Krispy Kreme, Inc. (DNUT) Q3 2026 Earnings Call Transcript

Operator: Greetings. Welcome to the Krispy Kreme Q3 26 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Steve West, Vice President, Investor Relations. Thank you. Steve, You may begin.

Steve Wayne West: Good morning, everyone, and welcome to Krispy Kreme's Third Quarter 26 Earnings Call. Joining me are President and Chief Executive Officer, Joshua Charlesworth, and Chief Financial Officer, Raphael Duvivier. The third quarter earnings release and accompanying presentation are available on our Investor Relations website at investors.krispykreme.com. A replay of this call will also be available on our website. Today's remarks contain forward looking statements including those of expectations, future events or financial performance. Forward looking statements are based on current expectations and are subject to risks and uncertainties. Actual events or results could differ materially from those forward looking statements due to factors described in the cautionary statements in our earnings release, annual report on Form 10-K filed with the SEC, and other SEC filings we make from time to time. We assume no obligation to update any forward looking statement except as may be required by law. Additionally, we will reference certain non GAAP financial measures Information about these non GAAP measures and reconciliations to the closest comparable GAAP measures are available in our earnings release and the accompanying presentation. Any reference to percentage growth when discussing third quarter results is a comparison to the third quarter of 25 unless otherwise indicated. Finally, we are tentatively scheduled to report our fourth quarter and full year financial results and hold our quarterly earnings call on March 4, 2027. I will now turn the call over to Joshua.

Joshua Charlesworth: Thank you, Steve, and good morning, everyone. The third quarter marked another period of significant progress on our turnaround to strengthen the balance sheet and drive sustainable profitable growth. Which gives us the confidence to increase our full year guidance. Krispy Kreme is a compelling growth story supported by sustained consumer demand for our iconic fresh doughnuts. Even in a dynamic macro environment. Unlocking that demand continues to be our priority, as we pursue profitable US expansion and capital light international franchise growth. In the third quarter, global system wide sales increased by 1% and our goal remains to grow by 2% to 4% to more than $2 billion in 2026. Our results demonstrate the success of the actions we are taking to drive sustainable growth and improve profitability. In the third quarter, adjusted EBITDA margin expanded 240 basis points compared to last year when excluding the cyber insurance recovery. Now, let's move to the 4 pillars of our turnaround plan. And the progress we are making against each. Number 1, refranchising Number 2, improving returns on capital. Number 3, expanding margins. And Number 4, driving sustainable, profitable US growth. Our first pillar, refranchising, enables us to drive more profitable system wide sales while accelerating new shop development through a capital light model. Earlier this year, completed the refranchising of Japan and The Western US with both transactions contributing to a reduction in net debt. Today, franchisees generate approximately 42% of our system wide sales and we expect that percentage to grow as we continue to pursue additional refranchising opportunities. We are disciplined in selecting the right partners both internationally and in the US to maximize value and position the brand for long term growth. We recently announced a development agreement with an existing franchisee to open 33 new doughnut shops across the New York City Metropolitan Area over the next 5 years. This is an exciting opportunity to expand our presence in 1 of the country's largest consumer markets through our capital light franchise model. As we look ahead we will continue to evaluate capital efficient ways to expand the brand. The second pillar of our turnaround is improving returns on capital. Across the business, we are reducing capital intensity and making better use of our existing assets while our franchisees invest to expand our footprint. Year to date we have reduced CapEx by approximately 65%, a meaningful improvement that supports our goal of generating positive free cash flow in 2026. This year, we have already announced 3 new international franchise agreements. Estonia, Mauritius, and The Netherlands Today, we announced a fourth agreement to enter Pakistan with Grave McKenzie restaurants to open 120 donut shops over the next 5 years. We are also seeing sustained demand in existing international franchise markets. Including Brazil, Spain and recently refranchised Japan, by the end of the third quarter, there were 98 new shop openings. Nearly all of which are franchised. Led by India, South Korea and The Middle East. The strong interest in development from franchisees around the world speaks to the strength of the Krispy Kreme brand and the significant opportunity to expand our global footprint through our capital light franchise model. We are actively pursuing new ways to expand Next week, 1 of our long time franchisees will open a reimagined shop prototype in Las Vegas. Designed to bring the Krispy Kreme hot light experience and fresh hot Original Glazed doughnuts to consumers in a smaller shop format. While we are in the initial phase of testing the new Hotline Express concept, we are encouraged by the interest we have already seen from franchisees as we focus on ways of improving capital returns within our hub and spoke model. The third pillar of our turnaround is expanding margins. We are simplifying the business and taking meaningful costs out of the P&L. These actions are producing significant year over year margin improvement especially in our US segment. In The US we are making donuts more efficiently through enhanced production planning, labor optimization, and streamlined hub operations resulting in a meaningful reduction in labor spent. We are also increasing delivery efficiency through improved route management and demand planning as well as optimized production and delivery schedules. The fourth pillar of our turnaround is sustainable profitable growth in the US across our donut shops, digital channels, and fresh delivery. Our donut shops are an important driver of profitable US growth. We continue to see success with our expanded core menu, led by the iconic Original Glazed doughnut. Along with a steady rotation of seasonal collections and innovative limited time offerings, including our recent popular Pokemon collection. Each plays an important role. Our core menu delivers consistency and value. Seasonal collections provide variety and new flavors and limited time offerings create excitement and cultural relevance. Together, they keep the brand fresh, give consumers new reasons to visit and drive sustained demand as we saw last weekend with a successful Halloween. Our digital channel continues to be a key driver of US growth, as a result of our ongoing improvements to our proprietary digital platforms. Including more convenient payment options as well as the continued growth of our loyalty program. Which now has more than 18 million US members. Since announcing our turnaround plan, just over a year ago, we have taken action to improve profitability and position our US fresh delivery business for sustainable growth. As a reminder, after a thorough assessment of our fresh delivery network last year, we exited approximately 1.5 thousand underperforming doors across the channels we serve today. Since then, we have been adding more profitable high volume doors and fresh delivery returned to growth in the third quarter. We have added 715 net new doors year over year. Which have higher average weekly sales than those we exited. In total, together with our franchisees we now serve approximately 7.7 thousand fresh delivery doors across The US. Sustainable profitable growth in fresh delivery depends on having the right conditions in place namely high traffic locations and prominent in store visibility. We are gathering insights specific to each channel including mass, grocery, club, and convenience, to better understand what drives success. In mass, including Walmart and Target, securing planogram placement with customers drives growth and unlocks digital opportunities. In grocery, more prominent front of store placement increases visibility and drives sales. We are working with several customers to improve our placement and make our doughnuts more accessible to shoppers. Publix is an example of this and has been a key driver of our recent door growth. In club, which includes Costco and Sam's Club, large store size and seasonal product rotations require a different approach. At Sam's Club, we have seen success by improving the prominence of our displays making it easier for customers to find our products. In August, we concluded our latest rotation with Costco in the US and we are now exploring different opportunities with them. Including seasonal offerings and roadshows. And finally in convenience stores where we sell mostly loose donuts traffic trends are very important. We believe increased fuel prices have been a factor in reduced traffic this year. As a result we are reviewing our footprint to optimize our door counts based on where we believe the conditions are right to support sustainable profitable sales. Overall, we are pleased with the progress in fresh delivery and remain focused on adapting our approach to drive sustainable profitable growth. On the topic of GLP-1 medications, our research shows that Krispy Kreme consumers who use GLP-1s are just as likely as non users to purchase sweet treats for holidays. And special occasions. While we recognize that GLP-1 users generally have lower appetites, our research shows that they have higher purchase consideration for Krispy Kreme. We believe this reflects 3 factors. Quality matters when consumers choose to indulge Krispy Kreme is typically purchased just 2 to 3 times per year often tied to special occasions. And our fresh doughnuts are often purchased for others. With approximately 80% shared and 40% gifted. We believe our focus on quality, occasional indulgence and sharing positions us well as consumer habits evolve. Example, our growing minis category featuring doughnut minis, dolls, and mini coolers offers consumers a compelling value and greater variety in smaller sharing sizes. As we approach the end of the year, we are pleased with our operational and financial momentum. The actions we have taken are positioning Krispy Kreme for sustainable, profitable, long-term growth and delivering the outcomes our turnaround plan was designed to achieve. Improve financial flexibility, reduced capital intensity, expanded margins through greater operational efficiency and improved sustainable, profitable U.S. growth. With that, I will turn the call over to Raphael to review our financial results.

Raphael Duvivier: Thank you, Joshua. I am pleased with our continued operational improvements and the strong financial momentum we have experienced this year. Driven by our turnaround plan. As expected, due to refranchising year to date net revenue is down to $1 billion but our adjusted EBITDA of $97 million is up $13 million versus last year. Reflecting the benefit of our turnaround actions. Adjusted EBITDA margin improved by 200 basis points to 9.5%, and free cash flow increased by $82 million Our leverage is now 1.2 turns lower than it was at the end of 25. Now turning to the third quarter. Net revenue $329 million, down 12%. Primarily due to refranchising of our Western US and Japan businesses. Organic revenue, which excludes refranchising and FX, was essentially flat. Adjusted EBITDA of $35.3 million decreased 13.1%, due primarily to lapping the $9.3 million cyber recovery in the third quarter of last year. Excluding the 1-time cyber recovery, our adjusted EBITDA increased 13% and our adjusted EBITDA margin improved by 42 basis points, driven by productivity initiatives across our network and cost controls at the corporate level. In our US segment, organic revenue increased 0.9%. Driven by fresh delivery and digital. We continue to take disciplined actions to optimize our production hubs, which is reflected in more than 10% growth in our sales per hub year over year. As reported, adjusted EBITDA for The US segment declined to $13.9 million, excluding the $9.3 million cyber related insurance recovery in the third quarter of last year, our US adjusted EBITDA grew 18%, and adjusted EBITDA margin increased 320 basis points, reflecting greater operating efficiencies. In our International segment, organic revenue was down 5.4% due primarily to declines in The UK partially offset by growth in Canada. Adjusted EBITDA of $20.1 million was 13.2% lower driven by the refranchising of Japan. Additionally, our adjusted EBITDA margin for the international business was 16.3%, a slight decrease of 20 basis points. In The UK, we are starting to see improved profitability following operational improvements we implemented during the summer. In October, we also implemented a restructuring of the UK production network to increase efficiencies and profitability. In our Market Development segment, organic revenue grew 14%. Driven by growth in royalty revenues from The U. S. Middle East, Japan, and Brazil. Adjusted EBITDA increased 54% to $18.5 million due to the refranchising of the Western US and Japan. Adjusted EBITDA margin decreased to 41.6%. Driven by a higher domestic versus international revenue mix associated with refranchising. We reported adjusted earnings per share of $0.06, an improvement of $0.05 versus last year. This was driven by a favorable tax rate, our refranchising deals and cost efficiencies from our turnaround plan, partially offset by the cyber insurance recovery in 2025. Moving to our balance sheet. As I said previously, our net leverage ratio of 5.5x was 1.2 turns better than at the end of 2025. We are pleased with the progress, but continue to view lowering our leverage ratio as a top priority. We expect to do this through net debt reduction and adjusted EBITDA growth and still anticipate our full year net leverage ratio to be below 5.5x. Free cash flow, which includes approximately $4 million in transaction related fees. Improved by $82 million in the first 3 quarters of 26. Driven by our focus on reducing capstone intensity. We continue to expect to report positive free cash flow of more than $15 million in 2026. Our year to date CapEx of $28.6 million decreased 65% compared to the same period last year. We continue to focus our invested capital on repair and maintenance of existing infrastructure. Which is in line with our asset light business model and should contribute positively to free cash flow generation. Moving to our financial targets. I am pleased to say we are improving and narrowing guidance for some metrics as laid out in our earnings release. This includeg and narrowing our net revenue range to $1.35 billion to $1.4 billion. Maintaining our adjusted EBITDA range of $140 million to $150 million despite inflation in global commodities this year. Maintaining our system wide sales growth range of 2% to 4% in constant currency. And lowering and narrowing our CapEx to $40 million to $45 million. Finally, before I close, I wanted to provide context for our 2026 adjusted EBITDA guidance. Our guidance range represents an increase of $25 million to $35 million compared to 2025 excluding the $14.1 million cyber insurance recovery last year and an estimated $11 million of adjusted EBITDA from our WKS and Japan operations that were refranchised in March 2026. We believe this allows investors to better understand our 2026 guidance and the positive impact of our turnaround is having on our financials. Operator, you may now open the line for questions.

Operator: Thank you. We will now be conducting a question and answer session. We ask that you please limit yourself to 1 question and 1 follow-up. If you would like to ask a question, please press 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your line from the question queue. Our first question is from Sara Senatore with Bank of America. Proceed with your question.

Sara Senatore: Hi. Good morning. This is Ashley on for Sara. Thanks for taking my questions. So you raised the fiscal 26 revenue guide by $100 million at the midpoint. But you held the adjusted EBITDA flat. Can you just walk through what drove the higher revenue outlook and why it does not carry through to EBITDA? Is that mostly just lower margin product sales to refranchise partners?

Raphael Duvivier: Hey. Hi. Thanks for the question. This is Raphael. Look. We are pleased we could raise our revenue guidance range, actually, tighten it in such, what I call it, the dynamic macro environment. And with that actually maintaining the EBITDA range, guidance. Look. We have worked hard this year to control cost. We believe. Look, the financial results combined our increased revenue guidance speak to the results of the turnaround plan. Okay.

Sara Senatore: Thanks. Just as a follow on the New York City development agreement, for the 33 shops. it is it is the first sizable US franchise development commitment we have seen. Know, should we read that as a template for other company operated U.S. markets, or is it specific to that franchisee and territory?

Joshua Charlesworth: Oh, no. We are really pleased to be able to announce the expansion in New York. This is an existing franchisee we have been working with for a few years, to add more than 30 shops over the next 5 years, exciting to bring Krispy Kreme to more places, make it more convenient for people to access our doughnuts. And in fact when you look across The US we have great partners across The U.S. already, more than 20 franchisees. Our biggest being the WKS Restaurant Group, which is also looking to expand in the West. So, we are pleased to work to bring our doughnuts to more places and make it convenient for people to access them.

Sara Senatore: Great. Thanks for the color. I will pass it back.

Operator: Our next question is from Brian Harbour with Morgan Stanley. Please proceed with your question.

Brian Harbour: Thanks. Good morning, guys. I guess, just because there is so much movement in the P and L right now. it is a little bit hard to discern this, but just like demand generally in The US, you know, how would you characterize that Maybe Q3 versus the start of the year, how do you think it looks into Q4 here?

Joshua Charlesworth: Yeah. Hi, Brian. Well, we are seeing sustained consumer demand in, as Rafael described, this dynamic macro environment. The areas where we are seeing most growth in The U. S. Are in our fresh delivery channels, internationally it is with our franchise partners. When you go deeper and look where the growth is being driven, we are seeing value is important to our consumer. We are seeing strength with our dozens business and in fact the promotions with our double dozens where we provide a discount on the second dozen and performing particularly well. But interestingly, in this environment, Krispy Kreme is a sharing and special occasion business also does well. We saw our Pokemon collection. It was very popular. Earlier in the quarter. And just last weekend, we had a successful Halloween. So overall, sustained demand is what we are seeing.

Brian Harbour: Okay. Thanks. And just I guess, currently, and then, as we start to think about next year, where are you on sort of COGS inflation across your 3 major inputs plus also just the trucking. I do not remember, you know, how you I assume there is a fuel cost that gets passed through. I do not remember exactly how much. And what the timing is, but could you just talk about that a little bit?

Raphael Duvivier: Hey, Brian. This is Raphael. Look. Inflation, I would say, is higher, certainly, in both commodities and fuel. If you think about edible oils, we have seen what is a significant increase since last quarter. But we have been able to manage that. that is why we are keeping guidance. Look, we are not discussing 2027 outlook yet at this time. But, our plans continue to cover, food commodity inflation through cost initiatives and some modest and selective pricing.

Operator: Our next question is from Jon Tower with Citi. Please proceed with your question.

Jon Tower: Hi. This is Gauss on for Jon Tower. I was wondering if you could maybe provide some color on how volumes have been at big-box retail partners. Relative to your initial expectations and how much additional opportunity do you have in The US?

Joshua Charlesworth: Could you just repeat the question? Gautam, I just did not quite catch it.

Jon Tower: Yeah. Sure. Sorry. Can you hear me?

Joshua Charlesworth: Yeah. Go for it.

Jon Tower: Yeah. If you could just provide some context on volumes of big-box retail partners How is that tracked relative to your initial expectations? How much additional distribution opportunity do you have across The US?

Joshua Charlesworth: No, thank you. So by big box, retailers, I assume you are referencing the likes of Walmart and Target where we have been adding distribution over the last year. We are pleased today to share that our fresh delivery business as a whole is back to growth after the interventions we made last year to make sure it is sustainable, profitable growth. And those big box retailers are an important part of that turnaround. We have been adding distribution with them because they have higher traffic and because the partners really understand the importance of merchandising and prominence in stores. So, you know, we are pleased with the momentum we are seeing with them. And we still see plenty of opportunity. We are not in all the Walmarts or Targets. In fact, we are in less than half of both. So, we look forward to continuing to work with them to expand access to our doughnuts.

Jon Tower: Thank you.

Operator: Our next question is from Daniel Guglielmo with Capital 1 Securities. Please proceed with your question.

Daniel Guglielmo: Hi, everyone. Thank you for taking my questions. You all have made great inroads with the franchise development growth. And in the opening remarks, you mentioned a few new countries that you are adding as well. Can you just remind us what the operational lift is for you all to stand up a new franchise market in a different country? Sure you have a pretty good playbook at this point, so any insights would be helpful.

Joshua Charlesworth: Yes. We do. We have been adding countries to the system for a number of years now. We have a team in Dubai dedicated to supporting those international franchise partners as well as here in North Carolina, we are well used to helping people source ingredients. We have a very well thought through network across the world and supply chain that helps people open up new markets As a reminder, we actually still make the equipment here in North Carolina and service it. And so we are able to support the various partners directly. And it was exciting today to announce a fourth country for this year as an agreement we have announced this time with Pakistan. And the business there that we partner with, Barry McKenzie Restaurants, they have outlined a commitment to 120 new shops in the next 5 years. So it was a great addition to our pipeline of growth with international franchisees. Thank you.

Daniel Guglielmo: Okay. Awesome. Thanks. And then on the 2026 goals from last year, 1 goal was to target 2 to 3 international refranchising deals. You got Japan done earlier this year, but there are still more to go. So can you just talk about how those conversations have changed throughout the year with interest rates rising quickly kind of across the globe? Any color there would be helpful.

Raphael Duvivier: Hi, Daniel. Good to hear from you. This is Raphael. Look. As you said, we are pleased with the deals that we did this year, I would say, not only Japan, but the WKS and as you can see, they are they are flowing through the P&L as expected. On your comment, we have still kept our goal of 2 to 3. We are still pursuing 1 additional 1. I think it is important to remember that as we think about partners, we want to make sure that we are bringing partners that have capital and we need to commit for growth. And we do deals that are accretive to the P&L from a DCF, but also from an EPS perspective. Which is what we have accomplished so far. So we keep you updated as we progress on that front.

Joshua Charlesworth: 1 thing I will add is in Japan, obviously, we refranchised earlier this year and we are pleased to see shop openings and growth momentum with the new partner there. And that is top of mind for us is opening new shops. Opened 98 this year with our franchise partners around the world. So refranchising is an important enabler to grow the brand and expand.

Daniel Guglielmo: Great. Thank you.

Operator: Our next question is from Rahul Krotthapalli. Please proceed with your question.

Rahul Krotthapalli: Hi. Good morning. This is Crystal on for Rahul. I wanted to first ask on competition. Given some other sweet treat concepts have been struggling, is there any opportunity for you to market your way into this to take some share?

Joshua Charlesworth: Well, you know, I focus on what we do best and we are pretty differentiated which is offer awesome fresh donuts, particularly for sharing and gifting occasions. This quarter we saw our limited time collections did really well, Such as the Pokemon and as I said the seasonal celebrations Some other innovation that we have brought is smaller sharing sizes to bring variety and smaller portions, smaller sharing portions for our customers. We have a Mini Crullers range that is still relatively new and growing well in our fresh delivery channel for example. So our job is to bring to the consumer what they are looking for and make it easier for them to find And we have certainly been benefiting from making those doughnuts available in more convenient locations. And so that will be our focus and let them make the choice.

Rahul Krotthapalli: Oh, perfect. And then also, given the category tailwinds that specialty beverage coffee is seeing, would refreshing the platform makes sense or be a priority to improve profitability? And do you see any maybe an attached opportunity?

Joshua Charlesworth: We are very proud of our coffees and beverages. But our focus is naturally the fresh donuts. that is what we absolutely excel in welcoming consumers to our donut shops, bringing the donuts, the fresh donuts to more convenient locations like our fresh delivery partners and also online and digital channel making it more convenient to pick up. I will tell you that in the fourth quarter, it is our peak season. We are very focused on meeting that demand for the different celebrations and seasonal moments that people are looking for our doughnuts for. Thank you.

Operator: We have reached the end of the question and answer session. I would like to turn the floor back over to Joshua Charlesworth for closing comments.

Joshua Charlesworth: We are pleased to have delivered another consecutive quarter of significant progress on our turnaround to strengthen the balance sheet and drive sustainable profitable growth. We are confident in the foundation we are building for Krispy Kreme's next era of growth. I believe our results continue to demonstrate that we are well on our way. Thank you very much for joining us.

Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.