you. Hello everyone, and thank you for standing by. My name is Paige and I will be your conference operator today. At this time, I would like to welcome everyone to the Krispy Kreme Second Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the company's prepared remarks, they will host a question and answer session. If you would like to ask a question, press star 1 to raise your hand. I would now like to turn the call over to Steve West, Krispy Kreme Vice President of Investor Relations. Steve, please go ahead.

Good morning everyone and welcome to Krispy Kreme's second quarter 2026 earnings call. Joining me are President and Chief Executive Officer Josh Charlesworth and Chief Financial Officer Raphael Duvivier. The second quarter earnings release and accompanying presentation are available on our investor relations website at investors.krispykreme.com This call will also be available on our website and contains forward-looking statements. Forward-looking statements, including those of expectations, future events, or financial performance, are based on current expectations and are subject to risks and uncertainties. Actual events or results could differ materially from those forward-looking statements due to factors described in the cautionary statements in our earnings release, annual report on Form 10-K filed with the SEC, and in other SEC filings we make from time to time. We assume no obligation to update any forward-looking statement, except as may be required by law. Additionally, we will reference certain non-GAAP financial measures. Information about these non-GAAP measures and reconciliations to the closest comparable GAAP measures is available in our earnings release. Any reference to percentage growth when discussing second quarter results is a comparison to the second quarter of 2025, unless otherwise indicated. I will now turn the call to questions.

over to Josh. Thank you Steve and good morning everyone. The second quarter highlighted continued significant progress on our turnaround to strengthen the balance sheet, reduce leverage and drive sustainable, profitable growth. Our year-to-date results demonstrate the success of the actions we are taking to grow the business and improve profitability. We remain confident in our ability to deliver our 2026 financial targets and are maintaining our previously issued guidance. B-Cream remains a compelling global growth story, supported by increasing consumer demand for our iconic fresh donuts, even in a dynamic macro environment. Unlocking that demand remains our priority, and we are doing so through our two largest opportunities, profitable US expansion and capital-line international franchise growth. In the second quarter, demand for our fresh, iconic donuts across the US and international markets drove system-wide sales growth of 2.6%, excluding the impact of the now-ended McDonald's USA partnership from last year. Overall, our goal remains to deliver system-wide sales of more than $2 billion in 2026. Adjusted EBITDA margin significantly increased by 340 basis points as our focus on optimizing operations and logistics, along with driving more profitable sales per door in fresh delivery, is translating into stronger financial performance. Now let's move to the four pillars of our turnaround plan and the progress we are making on each. One, re-franchising, two, improving returns on capital, three, expanding margins, and four, driving sustainable, profitable US growth. Our first pillar, re-franchising, enables us to drive more profitable system-wide sales growth while accelerating new shop development through a capital-light model. So far this year, we have completed two transactions that advanced this strategy in Japan and the Western US, both of which contributed to a reduction in net debt. In the past year, approximately 25% of system-wide sales were generated by franchisees. Today, franchisees account for 42% of system-wide sales. additional re-franchising efforts, our goal remains to reach approximately 50% of system-wide sales generated by franchisees beginning next year. As we evaluate additional re-franchising opportunities, we remain focused on identifying the right partners, both in international markets and the US, to maximize value and position our brand for long-term growth. The second pillar of our turnaround is improving returns on capital. Across the business, we are significantly reducing capital intensity and improving our utilization of existing assets, while our franchisees invest to support brand growth. As a result, we reduced our capex in the first half of the year by 70% compared to last year. which will contribute to achieving positive free cash flow in 2026. We are pleased to have entered into agreements for three new international franchise markets this year. including the Netherlands, Estonia and Mauritius, achieving our goal of three to four new markets in 2026. The continued strength of the Krispy Kreme brand is reflected in the interests we see from prospective franchise partners around the world, and we remain focused on pursuing additional opportunities to expand our global footprint through our capital-like franchise model. Year to date, we have opened 59 new shops driven by growth in Japan, Brazil, South Korea, and the Middle East. All but two of these shops were opened by franchisees, and we remain on track to achieve our goal of opening at least 100 shops in 2026. While our international development pipeline remains an important driver of capital-like growth, we are also focused on U.S. growth by leveraging existing manufacturing capacity to expand fresh delivery. Our current network utilization is only about 25%, demonstrating the opportunity to expand to more locations without incremental capacity investment. Walmart and Target, along with other strategic partners, are still significantly under-penetrated, and we can support additional growth through the same facilities that currently deliver to more than 7,600 doors nationwide. The third pillar of our turnaround is expanding margins. We are simplifying the business and reducing costs across the P&L, resulting in significant margin improvement versus last year, driven by the US segment. In the US, we are making doughnuts more efficiently to enhance advanced production planning, labor optimization, and streamlined hub operations, all leading to a meaningful reduction in labor spend. continue to increase delivery efficiency for improved route management, demand planning and the optimization of production and delivery schedules. Now that we have successfully outsourced our US logistics, we have greater cost predictability and reduced operational risk, enabling our teams to focus on what they do best, making fresh donuts. After completing a successful test of a new AI-enabled platform for fresh delivery demand planning, we are now rolling it out across our company network. based on the preliminary results, we expect this advanced technology solution will reduce out of stocks on the shelf while also minimizing returns. The fourth pillar of our turnaround is sustainable, profitable growth in the US across our donut shops, digital channels, and fresh delivery partners. Our donut shops are the largest driver of sustainable profitable growth in the US. The strength of our donut shops has been driven by our recently expanded core menu, led by our iconic original glazed donut. supported by five seasonal download collections each year and a steady cadence of innovative limited time offerings. Each plays a key role, but it's the combination that makes them so successful. Our core menu provides consistency and value. Our seasonal collections deliver new flavors and variety, and our LTOs create excitement and cultural relevance. Together, they keep the brand fresh and engaging for consumers, stimulate curiosity, and drive sustained demand. We further support demand through targeted marketing and promotional programs that reinforce value and encourage larger purchases. Promotions such as our discounted second dozen offer provide value for consumers while driving donut sales and growth in average ticket size. Sales through our growing digital channel have grown 8% year over year and now represent approximately 22% of total US retail sales. is driven by improvements in our proprietary digital platforms, including easier payment options and the growth of our loyalty program. This now includes nearly 18 million members in the US who visit typically 30% more frequently than non-loyalty members. In fresh delivery, we know that when our donuts are available in the right places and in the right quantities with strategic partners, we can generate higher average weekly sales and profitability. During the second quarter, we added more than 200 doors with strategic partners such as Walmart, Target, Kroger, and Sam's Club. A key component of our continued success in increasing average weekly sales per door is strengthening our relationships with these key strategic partners. Target is a great example of how deeper collaboration can unlock additional growth opportunities and create value for both organizations. expanding our relationship with Target to enhance merchandising and checkout placement. And beginning in September, Krispy Kreme products will be available for purchase on target.com. We believe this expanded relationship reflects the confidence leading retailers have in the strength of our brand and creates additional opportunities to increase sales and expand our fresh delivery network. Much of our progress in fresh delivery has been led by Suk Nicholas, who we recently announced as our Chief Commercial Officer. Her primary focus is to accelerate growth, expand key partnerships, strengthen customer relationships, and build world-class commercial capabilities across markets. Additionally, we continue to stay closely attuned to evolving consumer trends, including the use of GLP-1 and other weight loss medications. Last quarter, I discussed the conclusion from our research, which found Krispy Kreme consumers who use these medications are just as likely as non-users to purchase sweet treats for holidays and special occasions. With our differentiated fresh donuts, typically purchased two to three times per year, primarily for sharing occasions, we believe Krispy Kreme is well positioned in this context. While we continue to monitor this trend, among other macro factors, we remain focused on expanding the ways consumers experience and share Krispy Kreme, including through our high-performing minis category. Featuring donut minis, donut dots, and mini crawlers, this category offers consumers compelling value and greater variety. Overall, we are pleased with the continued progress on our turnaround, extending the momentum that began late last year. We believe the actions we have taken are positioning Krispy Kreme for sustainable, profitable growth for the long term and delivering the results our turnaround plan was designed to achieve. improved financial flexibility, reduced capital intensity, expanded margins through greater operational efficiency, and improved sustainable profitable US growth. With that, Rafael will now review our second quarter financials.

Thank you, Josh. I'm pleased with another quarter of improvements in our financial performance driven by the execution of our turnaround plan. We remain focused on sustainable, profitable growth through quality sales and effective cost management across the P&L. We continue to leverage the balance sheet through increased adjusted EBITDA and increase our profitability by expanding our adjusted EBITDA margin. Net revenue was $331 million in the second quarter, down 13 percent reflecting our planned re-franchising of the Western US and Japan. Excluding with franchising, we were essentially flat on our organic revenue basis. In fact, system-wide sales were $497 million, up 2.6% in constant currency when excluding the impact from McDonald's USA in their prior year period. This reflects the strength of Krispy Kreme brand around the world. Adjusted EBITDA of $28.8 million increased 43% driven by productivity initiatives across our network and cost controls at the corporate level. This represents the fourth consecutive quarter of adjusted EBITDA growth and an acceleration versus our first quarter of adjusted EBITDA growth of 38%. During the quarter, our consolidated adjusted EBITDA margin improved 340 basis points to 8.7% through our intense focus on driving sustainable, profitable growth. In our US segment, organic revenue increased 0.1% driven by the strategic closure of underperforming fresh delivery doors. Excluding the McDonald's impact from last year, U.S. organic revenue was up 4.4%, driven mostly by growth in digital and our retail shops. In fresh delivery, we have taken disciplined actions to improve the productivity of our doors. Our average weekly sales per door in the U.S., now inclusive of both company and franchise-operated doors, were approximately $697, an increase of 33% year-over-year. Adjusted EBITDA for the US segment increased 38% to $13.8 million, reflecting continued traction from our turnaround plan, more than upsetting the impact of our re-franchising efforts. We benefited from cost control initiatives and increased efficiencies, including outsourcing our US logistic network, in SG&A and eliminating costs related to the now ended McDonald's USA partnership. Those initiatives drove an adjusted EBITDA margin increase of about 370 basis points to 8%. In our international segment, organic revenue decreased 5.1%, due mostly to declines in UK and Australia, partially offset by growth in Canada. adjusted EBITDA of $14.2 million declined 22% year over year, driven by the re-franchising of Japan. Additionally, our adjusted EBITDA margin for international business was 12.1%, which was 160 basis point lower year over year due mostly to a change in mix from the Japan re-franchising. In our market development segment, organic revenue increased 14.4%, driven by growth in royalty revenues from Middle East, Japan, and Brazil. Adjusted EBITDA increased 117% to $19.4 million due to re-franchising of the Western U.S. and Japan and increased royalty revenue. Adjusted EBITDA margin decreased to 47.3%, driven by higher domestic versus international revenue mix associated with re-franchising. Our adjusted earnings per share improved 12 cents year over year, about 2 cents of which was due to our re-franchising deals. Moving to our balance sheet, we continued to deleverage and ended the quarter with a net leverage ratio of 5.4 times our trading four quarters of adjusted EBITDA. leverage ratio has improved by 1.3 turns versus our reported ratio of 6.7 times at the end of 2025 and more than two turns since last year's second quarter. We are pleased with the progress, but continue to focus on reducing our leverage ratio to additional net debt reduction and adjusted EBITDA growth. Additionally, our free cash flow improved by more than $100 million in the first half of 2026, as compared to the first half of last year, driven by focus on reducing our capital intensity. CapEx year-to-date of $16.1 million decreased 70% versus the first half of 2025. We continue to focus our invested capital on repairs and maintenance of existing infrastructure, which is in line with our asset-light business model, and we believe we contributed meaningfully to free cash flow generation during that year. Before providing our guidance update, I wanted to discuss our long-term re-franchising philosophy. We believe our attractive franchise margins advance our capital-light growth strategy. As Josh mentioned, we added three international franchise markets this year, and we are working to add more. We also continue discussions to repranchise additional markets to trusted partners to grow our brand around the world. believe this will lead to higher margins, reduce capex and generate more free cash flow than only the markets ourselves. While some grief and change deals can be diluted to the income statement, we believe it important to view them from a discounted cash flow perspective. our re-franchising deals intend to be accreted to free cash flow over time by increasing high margin royalty stream and reducing capex which we believe will increase long-term sharehold value. Moving to our financial targets, I'm pleased to say we're maintaining our previously stated full-year guidance metrics as laid out in our earnest release. And key metrics include net revenue of 1.25 to $1.35 billion. System-wide sales growth of 2% to 4% in constant currency. Adjusted EBITDA of $140 to $150 million. capital expenditures of 50 to 60 million dollars. Given the dynamic changes over the last four quarters, I want to provide some additional color on the rest of the year. The fourth quarter is typically stronger due to seasonality and thus we expect to see higher growth and margins in the fourth quarter than in the third quarter. Additionally, as a reminder, in the third quarter of 2025, we reported a 9.3 million dollars cyber related insurance gain. Adjusted behind the third quarter of 2025 would have been $31.3 million excluding this gain.

And with that, I will now turn it over to Josh for his closing remarks. We are pleased to have delivered another consecutive quarter of significant progress on our turnaround to strengthen the balance sheet, reduce leverage, and drive sustainable, profitable growth. confident in the foundation we are building for Krispy Kreme's next era of growth and believe our results continue to demonstrate that we are well on our way. Operator, you may now open the lineup for Q&A.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brian Harbor with Morgan Stanley. Your line is open. Please go ahead.

Yes, thanks. Good morning, guys. Just, you know, when I think about sort of EBITDA margins, I mean, you don't have a longer term target out there right now, but like you've obviously completed quite a bit here. On the cost side, you've sort of completed the outsourcing of delivery. I mean, where do you see this going over time or as we think about kind of upside? into next year and beyond, what will be the key margin drivers? Where do you see that going? Hey, Brian, how are you?.

We were happy with the turnaround plan. I think as you said, look, this is the fourth quarter. We've seen the results. It's more important than the first quarter where we've seen the two deals that we already did. Japan and the Western US flow to the P&L, right? So you're seeing that impact and you see the margin coming up, right? So as we complete more deals, and we continue to move our agenda to become capitalized, we believe margins will continue to increase and as well drive more free cash flow by 20%.

I'll just add, as you mentioned, the outsourcing of logistics in the US. Yes, we've completed that transition, but most of the benefits of our logistics optimization have not really yet come through to the P&L. We're seeing greater cost certainty, improved service levels, efficiencies. These are at the moment more than offsetting any inflation on gas prices, for example. So we'd expect to see over time the benefits to margin of that logistics outsourcing as well.

Okay. Which of the, um, which of the DFD, you know, uh, I guess for you right now, do you continue to still have some net closures or are there places that you're still rationalizing? It seems like Walmart and Target are more of the focus for growth, but could you talk more about what's working best there and should that continue to drive that increase in average weekly sales? Sure.

We're working closely with our strategic partners. You mentioned Walmart, Target, there are others, Kroger, Publix, just to mention a couple more, Costco, Sam's Club as well in the Club channel. very promising and we work closely with those both to expand distribution where the conditions are right, where we can make sure we have sustainable, profitable sales. That's how we made the interventions that we made last year, but also where we already are that we're improving in-store merchandising, placement of the product. And that's why we've not only increased the number of doors where we distribute so far this year in the US by about 450 doors, but we've also increased the average weekly sales in our whole network by over 30% compared to a year ago. So to your overall question, yes, We're very pleased with the fresh delivery channel. It was important to make interventions on it last year, and we continue to work with those partners to improve the whole network. Most recently, even adding .com availability with the likes of Kroger.com, Walmart.com,.

and soon target.com. Your next question comes from the line of David Palmer with Evercore ISI. Your line is open. Please go ahead.

Great. Thank you. I'm looking at your margin stuff for the the quarter and actually your U.S. organic sales, I could have looked like the U.S. organic sales were better than we would have thought and even the margins we could have envisioned stronger than what they were. So I'm just wondering, are there any ramp costs or any call-outs this quarter that you would point out? You talked about some of the expansion you're doing with certain retailers, so maybe there's something there that we should be thinking about and modeling into the second half.

Do you have a quick follow-up? Sure. I'll start with the growth and I'll hand over to Rafael to talk about the margins. Two both importantly go hand in hand. You know, we actually, you're right. We saw strong underlying growth in the second quarter in the U.S. If you exclude the McDonald's business that we exited from last year, the the organic growth was up 4.4% in the second quarter. You know, we're seeing popularity, both with our popular and affordable original glazed donuts, especially these second dozen promotions that are driving additional volume and ticket, but also our donut innovations. As I described earlier, these, cadence of limited time offerings backed up by a seasonal program is generating a lot of engagement with the brand. It's good to see the underlying growth coming through, but also the profit. Raphael. Hey, David.

on the US margin and we are pleased with the results in the quarter right if I look at the margin we almost double the US margin compared to last quarter you have to remember as well that q3 and q4 the second half is stronger for us so So you should see higher margins as we get to the balance of the year.

That's great. And I guess international sales, anything to point out, you know, look like organic sales were maybe a little lighter any trends you want to call out there or actions that you're taking in your key international markets and I'll pass it on.

Yes, so look at international. We continue to see strong growth in Canada, even in places like Japan. You also just going back because we recently were franchise, but they're growing right, so it's not hitting that segment anymore, but they open five shops. already this quarter. We did see some decline in our company own UK market is mostly from door resumption rationalization that we did last year plus the extreme hot weather. expected gold sales and profits, but we feel confident on the on the on the deep turnaround plan as we head to the second half of the year.

Thanks, guys. Thanks, David. Your next question comes from the line of Sarah Senatore with Bank of America. Your line is open. Please go ahead.

Hi, this is Ashling on for Sarah. Good morning, guys. I was just wondering if you could give a little more color on what is happening in the UK and Australia. It sounds like those markets are still kind of weighing on international. So I'm curious whether the pressure is mostly, you know, demand or brand relevance. And when you have markets that are underperforming, does that make sense? re-franchising more attractive because a local partner may be kind of better positioned to fix them or more challenging because it weighs on valuation.