Krispy Kreme is celebrating more than its 85th birthday this year. In addition to partnering with McDonald’s in October to test selling doughnuts under the Golden Arches, Krispy Kreme also managed to grow its net revenue to $377.5 million in the third quarter, a 10.1 percent year-over-year increase. That brings the chain’s total net revenue to $1.52 billion so far in 2022.
“We had positive organic growth in every country around the world, despite a tough macro environment,” Krispy Kreme president and CEO Mike Tattersfield told investors on the Q3 earnings call.
Implementing price increases in the U.S., plus decreasing promotional activity after Labor Day, helped to improve Krispy Kreme’s margins in the final period of Q3, Tattersfield said. Hubs with spokes in the U.S. and Canada averaged $4.5 million in sales per hub, an increase of 18.4 percent year over year, while international hub sales grew 16.3 percent to $10 million.
As a refresher, the chain’s “hub-and-spoke” model focuses on building production center hubs that distribute fresh doughnuts every day to multiple "points of access," or spokes, which include grocery stores, gas stations, carts, food trucks, and smaller retail stores. Krispy Kreme defines hubs as either hot light theater shops or doughnut factories.
After adding 294 fresh points of access in Q3, Krispy Kreme’s footprint totaled 11,700 global points of access as of October 2, a 17 percent increase from last year. This led to global organic revenue growth of about 12 percent from 2021.
The news isn’t all sweet, however. Adjusted EBITDA in the third quarter declined to $38.5 million—down about $3.1 million due to foreign exchange challenges and the U.K.’s operating environment impacted by soaring energy costs and overall inflationary pressures, Tattersfield said.
Krispy Kreme also shuttered eight shops in Q3 following a performance review of hubs without spokes, which are hot-light theaters that do not benefit from expanding off-premises points of access, according to Josh Charlesworth, Krispy Kreme’s global president, chief operating, and financial officer.
The chain plans to close another two underperforming stores, and has identified a further 12 shops which will be closed in the coming months, Charlesworth told investors.
“All of these shops are low revenue and have flat on negative EBITDA margins and most are hubs without spokes, which could not be converted to produce for DFD,” he said on the earnings call. “We believe these 20 locations represent the overwhelming majority of potential closures.”
“During our review, we also identified additional hubs without spokes, which could either be converted to produce for DFD by closing the lobby area,” Charlesworth continued.
Significantly reducing promotional activity since September helped the chain’s margins and led to improved gross profit trends, Tattersfield highlighted. Krispy Kreme celebrated its 85th birthday in July by giving away a year of free Original Glazed dozens to 8,500 customers, plus a “Beat the Pump” promotion that set the price for a dozen Original Glazed doughnuts based on the national average price of a gallon of gasoline.
“Promotional activity in the U.S. remained high for the first two months of the quarter, due to our well-received Beat the Pump discount, which ramped all the way through Labor Day,” Charlesworth told investors.
“The final period of the quarter saw price promotional activity in the U.S. return to normal with no impact on sales,” he continued. “This, along with additional pricing on DFD in September, meant that the final period of the quarter posted significantly higher margins than the prior year.”
Krispy Kreme went public in 2021 after being run for about five years by German investment giant JAB Holding, which owns Pret A Manger, Panera Brands and its subsidiaries Panera Bread, Caribou Coffee, and Einstein Bros Bagels. In 2018 Krispy Kreme acquired a majority stake in Insomnia Cookies, a 200-unit cookie and milk chain popular in college towns.
In addition to strong performance from Delivered Fresh Daily (DFD) locations, Krispy Kreme’s growth in Q3 can also be attributed to its robust e-commerce sales, which represented about 18.5 percent of retail sales—up 170 basis points from last year. Led by Insomnia Cookies and Krispy Kreme in the U.S., the e-commerce mix grew a combined 370 basis points to 20.7 percent from 2021.
“E-commerce growth was driven by an expanded delivery radius through partnerships with third-party aggregators, the addition of dark shops and improved availability of our specialty donuts on our mobile app,” Tattersfield told investors. “While much progress has been made, we continue to see significant upside to our e-commerce platform in the coming years.”
Krispy Kreme’s development pipeline is also growing, with deals signed in seven international countries so far in 2022, including Jamaica and France. The goal is to open in at least three countries per year moving forward. The chain’s franchise partner in the Middle East, Americana, recently opened a shop in Jordan for the first time and achieved the highest weekly sales ever in the Middle East, Tattersfield noted.
“With a proven model, we are building a very strong pipeline for new market entries with both existing and new franchise partners, as well as looking at equity stakes in certain strategic markets,” he told investors, and he expects to be announcing more new markets in upcoming quarterly earnings calls.
Tattersfield also expressed his excitement about the doughnut shop’s partnership with McDonald’s, which kicked off in late October with an operational pilot test at nine McDonald’s locations around Louisville, Kentucky.
“Obviously, this is a small test to partner with a global company. But we think this represents the type of opportunity that shows why we remain very confident in our long-term goal of achieving more than 50,000 points of access globally,” he said.
Charlesworth noted the chain does not expect U.S. points of access to grow in the fourth quarter with “grocery store customers accepting minimal changes to their floor space during the holidays,” he said. “We expect points of access to resume their strong growth again in 2023, though.”
Additionally, six new Insomnia Cookie shops opened in Q3, bringing its reach to 227 locations.