Krispy Kreme's Growth Strategy: Expanding Access and Premiumizing the Brand
2023-07-30
Krispy Kreme held its Q1 2023 earnings call, where the company's financial performance and growth strategies were presented and discussed. The meeting focused on expanding access and driving sales per box, particularly through the Doorstep Fresh Delivery (DFD) service and the growth of e-commerce.
One of the most interesting topics discussed was the company's emphasis on driving sales and engagement through access and premiumization. CEO Mike Tattersfield highlighted the significance of special occasions, with 40% of their products being gifted. However, he also saw an opportunity to expand beyond these events and increase sales per box by premiumizing the brand. Tattersfield pointed to the success of the English brand, Biscoff, as an example. The company aims to improve access to their products through their digital-first delivery service, bringing the "total doughnut experience" directly to customers' doors. This strategy is expected to enhance engagement and connection with the brand. Tattersfield also acknowledged the growth in e-commerce and the importance of meeting consumers' preferences for convenience. Overall, the company's strategy revolves around expanding access, premiumizing the brand, and leveraging e-commerce to drive sales and engagement.
The market outlook for Krispy Kreme is positive based on several factors discussed during the call. Despite negative impacts from foreign exchange headwinds, the company experienced a significant increase in market development adjusted EBITDA in the first quarter. Adjusted EBITDA margins also improved, driven by strong organic revenue growth in key markets. Additionally, the company completed a refinancing of its term loan and revolver facilities, extending maturities and improving financial stability. Efforts are being made to reduce reliance on expensive vendor financing programs, which will help improve adjusted EBITDA and net income. The company has set a target to achieve a net leverage ratio between two times and 2.5 times by 2026. The company's 2023 guidance includes expected growth in organic revenue and adjusted EBITDA, indicating a positive market outlook for continued growth and improved financial performance.
The key drivers of Krispy Kreme's business are the premiumization of doughnuts, improving access and convenience for customers, and the significance of special occasions in driving sales. The company plans to introduce new flavors and varieties to premiumize its doughnuts. They also aim to expand access through the Door-to-Door service for doughnut delivery and leverage the growth of e-commerce by offering online ordering options and ensuring easy access to their products through digital channels.
Looking ahead, the company's outlook for the quarter and year remains positive. They have reaffirmed their 2023 guidance, which includes expectations of growth in organic and net revenue, adjusted EBITDA, and adjusted EPS. Krispy Kreme also plans to open new stores and company-built hubs. Despite potential headwinds from foreign exchange rates and lower revenue from exiting a business segment, the company is confident in achieving their guidance range and is trending towards the middle or higher end of their revenue and adjusted EBITDA ranges.
During the call, Krispy Kreme highlighted the progress made on its strategic initiatives. This includes an increase in market development adjusted EBITDA by 36% in the first quarter and an improvement in adjusted EBITDA margins by 250 basis points. Efforts to reduce reliance on vendor financing programs resulted in a reduction of over $45 million. The company also completed a refinancing of its term loan A and revolver facilities. They reaffirmed their 2023 guidance and have plans to open new Insomnia Cookie shops and company-built hubs in 2023. Despite lower revenue from exiting Branded Sweet Treats, Krispy Kreme remains confident in its overall performance.
In terms of capital spending, the company expects to allocate approximately $105 million to $115 million, which is approximately 6.6% of revenue, for opening new Insomnia Cookie shops and building company hubs. They plan to open at least 30 to 40 new Insomnia Cookie shops and approximately ten company-built hubs in 2023.
The call participants included Mike Tattersfield, the President and Chief Executive Officer of Krispy Kreme, along with other key executives and analysts from various companies. The purpose of the call was to discuss the company's performance and strategies. Krispy Kreme, under Tattersfield's leadership, is focused on expanding access to their products and leveraging digital channels to drive sales and engagement.
Krispy Kreme's growth and success as a doughnut company were emphasized during the call. The company places a strong emphasis on freshness in their products and highlighted the impressive growth of their Delivered Fresh Daily (DFD) business. They have confidence in their ability to continue growing points of access for customers and have made the decision to exit their start-up CPG business, Branded Sweet Treats, to focus on bringing fresh and delicious doughnuts to convenient locations. Krispy Kreme's omnichannel strategy, which provides convenient access to consumers through various channels, is seen as unique in the industry. With only 400 doughnut-producing hubs worldwide, the company efficiently delivers fresh doughnuts to over 12,000 points of access daily, with a long-term goal of reaching at least 75,000 points of access. These points of access include grocery and convenience stores, mass merchandisers, restaurants, and drugstores.
Overall, Krispy Kreme's Q1 2023 earnings call highlighted their focus on expanding access, premiumizing the brand, and leveraging e-commerce to drive sales and engagement. With a positive market outlook, the company remains confident in achieving their guidance and continuing their growth trajectory.