Krispy Kreme Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 10 speakers on the call.

Operator

You for standing by. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the 3rd Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. Conference.

Operator

After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Ms. Stephanie Vice President of Investor Relations. Ms. Dacus, please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to Krispy Kreme's 3rd quarter 2023 earnings call. Thank you for joining us today. Our earnings release and associated earnings presentation are available on our Investor Relations website at investors. Crispycreams.com.

Speaker 1

Joining me on the call this morning are Mike Tatterfield, President and Chief Executive Officer Treasurer, Global President and Chief Operating Officer and Jeremiah Ashukian, Chief Financial Officer. After prepared remarks, There will be a question and answer session. Before we begin, I would like to remind you that this call contains forward looking statements made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events or future financial performance. Forward looking statements involve a number of inherent risks and uncertainties, and we caution investors that these risks could cause actual results to differ materially from those contained in any forward looking statements. These factors and other risks presentation and uncertainties are described in detail in the company's Form 10 ks filed with the SEC for the year ended January 1, 2023, and in the other filings we make from time to time with the SEC.

Speaker 1

Forward looking statements made today are only as of today. The the company assumes no obligation to publicly update or revise any forward looking statements, except as may be required by law. Additionally, today's call will include certain non GAAP financial measures. A reconciliation between non GAAP financial measures and their closest comparable GAAP

Speaker 2

Thank you, Stephanie. Good morning and thank you everyone for joining us today. We have quite a bit of news this quarter at Krispy Kreme with our upcoming CEO creation of our strategy and our exploration of strategic alternatives for Insomnia Cookies. To frame the call, I want to talk about our history. Afterwards, I'll pass the mic to Josh to dive into our strategy and Jeremiah to cover our financial results and outlook for the remainder of the year.

Speaker 2

Krispy Kreme has been a love sweet treat brand since Bernie and Rudolf first started making donuts in 1937. Since joining the company in 2016, we've taken Krispy Kreme on a transformation to become focused as a donut company Always Creating Frickin' Awesome Donuts. Vernon's recipe and his hot fresh donuts is how he built the brand. Also since 2016, we've nearly tripled the number of access points where consumers can buy fresh donuts daily and increase the geographies where we operate by roughly 50% as we are now in 37 countries. We learned that we need to be where consumers want us and develop our points of access beyond the fresh and theater shops to include delivery fresh daily to grocer, convenience and we are now unlocking new channels such as club and quick service restaurants.

Speaker 2

We have profitably reshaped our global ownership network via our hub and spoke model and also acquired Insomnia Cookies 5 years ago To help us strengthen our e commerce and digital platform, digital orders now represent approximately 20% of consolidated retail sales. Finally, we have continuously invested in innovation and focused the brand on gifting, sharing and premiumization consumer's worldwide. We know and believe there's nothing we can't do with a donut. And as always, At the core of our company is our purpose to touch and enhance the lives through the joy that is Krispy Kreme, which guides our culture And sets our direction to becoming the most loved sweet treat brand in the world. As I reflect back, none of this would have been possible without our more than 23,000 Global Krispy Kremeers, our leaders and our culture to drive growth and results daily.

Speaker 2

This team has transformed our business Crispy Creme that has more than proven itself. I'm truly grateful and thankful to every Krispy Kreme. Crispy Kreme. I mentioned our announcement to explore strategic alternatives for the company to enhance both brands' growth trajectories and enable Krispy Kreme to focus on our core strategy of producing, selling and distributing fresh donuts daily. We thank Insomnia for their tremendous partnership and building upon our e commerce and digital capabilities, all while we help grow the Insomnia business here in the U.

Speaker 2

S. Roughly 250 cookie bakeries as well as we expand globally into the U. K. And Canada. Regarding the CEO transition, for some time now, I've been in conversations with the Board regarding my succession plan.

Speaker 2

Given the progress we've made on our strategy, the phenomenal team and culture we have in place, it was the right time to promote Joss to CEO Executive January 1. I am also excited to transition to a senior advisor role in Krispy Kreme Ambassador, Well, I'll support Josh and continue to spread the joy that is Krispy Kreme. Josh has played a critical role in Krispy Kreme's growth for the last 6 years, Chris' has been a tremendous partner to me and I love his passion for the brand and our Krispy Kremeers. All of this gives me confidence in our future success. Josh, I couldn't be happier to transition this role to you and look forward to watching more of your accomplishments as CEO.

Speaker 2

Now towards Q3. Our results this quarter demonstrate the continued strength of our team, our business model and the power of our brand. CREC. We delivered growth on both the top and bottom line, in line with our plans, while delivering adjusted EBITDA margin expansion through our hub and spoke model. Our global expansion continued as we made our donuts available in 2 markets, Switzerland and Kazakhstan and to discuss the momentum we've seen so far in the Q4.

Speaker 2

Josh, congratulations once again. Turn on that hot light, Amigo.

Speaker 3

Thanks, Mike. It's such a privilege and honor to be asked to lead this great team that you've brought together to represent this incredible brand, which means so much to so many people and above all to support all our Krispy Kremeers around the world as we seek to firmly establish Krispy Kreme as the world's most loved sweet treat. Another more personal note, thank you, Mike, for the many years of support you've given me, including this period of CEO transition. And I'm very pleased that you'll be staying on as a member of the Krispy Kreme Board. I'm so excited for what is ahead of us at Krispy Kreme.

Speaker 3

Our strategy is clear, make our fresh donuts available in more places and keep reminding people of the joy that is Krispy Kreme, Not just to eat, but to share and give to others. We have made so much progress in leveraging the power of the Krispy Kreme brand under Mike's leadership, Now selling over 1,600,000,000 fresh donuts a year in over 13,000 points of access around the world. And yet, we have so much further to go. Our existing points of access represent less than 1% of the places a customer could in theory buy Krispy Kreme Donuts And our purchase frequency is less than 3 times a year, despite the many occasions and celebrations where our consumers can and do enjoy our doughnuts. We've laid out a great strategy and we will remain focused on maximizing our global growth opportunity, leveraging our profitable Omnichannel Fresh Donut Business.

Speaker 3

The key elements being: 1, expand availability of fresh donuts through more points of access premium offerings for special occasions and improving e commerce and loyalty programs 3, drive end to end productivity in our doughnut supply chain through operating excellence and automation and 4, improve capital efficiency And we are pleased with our progress so far. Our 3rd quarter results were excellent with organic growth just under 10%, adjusted EBITDA margins up by 50 basis points and points of access increasing 14% to 13,394. The 522 points of access that we added in the quarter were across multiple markets, including 4 53 new Deliver Fresh Daily Merchandising Displays or DFD Doors, 59 Fresh Shops and 4 Hotline Theatres. The new DFD doors include OXXO Convenience Stores in Mexico, Woolworths Grocery Stores in Australia and Costco wholesale stores in the U. K, Australia and Canada, reflecting the increasing diversity of our customer mix.

Speaker 3

This also demonstrates our ability to expand DFD across multiple channels in several markets around the world. The 186 DFD doors we added in the U. S, including 2 more new Kroger divisions with Dillon's in Kansas and Pick N Save in Wisconsin, And we also saw significant growth with Publix. We now have just over 6,500 DFD Doors in the U. S.

Speaker 3

The quick service restaurant channel is an exciting DSD opportunity for Krispy Kreme, not just in the U. S, but around the world. And we are making investments in the U. S. That reflect our confidence in further scaling our Deliver Fresh Daily network.

Speaker 3

While nothing has been finalized, we are excited about our continued partnership with McDonald's and we are in advanced discussions about expanding the relationship. Turning to the consumer. We saw even on our seasonally low summer months strong engagement with the Krispy Kreme brand significantly increased average transaction values and drove strong overall growth. For example, our partnership with M and M's in the summer, which included a one of a kind doughnut pack with M and M's minis was a huge hit in 17 markets around the world. Our brand continues to grow and over index with valuable younger consumers with 18 to 34 year olds success of our strawberry glazed doughnut partnership with Hailey Bieber, which sold out quickly every day we ran it in early September.

Speaker 3

These partnerships demonstrate our ability to reach beyond seasonal occasions with creative and innovative marketing approaches, especially with our more social media and digital savvy consumers. As we move into the peak holiday season, We have seen growth accelerate so far in the Q4, thanks to a record overall performance in the buildup to Halloween, especially in the U. S, specialty doughnut collections inspired by the holidays and pop culture. Selling the same fresh doughnuts, both our beloved original glazed and our premium offerings that we make in our production hubs through more points of access is at the heart of our unique hub and spoke operating model, making Krispy Kreme more accessible and convenient to more consumers and the hubs themselves more productive and profitable. This quarter, we increased the number of U.

Speaker 3

S. Hubs with spokes from 143 to 148 by adding delivery routes to existing locations. Our trailing 12 month sales per hub KPI was up 9% year over year to $4,800,000 helping drive U. S. Fresh margins up over 100 basis points compared to the same quarter a year ago.

Speaker 3

We are seeing continued success in replicating the hub and spoke model and leveraging growth and deliver fresh daily doors across several cities, notably Charlotte, Dallas, Denver, Houston and Miami, which have had some of the largest increases in DSD doors this year. As evidenced by our 3rd quarter results, Our strategy continues to produce positive and tangible results. And I'm excited for the future as we continue to pursue Establishing Krispy Kreme as the World's Most Lovesweet Treat. I'll turn the call over now to Jeremiah.

Speaker 4

Thanks, Josh, and good morning, everyone. The Q3 finished in line with our expectations as we delivered growth on both the top line and adjusted EBITDA with improved performance throughout the business. We delivered our strongest Q3 adjusted EBITDA growth since our return to the public markets. And if trends maintain, we continue to track toward the mid to high end creation of marketing activations, pricing actions and further expansion of our omnichannel approach globally and across all segments. Organic revenue grew 9.6 percent to $400,300,000 As a reminder, organic revenue excludes impacts of acquisitions, foreign currency and the branded sweet treats business.

Speaker 4

Growth, pricing and the shift away from branded sweet treats resulted in product and contribution cost decreasing by 230 basis points year over year. GAAP net loss was $40,300,000 in the quarter Q3 of 2019. We continue to expect an adjusted tax rate of between 24.5 percent 26 percent for the full year 2023. Adjusted EBITDA grew 13.5% year over year to $43,700,000 exceeding the revenue growth rate. In turn, adjusted EBITDA margins expanded across all reportable segments, increasing 50 basis points year over year to 10.7%, demonstrating our ability to improve operating leverage through pricing and productivity initiatives.

Speaker 4

Diluted adjusted net income declined 3.6

Operator

increase in the Q4

Speaker 4

of 2019. Adjusted EPS remained flat compared to last year at $0.03 despite net interest expense increasing 44 percent to $3,900,000 The increase was primarily driven by higher benchmark interest as well as reducing our reliance on vendor financing. Turning to the segment results. In the U. S.

Speaker 4

Segment, organic revenue grew 10.2% $258,600,000 driven by effective premiumization opportunities and decreased discounting leading to an increased average transaction size. Adjusted EBITDA increased 8.8% year over year and margins expanded 30 basis points to 8.6%. Margin expansion was primarily driven by hub and spoke efficiencies and mitigating commodity inflation and labor pressures with the pricing taken from earlier in the year. We continue to be focused on waste mitigation in both materials and labor efficiency, and we're making improvements in both those areas. We expect that these structural improvements should set up for persistent margin expansion moving forward, combined with benefits from our hub and spoke system maturing.

Speaker 4

And finally, Insomnia margins improved sequentially due to pricing actions taken in the quarter to address input costs. In the International segment, organic revenue increased 8.2% year over year, driven by increased pricing and points of access growth. Notably, Mexico continues to grow double digits and accelerated both sequentially and year over year, driven by strong e commerce and hub and spoke expansion. Adjusted EBITDA increased 17.3%, expanding 30 basis points year over year and has returned to over 20%, primarily driven by declines in product and distribution costs as a percent of revenue due to the effective pricing increases. We saw strong operating leverage in the U.

Speaker 4

K. Given actions taken to deploy cost control initiatives and introducing a 9 pack format in DFD. In the Market Development segment, organic growth increased 9.1%, which was partially offset by the timing of equipment sales to franchisees. Notably, Canada grew more than 30% as points of access growth accelerated. Adjusted EBITDA increased $1,600,000 13.3 percent with margin expansion of 220 basis points to 32.6 percent, driven mainly by strong margin improvement in our company owned Canadian and Japanese businesses from hub and spoke efficiencies combined with fewer lower margin equipment sales to franchisees.

Speaker 4

Moving to the balance sheet. We have a healthy balance sheet with ample liquidity and expect leverage to close the year below 4 times. We are focused on the long term health of the business and setting up our capital structure to support growth through a strong balance sheet. As we explore strategic alternatives for Insomnia Cookies, we expect to use any proceeds to fund our growth agenda and strengthen our financial positioning, CREATED and 2.5 times net leverage in 2026. Capital expenditures increased to 8.4% of revenues in the 3rd quarter, Looking forward, and as Josh mentioned, the Q4 is seasonally our strongest and we've observed a strong October with low double digit organic sales growth and continue to trend towards the mid to high end of the range.

Speaker 4

Additionally, I want to specifically call out the changes to interest expense and capital expenditure assumptions. We are updating our outlook for interest expense to be between $47,000,000 $51,000,000 due to the prevailing interest rate environment Credential acquisition, as well as our strategic reduction of vendor financing. In addition, we're updating capital expenditures, which we now expect to land between 7% 8 3rd quarter of full year revenues, largely due to strategic investments in growth of our U. S. Delivered fresh daily network and foreign currency rates.

Speaker 4

In summary, we had a strong Q3 and are seeing momentum in the Q4, and we're excited about the future growth opportunities in our business.

Operator

Your first question is from the line of John Ivan Co. With JPMorgan. Please go ahead.

Speaker 5

Hi, thank you. The question is on U. S. Margins. And I know in the past we've talked about DSD profitability really being looked at a market level.

Speaker 5

And I wonder if there's any more intelligence critical thinking around doing it at a root level or account level or even day of the week level, if there's an opportunity for you to actually Crispy Kreme, maybe beyond what we saw in the Q3 out of that business in general. And secondly, I think there's been some illusion that Krispy Kreme may use potentially use third party delivery into some DFD accounts as opposed CRISPR team to using your trucks and your drivers. And is that an initiative that is currently being tested or explored or something that we could talk about on this call? Thank you.

Speaker 4

Yeah. Thanks, John. Appreciate the question around margins. I'll open up and update you. We were pleased with kind of what we saw this quarter with respect to U.

Speaker 4

S. Margins. We were up 30 basis points obviously in the U. S. With the U.

Speaker 4

S. Fresh business up over 100 basis points for the quarter, really driven by some of that hub and spoke efficiency that you referenced, but also despite needing to absorb performance based accruals. So we still have bonuses this year that We expect to pay where we are declining those bonuses or decreasing those accruals last year. With respect to your question around looking at the business differently, we'll constantly kind of tinker with and explore looking at different ways to investigate how to view the business. And maybe I'll pass to Josh to kind of elaborate more.

Speaker 3

Yes. I think the primary focus that we look out for the health of the DFD business is the quality of the doors themselves and then we make sure that the routes that we service them with are as efficient as possible. So the average sales per week of the door, which is over $600 a week and again this quarter grew 12% after multiple quarters of strong growth demonstrates that we're continuing to add productive doors and keep an eye on the existing base. Generally, it's critical scale and density in a city that drives the profitability of the DFD routes, routes that do 15 plus stops, get in, get out quickly, high quality doors, short driving times is the focus. In terms of between different customers and what have you.

Speaker 3

We do see C Store be a little higher margin than grocery, but that's more reflecting the product portfolio. There's more loose doughnuts C Stores and actually in grocery stores at the moment, we have an initiative to add more cabinets the greater display of those loose doughnuts. We've added over 120 this year. Creative process around it and that's how we think about it. The real quality of the doors and those routes is the primary thing across the different cities.

Speaker 5

And in terms of perhaps considering a different route, so style of distribution versus doing it in house, potentially using the existing distribution capabilities of a third party, for example, in various markets. Is that an opportunity?

Speaker 3

It could be. The routes that we have today are all run by ourselves as we built out this model over the last couple of years. We wanted to move quickly. We wanted to protect quality. The most important thing is these doughnuts, which obviously fresh daily, always displayed in the highest best way and then drive the profitability through the high quality doors and the efficient routing.

Speaker 3

But that doesn't say that looking forward, 3rd party couldn't play a role, particularly as we look to scale DFD in the U. S. The quick service restaurant opportunity is clearly significant. And to scale We will need to be flexible in different models. But right now, we're focused in our in house logistics model and making

Speaker 2

Thank you.

Operator

Your next question is from the line of Sarah Sinatore with Bank of America. Please go ahead.

Speaker 6

Great. Thank you. Hopefully, you can hear me. I have a question about the McDonald's announcement. It's twofold.

Speaker 6

One is, Is that the CapEx increase? Is that the sort of reason for that? Or are there other initiatives that you're also supporting? And maybe you could give a little color on that? And then With respect to McDonald's, are there findings that you can share about things like pack size or loose donuts?

Speaker 6

What you know about the customers per your earlier comments about the relative profitability of different DFD doors. Just wondering if there's anything, any insights that you can share from the early test. Thanks.

Speaker 4

Yes. Thanks, Sarah. Maybe I'll address the CapEx question and I'll flip it to Josh to address the McDonald's question. Obviously, we continue to focus our spend on the highest returns. CapEx did tick up this quarter to about 8.4%, as we continue to invest behind growth and expansion of our U.

Speaker 4

S. DFD network. But we also saw and are experiencing the impact of foreign exchange rates on international investments in the quarter and obviously on a year to date basis, which also contributed some of the tick up This quarter. Josh, you want to cover the McDonald's piece?

Speaker 3

Sure thing, Jeremiah. Hi, Sarah. Yes, regarding McDonald's itself, nothing has been finalized, but the opportunity to expand DFD through existing and new channels including QSR is clear and we are discussing the potential for an expanded partnership with McDonald's in the U. S. The learning has been very interesting through the pilot presentation that we've done with them throughout the year in Kentucky.

Speaker 3

And that is the nature of a lot of the discussions with McDonald's right now, ongoing analysis and discussion with them, covering the operational execution, making sure the doughnuts always arrive at the right time, right quality, understanding then indeed our the requirements that would be needed to scale Beyond Kentucky and of course commercial viability of the whole thing. I mean, our confidence in the U. S. DFD opportunity, Including now QSR is what's grown. It's such that we've decided to thoughtfully start making additional investments.

Speaker 3

We're just getting going, but those investments will be around manufacturing capacity to support scale growth. Because to your point around what have we learned from it, what we've learned is that these QSR outlets Creative and the Creative and the Company's Chief Financial Officer. We're able to provide a fresh doughnut experience. The the portfolio is relatively limited, but that doesn't mean it couldn't be added to over time. We've seen that both loose doughnuts and pre packed doughnuts, well received.

Speaker 3

And so from our point of view, it's behaving very well and substantiates the brand Cribu as we scale it. And as I mentioned before, we don't see sort of cannibalization of our base business in other DFD doors or indeed in our retail locations. And so we're excited for it. Our confidence has clearly grown enough to really start thinking about where we'd invest to support that kind of scale.

Speaker 6

Thank you.

Operator

Your next question is from the line of Brian Mullen with Piper Jaffray. Please go ahead.

Speaker 7

Thank you. Just a question on Insomnia. I believe you're about $230,000,000 of revenue from that business this year. How should we think about the store level margins associated That revenue and related to that, maybe what's a good way to think about a G and A and a D and A allocation. We can try to come up with a good sense of adjusted EBITDA.

Speaker 7

If you'd be willing to share any color, it would be great.

Speaker 4

Yes, Brian, I can take that question. Look, number 1, we're super pleased with the business performance as continues to grow and the profitability is improving sequentially. There also continues to be a lot of opportunities for growth expansion both in the U. S. And internationally as we're seeing great engagement early on in both Canada and the U.

Speaker 4

K. In the early stages. I don't want to kind of speculate too much or at least kind of share too much as given the fact that we're in a process right now and some of the other questions around financials. And I'll probably leave it at that.

Speaker 7

Okay, understood. Thank you. Just a follow-up, just related to the potential or not the potential, but you're going to be expanding production capacity in U. S. In the past, you said it's a 10% to 15% increase in hubs to be able to serve an additional 8000 to 10000 Citi doors on top of the capacity you have.

Speaker 7

So just how do you want us thinking about the cost to build each additional new hub? Maybe how long would it take you to build and How many hubs are you thinking you can get to next year in your planning?

Speaker 3

Okay. I'll take that. Hi, Brian. Yes, actually just stepping back a moment, as it relates to supporting the whole DSD opportunity in the U. S.

Speaker 3

Including QSR, We can add about 6,000 points of access from the existing production hubs with minimal investment. You're just talking trucks, drivers, that kind of thing. But clearly, we want to go beyond that, which is what you're talking about. We want to start investing in increased capacity in underserved markets around the country as well. That can be new markets like New England or Upstate New York, Minnesota, but also markets where we're near full capacity very strong businesses like California and Florida.

Speaker 3

So yes, as you talked about going beyond the 12,000 points of access that we can do from our existing hubs. We would add about 10% to 15% hubs on top of our existing network And that would serve about another 8,000 points of access, so 20,000 points of access all in, obviously exciting opportunity. Now it's interesting, these production hubs in the future, we'll be building them to support more off premise DFD sales the hubs that we have today. So they're going to have additional doughnut making lines. They'll have larger load out logistics areas.

Speaker 3

So we're going to evolve to support what is clearly a rapidly growing DFD opportunity for us. 10% to 15% more hubs works out at about 25, 35 new hubs over the next few years, about £3,000,000 to £6,000,000 a hub. Timing depends on a number of factors. As I said, there's nothing finalized with McDonald's. So we'll continue to update you on our plans as we have

Operator

next question is from the line of Andrew Wolf with CL King. Please go ahead.

Speaker 8

Great. Thank you. Just wanted to ask, the restaurant industry at large generally had a weak summer, especially August September and then

Speaker 7

it bounced back in October.

Speaker 8

Was the cadence of sales certainly within the shops and the hubs, was that similar? And also how was the DFD? Was there any similarity to sort of the restaurant industry at large in your sales cadence?

Speaker 4

Yes. Thanks, Andrew. It's seasonally Q3 is actually one of our softest periods Traditionally and Q4 is one of our strongest. So we're kind of seeing that cadence right in line with our expectations. So growth obviously in the quarter was right in line with what we'd expected it to be.

Speaker 4

In U. S. Specifically, we are pleased with the growth we're seeing in the U. S. And how the underlying business is holding up, given some of the price we've taken, as it grew double digits for the 4th consecutive quarter.

Speaker 4

With respect to DFD, all of our channels grew, DFD being one of the largest growth contributors at over 20% in Q3. Of that growth in DFD, half was driven by points of access and half was driven by price and premiumization and bringing specialty donuts into the channel. And we're actually maintaining productivity in existing doors, Which is a good sign for us as well. So

Speaker 3

It's really interesting the seasonality of us versus the industry you referenced. Obviously, to the earlier question. We're learning about QSR restaurants and the way they behave this year. And obviously, the the summer season and the ones we've been servicing is quite big. It's a big part of the year.

Speaker 3

For us, it can be a low, obviously related to weather factors and what have you and less holidays during that period. It was actually really exciting that we were able to bring a lot of excitement around the brand Christmas Eve in the low season with M and M's, pumpkin spice was a fantastic promotion in the U. S. And I mentioned the Hailey Bieber influencer Strawberry Glaze promotion as well. So, being able to create that excitement at this premium specialty doughnuts in the low season It was great and that applied to the donut shops, e commerce particular and DFD, where we supplied those specialty donuts across All three.

Speaker 3

Now looking ahead, of course, we've got more holidays, more excitement around the brand to think about our high season and hence a good start with Halloween. It was really good to see you as well.

Speaker 8

Great. Just one follow-up on the comment on the maintenance of sales productivity at DFT Doors. Good to hear. Is that on a dollar basis or on a unit basis? I guess what I'm specifically asking about, It sounds like the premiumization is going well, but is there like an elasticity issue at all?

Speaker 8

Or is it about what you expect? And so I guess it would end up being the same. Would it translate to any change in shrink in terms of product that didn't get bought.

Speaker 4

Yes. I think so, I can take that, Andrew. And as I mentioned, half of the growth was driven We would have expected to see.

Speaker 3

And the specialty doughnuts, there's a lot of demand for them. So in many ways, having Those become a bigger part of the portfolio is good for productivity because they sell out faster.

Speaker 8

Got it. Okay, terrific. Thank you.

Speaker 4

Crip.

Operator

Your next question is from the line of Bill Chappell with Truist. Please go ahead.

Speaker 9

Thanks. Good morning. Just two questions on insomnia and the announcement intra quarter on there. I guess one, as you're thinking about potentially strategic alternatives, can you maybe quantify what that business did for organic sales in the U. S.

Speaker 9

For the quarter and what that would maybe even for the year? And then second, Just kind of a little more color behind the thought process of that. I mean from the IPO on, you had been pretty firm about saying it was a key part of the business and it was something that you could really nurture and build. And This seems like the timing in terms of maximizing value for it when there's a lot of noise about GLPs and what have you is not ideal. So just trying to understand kind of what went behind it and what your thought process is on timing and stuff like that as well as kind of what it would take away in terms of the total organic growth?

Speaker 9

Thanks.

Speaker 2

Hey, Bill, this is Mike. 5 years ago, we took on the business of Insomnia. One of the key things that we really looked at is how do we capitalize on the delivery and e commerce capability of that brand? And then how do we help that brand start to brand itself and get scaled in the U. S.

Speaker 2

And potentially outside of the U. S. So what we've seen and you've seen today, where 20% of our retail sales overall is being driven by delivery, we checked that box, Right. So when you start to see where they're now at a 250 cookie shop basis bakery basis in the U. S, They're starting to unlock in the international, both in the Canada and the UK.

Speaker 2

They have a tremendous growth story. Krispy Kreme has a tremendous growth story in front of us. The the reason to look at strategic alternatives is to just explore and enhance that growth potential that we have there. So that's why the The timing is the right timing right now. That's why we chose this today.

Speaker 2

Yes.

Speaker 4

And let me I can pick it up in terms of how we're feeling overall in the top line. As I kind of mentioned a few questions ago that we're again, we're super pleased with how the business is performing both on top line as well as on profitability sequentially and year over year. With respect to the process, we're super pleased with the strong level of interest we've seen already from very high quality parties and remain focused on the transaction, which will generate a strong return on investment in the business that we made and realize value for our shareholders. And we'll share more news as we have it with you all. With your question around like the overall growth impact, we expect it to have a 100 basis point to 200 basis Crispy Kreme business, It's proven it can accelerate and therefore offset some of that.

Speaker 4

In terms of GLP question, maybe I'll flip it to Josh and he can address your GLP concern.

Speaker 3

Yeah. The Krispy Kreme consumer remains strong and the trends are strong. We don't see any impact from the use of these drugs that you mentioned. It's not surprising. More than 70% of our doughnuts are sold in sharing sizes, Christmas Eve, usually at special occasions and celebrations.

Speaker 3

They're often given to others. Krispy Kreme is an infrequent purchase. It's typically bought less than 3 times a year. And actually the majority of our sales are from donuts that are under 200 calories each. So we know our customers well.

Speaker 3

We actually do conduct regular brand research on the purchase barriers. The latest research just from a couple of weeks ago shows that once again that it's actually accessibility that remains the number one barrier to purchase of a Krispy Kreme. The availability and convenience of those doughnuts for our customers. Health considerations remain a low priority and actually unchanged from the prior survey. So the consumer remains strong and the trends remain strong for Krispy Kreme and the growth ambition the Krispy Kreme as we've talked a lot about today, driven by both points of access expansion in multiple channels and the engagement around the brand such as all the specialty premium donuts that we've seen so much success with recently Is why we're not concerned around the impact on the overall performance from taking out insomnia.

Speaker 3

In fact, we see the opportunity to reinvest the proceeds behind the growth and drive the brand, the Krispy Kreme brand on further.

Speaker 9

Got it. And maybe I wasn't clear. I was talking more about the GLP concern on the valuation that you might get for insomnia, but So be it. In terms of just clarifying, so if you take out insomnia and it takes out 1 to 200 basis points of the total company, That means it's probably about a 300 basis point impact on the U. S.

Speaker 9

Business since it's U. S. Based. Just Trying to understand our numbers as we go forward in kind of the organic growth you're thinking.

Speaker 4

Yes. It Might make sense to take that offline just to debrief in the follow-up conversation, but I think you're probably close ish in terms of

Operator

Mike Tannersfield for any closing remarks.

Speaker 2

Yes. So thank you everyone for your time. On a personal note, this marks My final earnings call is CEO of Krispy Kreme. As I said before, I couldn't be happier to transition this role to Josh. Christmas and I look forward to watching how he and the team will accomplish.

Speaker 2

Again, thank you all for all the investors and your continued support of the company

Operator

This does conclude the Krispy Kreme 3rd quarter 2023 earnings call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Krispy Kreme Q3 2023
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