Krispy Kreme Inc

The following comparisons are historical results and are not indicative of future results, which could differ materially from the historical financial information presented.

Quarter ended March 31, 2024 compared to the Quarter ended April 2, 2023

The following table presents our unaudited condensed consolidated results of operations for the quarter ended March 31, 2024 and the quarter ended April 2, 2023:

Royalties and other revenues: Royalties and other revenues increased $0.9 million, or 11.0%, from the first quarter of fiscal 2023 to the first quarter of fiscal 2024, led by expansion and performance of the international franchise business, partially offset by continued foreign exchange headwinds.

The following table presents a further breakdown of total net revenue and organic revenue growth by segment for the quarter ended March 31, 2024 compared to the quarter ended April 2, 2023:

Total net revenue growth of $23.7 million, or approximately 5.7%, and organic revenue growth of $27.6 million, or approximately 6.7%, were driven by the continued and successful execution of our omni-channel growth strategy globally, high impact brand activations, and product premiumization efforts. We have continued to increase availability through new Global Points of Access, including capital-light DFD Doors, and via digital channels. Additionally, we have continued to take pricing actions to offset cost inflation, including in the first quarter of fiscal 2024, but with growth in pricing and cost inflation slowing compared to this time last year.

U.S. segment net revenue grew $14.6 million, or approximately 5.2%, and organic revenue increased $20.3 million, or approximately 7.4%, from the first quarter of fiscal 2023 to the first quarter of fiscal 2024. Growth was driven by an additional 1,160 Points of Access compared to the first quarter of fiscal 2023 and record-high digital channel sales due to a focus on owned channel improvements and increasing product availability through third parties. Organic revenue growth was also aided by effective pricing increases, leading to an increase in the average transaction size, offset some by transaction declines.

Our International segment net revenue grew $12.8 million, or approximately 11.4%, from the first quarter of fiscal 2023 to the first quarter of fiscal 2024, aided by foreign currency translation impacts of $1.8 million from a strengthening British pound and Mexican peso. International organic revenue grew $10.9 million, or approximately 9.8%, from the first quarter of fiscal 2023 to the first quarter of fiscal 2024, driven by increased pricing and Points of Access growth of 917 compared to the first quarter of fiscal 2023 and successful marketing activations. International organic revenue growth was offset some by softer transaction volume compared to last year.

Our Market Development segment net revenue and organic revenue decreased $3.6 million, or approximately 14.1%, from the first quarter of fiscal 2023 to the first quarter of fiscal 2024, driven by timing of mix and equipment sales to franchisees and softness in the Middle East markets.

Product and distribution costs (exclusive of depreciation and amortization): Product and distribution costs decreased $10.8 million, or 9.2%, from the first quarter of fiscal 2023 to the first quarter of fiscal 2024. As a percentage of revenue, product and distribution costs decreased by approximately 390 basis points from 28.1% in the first quarter of fiscal 2023 to 24.2% in the first quarter of fiscal 2024, primarily due to benefits from the exit of the lower-margin Branded Sweet Treats business as well as lapping the related $7.6 million inventory write-offs and employee severance expenses incurred during the first quarter of fiscal 2023.

Operating expenses: Operating expenses increased $13.8 million, or 7.2%, from the first quarter of fiscal 2023 to the first quarter of fiscal 2024, driven mainly by labor cost inflation and investments to support growth. Operating expenses as a percentage of revenue increased by approximately 70 basis points, from 45.7% in the first quarter of fiscal 2023 to 46.4% in the first quarter of fiscal 2024, primarily due to the impact of lower transaction volumes on operating leverage. This has been partially offset by efficiency benefits from Hub and Spoke expansion.

Selling, general and administrative expense: Selling, general and administrative (“SG&A”) expense increased $10.1 million, or 16.4%, from the first quarter of fiscal 2023 to the first quarter of fiscal 2024. As a percentage of revenue, SG&A expense increased approximately 150 basis points, from 14.7% in the first quarter of fiscal 2023 to 16.2% in the first quarter of fiscal 2024, primarily driven by investments in strategic initiatives such as global transformation and exploring strategic alternatives for the Insomnia Cookies business, as well as higher share-based compensation expenses in the first quarter of fiscal 2024.

Other expenses/(income), net: Other income, net of $5.3 million in the first quarter of fiscal 2023 was primarily driven by a gain on a sale-leaseback transaction of $9.7 million, partially offset by $5.4 million of property, plant and equipment impairments associated with the decision to exit the Branded Sweet Treats business.

Depreciation and amortization expense: Depreciation and amortization expense increased $5.6 million, or 20.2%, from the first quarter of fiscal 2023 to the first quarter of fiscal 2024. As a percentage of revenue, depreciation and amortization expense increased approximately 90 basis points, from 6.7% in the first quarter of fiscal 2023 to 7.6% in the first quarter of fiscal 2024, primarily driven by higher capital spend and assets placed into service to support the Hub and Spoke model evolution, including preparing for the McDonald’s U.S. national rollout discussed in “Significant Events and Transactions” above.

Interest expense, net: Interest expense, net increased $1.7 million, or 14.6%, from the first quarter of fiscal 2023 to the first quarter of fiscal 2024. The increase was primarily driven by increases in outstanding debt and the benchmark interest rates associated with the unhedged portion of our variable rate long-term debt. The interest rate swap arrangements associated with the hedged portion of our long-term debt are set to mature in June 2024; we are currently evaluating arrangements to extend the maturity of these contracts.

Income tax expense: Income tax expense was$4.3 million in the first quarter of fiscal 2024, compared to$0.3 million in the first quarter of fiscal 2023. The increase of $3.9 million was primarily driven by lower pre-tax results and a decrease in theworldwide annual effective tax rate compared to the first quarter of fiscal 2023.

Results of Operations by Segment – Quarter ended March 31, 2024 compared to the Quarter ended April 2, 2023

The following table presents Adjusted EBITDA by segment for the periods indicated:

(1) Refer to “Key Performance Indicators and Non-GAAP Measures” above for a reconciliation of Adjusted EBITDA to net income.

U.S. segment Adjusted EBITDA increased $4.1 million, or 10.6%, with margin expansion of 70 basis points to 14.4% in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023, driven by benefits from lapping the exited Branded Sweet Treats business, productivity benefits from Hub and Spoke expansion, the growth of digital channels, and labor and waste optimization. We also effectively offset commodity inflation and labor pressures by implementing pricing increases, including during the first quarter of fiscal 2024, but with growth in pricing slowing compared to this time last year.

International segment Adjusted EBITDA increased $1.6 million, or 8.2%, with margin decline of 50 basis points to 16.5% in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023, as lower transaction volumes in the U.K. continued to more than offset strength in the other International equity markets.

Market Development segment Adjusted EBITDA increased $0.3 million, or 3.0%, with margin expansion of 900 basis points to 54.1% in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023, driven mainly by the timing of lower-margin equipment sales and the continued expansion of our international franchise business.

Corporate expenses within Adjusted EBITDA increased $2.7 million, or 19.3%, from the first quarter of fiscal 2023 to the first quarter of fiscal 2024 primarily due to strategic initiatives such as global transformation and exploring strategic opportunities for the Insomnia Cookies business.

Capital Resources and Liquidity

Our principal sources of liquidity to date have included cash from operating activities, cash on hand, amounts available under our credit facility, and vendor financing including our SCF programs and structured payables programs. Our primary use of liquidity is to fund the cash requirements of our business operations, including working capital needs, capital expenditures, acquisitions, and other commitments.

Our future obligations primarily consist of our debt and lease obligations, as well as commitments under ingredient and other forward purchase contracts. As of December 31, 2023, we had the following future obligations:

•An aggregate principal amount of $837.5 million outstanding under the 2023 Facility;

•An aggregate principal amount of $11.0 million outstanding under short-term, uncommitted lines of credit;

•Non-cancellable future minimum operating lease payments totaling $759.2 million;

•Non-cancellable future minimum finance lease payments totaling $63.3 million; and

•Purchase commitments under ingredient and other forward purchase contracts of $130.5 million.

As of March 31, 2024, our outstanding principal amount under our 2023 Facility was $881.3 million. The increase from the 2023 Facility balance as of December 31, 2023 included draws to fund payments on our commercial trade financing obligations. Refer to Note 8, Long-Term Debt to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information.

We had cash and cash equivalents of $33.1 million and $38.2 million as of March 31, 2024 and December 31, 2023, respectively. We believe that our existing cash and cash equivalents and debt facilities will be sufficient to fund our operating and capital needs for at least the next twelve months. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, the timing and extent of spending on business acquisitions, the growth of our presence in new markets, and the expansion of our omni-channel model in existing markets. We may enter into arrangements in the future to acquire or invest in complementary businesses, services, and technologies. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.

Cash Flows

We typically generate significant cash from operations and have substantial credit availability and capacity to fund operating and discretionary spending such as capital expenditures and debt repayments. Our requirement for working capital is not significant because our consumers pay us in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the vendor of such items. The following table and discussion present, for the periods indicated, a summary of our key cash flows from operating, investing, and financing activities:

Cash Flows (Used For)/Provided by Operating Activities

Cash used for operations totaled $17.7 million for the first quarter of fiscal 2024, a fluctuation of $28.1 million compared with the first quarter of fiscal 2023. This fluctuation in cash flows related to operations was primarily due to the intentional paydown of obligations due under our SCF programs discussed in Note 7, Vendor Finance Programs to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, as well as our receipt of $7.7 million cash proceeds from the settlement of interest rate swap derivative contracts in the first quarter of fiscal 2023 discussed in Note 6, Derivative Instruments to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Cash Flows Used for Investing Activities

Cash used for investing activities totaled $29.0 million for the first quarter of fiscal 2024, an increase of $12.6 million compared with the first quarter of fiscal 2023. The increase was primarily due to $10.0 million proceeds from a sale-leaseback transaction during the first quarter of fiscal 2023 discussed in Note 4, Leases to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, as well as higher capital expenditures in the first quarter of fiscal 2024.

We expect to incur additional capital expenditures related to our accelerated U.S. expansion, including via QSR channels such as the McDonald’s U.S. national rollout discussed in “Significant Events and Transactions” above. We continue to expect capital expenditures to be between 7% and 8% of revenues in fiscal 2024 as we continue to deploy the capital-efficient Hub and Spoke model globally. We expect incremental cash outflows related to capital expenditures associated with the accelerated U.S. expansion primarily in 2025 and 2026, which would have an impact on our capital expenditures as a percentage of revenues during those years.

Cash Flows Provided by Financing Activities

Cash provided by financing activities totaled $43.6 million for the first quarter of fiscal 2024, an increase of $41.8 million compared with the first quarter of fiscal 2023. The increase was primarily due to draws on our 2023 Facility used in part to fund payments to reduce our vendor finance program obligations, particularly the SCF programs.

Payments on our structured payables resulted in a net $29.6 million change in cash flows (net proceeds from structured payables of $3.9 million in the first quarter of fiscal 2024 compared to net payments on structured payables of $25.7 million in the first quarter of fiscal 2023). Refer to Note 7, Vendor Finance Programs to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information.

Debt

Our long-term debt obligations consist of the following:

2023 Secured Credit Facility

The 2023 Facility consist of a $300.0 million senior secured revolving credit facility and a term loan with a principal amount of $700.0 million. Refer to Note 8, Long-Term Debt to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information.

Under the terms of the 2023 Facility, we are subject to a requirement to maintain a leverage ratio of less than 5.00 to 1.00 as of the end of each quarterly Test Period (as defined in the 2023 Facility) through maturity in March 2028. The leverage ratio under the 2023 Facility is defined as the ratio of (a) Total Indebtedness (as defined in the 2023 Facility, which includes all debt and finance lease obligations) minus unrestricted cash and cash equivalents to (b) a defined calculation of Adjusted EBITDA (2023 Facility Adjusted EBITDA) for the most recently ended Test Period. Our leverage ratio was 3.75 to 1.00 as of the end of the first quarter of fiscal 2024 compared to 3.48 to 1.00 as of the end of fiscal 2023, primarily due to the increase in long-term debt.

We were in compliance with the financial covenants related to the 2023 Facility as of March 31, 2024 and expect to remain in compliance over the next 12 months. If we are unable to meet the 2023 Facility financial or other covenants in future periods, it may negatively impact our liquidity by limiting our ability to draw on the revolving credit facility, could result in the lenders accelerating the maturity of such indebtedness and foreclosing upon the collateral pledged thereunder, and could require the replacement of the 2023 Facility with new sources of financing, which there is no guaranty we could secure.

Short-Term Lines of Credit

We are party to two agreements with existing lenders providing for short-term, uncommitted lines of credit up to $25.0 million. Borrowings under these short-term lines of credit are payable to the lenders on a revolving basis for tenors up to a maximum of three months and are subject to an interest rate of adjusted term SOFR plus a credit spread adjustment of 0.10% plus a margin of 1.75%.

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity with GAAP. The preparation of the Condensed Consolidated Financial Statements requires the use of judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as related disclosures. We consider an accounting judgment, estimate, or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates, and assumptions could have a material impact on our Condensed Consolidated Financial Statements. Actual results could differ from the estimates made by management.

There have been no material changes to our critical accounting policies and estimates as compared to those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K for the year ended December 31, 2023.

New Accounting Pronouncements

Refer to Note 1, Description of Business and Summary of Significant Accounting Policies to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, for a detailed description of recent accounting pronouncements.