Krispy Kreme, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Turnaround plan focus: Focused on refranchising, improving returns on capital, expanding margins, and driving sustainable, profitable U.S. growth.
• Refranchising: Working on refranchising international markets, restructuring the joint venture in the Western U.S. with WKS Restaurant Group, and expecting proceeds to reduce net debt.
• Returns on capital: Reduced CapEx spending, plan to further reduce CapEx in 2026, and international franchise pipeline as a source of light-capital growth.
• Margin expansion: Simplified business model, optimized production and delivery efficiency, reduced operating and SG&A costs. Added over 200 profitable doors with strategic partners in the U.S. in Q3, and U.S. digital sales increased 17% year-over-year.
• U.S. growth: Focused on high-volume, high-margin doors, partnered with Walmart, Target, etc., updated core menu to respond to consumer demand, and emphasized original glazed donut with digital marketing.

Segment Performance

• U.S. segment: Organic revenue growth declined 2.2% due to exiting approximately 600 unprofitable doors and 2,400 doors connected to the ended McDonald's USA partnership. Adjusted EBITDA was $21 million in the quarter, up from $13.9 million in the third quarter of last year. Sequentially, store optimization led to an 18% increase in average weekly sales to $617 per door.
• International segment: Organic revenue grew 6.2% driven by growth in Canada, Japan, and Mexico. Adjusted EBITDA increased by $0.4 million or 1.7% to $23.2 million. Margin declined 90 basis points to 16.5% due to the ongoing turnaround in the U.K.
• Market Development segment: Organic revenue declined 5.3%. Adjusted EBITDA was $12 million with a margin rate of 63.5%, up 930 basis points year-over-year.
• Consolidated results: Generated $42.3 million in operating cash flow and $15.5 million in free cash flow during the third quarter. Bank leverage ratio was 4.5x at the end of the quarter, and net leverage ratio was 7.3x, down from 7.5x as of last quarter.

Guidance

• Expect further improvement in adjusted EBITDA for the remainder of 2025, with Q4 expected to be higher sequentially than Q3 and positive cash flow in Q4.
• Plan to reduce CapEx investment in 2026 compared to 2025.

Risks

• Forward-looking statements involve risks, assumptions, and uncertainties where actual results could differ materially from forward-looking statements. These factors are described in detail in the company's earnings press release, annual report on Form 10-K, and other SEC filings.

Q: You all mentioned great momentum in the International segment, and we have seen international strength versus the U.S. for other global brands this earnings season. Are you seeing continued strong trends in those markets for 4Q? I think you mentioned Japan and Mexico adjusted EBITDA growth this year -- this quarter.

A: This is Raphael. I can take the question. Thank you for the question. Yes, we did see, and as you can see from the results in international, we saw year-over-year growth, but also more important, a growth in the quarter, which we have not seen in the past quarters. We continue to see good momentum. You mentioned Mexico and Japan, they continue to deliver, but also the markets that we don't own, the international franchise markets, we continue to see growth in places like Brazil, where we've just opened and the places that we're actually planning to open. So we continue to see strong momentum there.

Q: I guess maybe can you just comment on sort of the U.S. demand environment as you saw in 3Q and kind of what's important here?

A: Yes, I'll take that. Q3 was very interesting for us because the results reflect the progress on our turnaround plan. Think about it, we intentionally exited from McDonald's restaurants and another 600 poor performing doors. So overall, that contributed to a small revenue decline, but a significant improvement in EBITDA and positive cash flow. So it was clearly the outcome of our actions, the rationalization program, though on U.S. doors is over. So instead, we continue to focus on high-volume, profitable doors going forward with strategic partners. We've actually added 1,000 of those year-to-date with people like Walmart, Target and Costco. And that's resulted in average weekly sales jumping back up over $600. So that is about the future. We intended to have that reduction in growth in the third quarter to drive the turnaround plan. Underlying all that, we're actually seeing U.S. trends improving. The consumer response, in particular to our specialty doughnut campaigns, we had Harry Potter in the late summer and just saw a successful Halloween means that my confidence in Krispy Kreme's long-term sustainable profitable growth is high.

Q: Okay. What -- I guess, what additional cost things should we expect here just since the end of the year? And I know you're not guiding, right, but do you think that -- do you want to make any comments about where you think EBITDA could be in the fourth quarter?

A: Yes, I can take this. This is Raphael. Look, we saw a sequential improvement in EBITDA in Q3 as we saw in Q2 and are happy with the progress we made. The turnaround plan is working. And we continue to believe that as we enter Q4, we'll see sequential EBITDA improvement. As I said, we're not providing guidance, but we do expect Q4 EBITDA to be higher and to still be able to generate a positive cash flow in Q4.

Q: The next question comes from the line of Sara Senatore of Bank of America. My first question is around the comment on fully outsourcing U.S. delivery in 2026. Do you guys mind talking through the P&L implications? Does that create a lower cost per delivery or just a more like variable cost structure so that you don't need as much volume to lever expenses? And then I have a quick follow-up.

A: Yes, sure. This is an important program for us through our turnaround. You're right, we're now -- 54% of the network is outsourced to third-party providers, and we expect that to be the whole network in 2026. What we see is very high service levels. We're very pleased with the partners as we roll this program out. For now, on your P&L question, it's ensuring we have more predictable costs but interestingly, we see it as, in the long term, providing us a tailwind. If you recall, earlier in 2025, late '24, we were seeing the impact of casualty losses, and that exposure is reduced going forward. We also expect with the expertise of these partners who are focused every day on moving our doughnuts as logistics experts as opposed to us ourselves being the producers of the doughnuts, we expect operational improvements over time. They've already been identifying and sharing with us ideas around how they can use their technology and expertise to improve route management, for example. So a long-term tailwind for us. But for now, the impact on the P&L is more just ensuring we have predictable costs without any of the surprises of those casualty losses.

Q: Excellent. And then just as a follow-up, just thinking about the recently announced expanded core menu lineup, just want to know like what prompted that change? And how do you all think about balancing variety versus complexity?

A: Yes. I mean it reflects -- we talk about long-term sustainable, profitable growth. That's seen us really focus on our core business. And there's nothing more core than our fresh doughnuts board at our doughnut shops across America. And we've been highlighting the original glazed itself, adding flavored glazes like chocolate glaze, strawberry glaze. But we also saw that we haven't refreshed and updated our assorted doughnut menu for many years. And we get a lot of input from consumers, social media, in particular, pointing out that there are favorite doughnuts from the past or even favorite ideas that they have that they would love to see. So we've been listening to the consumer. You'll see we've brought out with this new refreshed range, OREO Cookies with Kreme and New York Cheesecake, my favorite, the Biscoff Cookie Butter. And that's a response to consumer demand. Now we also think -- we've also done that. We've been really thoughtful about making sure that consumers have a good amount of choice and get a really awesome experience when they come to the Krispy Kreme Doughnut shop, all in the context of our turnaround plan, focusing on what we do best, making awesome doughnuts. And we're really looking forward to the impact of that.

Q: Your next question comes from the line of Rahul Krotthapalli of JPMorgan. Josh, you have a large brand presence or brand equity that is probably even bigger than the company as many would say today. I mean discuss the growing supply or competition in the segment as we see a number of cake and cookie and other sweet treat brands in the market. And at the same time, many consumers are also being more mindful of spending generally and then also more conscious around the segment. Any thoughts you could like to share there? And then I have a follow-up.

A: Yes. We're very proud of the strength of the brand, both in terms of awareness and also in terms of what it means to people, particularly in sharing occasions, gifting occasions, makes us quite unique compared to others. It's a relatively infrequent purchase, just 2 or 3 times a year. So we don't really get impacted by those things. Instead, we find what's most important is making sure we really come with an awesome doughnut experience with our original glaze, most famously with the hot doughnut and continuously bringing news, as I just mentioned a moment ago, with innovation, specialty collections and being relevant at those important times of the year. I mean we're in hot doughnut season right now. It's really important that we saw a good response to the brand at Halloween and the whole holiday period coming up is an important one for us. So that's where we are focused, bringing moments of joy that people can share and enjoy with us.

Q: And the follow-up is on the retooling the distribution network. I know you are like taking a full look on the entire DFD touch points now. Is there any changes to the thought process on kind of brands and partnerships you want to focus on going forward? Are we -- where are we in the journey there? And then also, is there any change in the kind of agreements or how you want to execute the drop-offs in this new model?

A: So we're continuously looking to improve our distribution network, looking at delivery timing, making sure that we are producing the doughnuts in close proximity to our customers, but also efficiently. So we really are doing a lot of work around that as part of our turnaround and continue to expect benefits from that. The big initiative for us was to exit from low-traffic doors. We had -- over time, we identified there were about 1,400 doors in the U.S. where the traffic wasn't high enough, and therefore, the weekly sales were good enough. And so we intentionally exited from those this year, but that program is done. So going forward, to your broader question, it is about expanding convenience and access to the brand. But only where the traffic is high enough and in-store visibility is really clear. That's when the conditions are right for us. What's great is we have several customers that already qualify against that. And they have plenty of upside opportunity. It's only recently in the last year or so that we entered Target, and we're really just starting out with Costco as 2 clear examples of that. And even more recently just got going with Sam's Club. So we have plenty of customers where we can go that are sort of proven with that high traffic. It's interesting and internationally that we see some other innovations such as the KFC we're seeing in the Middle East. But really in the U.S., the focus is on these big high-traffic locations in which we have plenty of runway, and they can support our long-term sustainable profitable growth.

Q: This is Jaafar Mestari from BNP. Just wanted to clarify one thing in terms of the outlook where you talk about the remainder of 2025, you expect to see further improvement in adjusted EBITDA. Does that mean a Q4 '25 EBITDA higher sequentially than Q3? Is that a Q4 '25 EBITDA higher year-on-year than Q4 last year? Or is there any other way we should look at this?

A: I can take this. This is Raphael. Yes, that's the way you should read this. We do expect to see improvement in Q4 versus Q3 and also positive cash flow in Q4 as we generated in Q3. And as to 2026, we're still not providing guidance, but you can expect sequential improvement in EBITDA. And as I said, in Q2, we continue to focus on lowering CapEx spend. We will do this in the second half of this year, and we will lower CapEx for next year as well.