Krispy Kreme(DNUT) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the quarter ended July 4, 2021, detailing operations, financial position, cash flows, and related accounting notes Condensed Consolidated Statements of Operations (Unaudited) | (In thousands) | Quarter Ended July 4, 2021 | Quarter Ended June 28, 2020 | Two Quarters Ended July 4, 2021 | Two Quarters Ended June 28, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $349,186 | $244,972 | $670,995 | $506,188 | | Operating income/(loss) | $9,125 | $(568) | $22,805 | $3,830 | | Net loss | $(14,996) | $(11,685) | $(15,374) | $(22,633) | | Net loss attributable to Krispy Kreme, Inc. | $(17,142) | $(12,630) | $(20,203) | $(24,145) | | Net loss per share — Basic & Diluted | $(0.13) | $(0.10) | $(0.16) | $(0.19) | Condensed Consolidated Balance Sheet Highlights (Unaudited) | (In thousands) | As of July 4, 2021 | As of January 3, 2021 | | :--- | :--- | :--- | | Total current assets | $146,821 | $164,093 | | Total assets | $3,093,580 | $3,060,995 | | Total current liabilities | $1,047,886 | $497,835 | | Total liabilities | $2,271,774 | $2,212,636 | | Total shareholders' equity | $821,806 | $848,359 | Condensed Consolidated Statements of Cash Flows (Unaudited, Two Quarters Ended) | (In thousands) | July 4, 2021 | June 28, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $56,845 | $13,936 | | Net cash used for investing activities | $(86,261) | $(40,705) | | Net cash provided by financing activities | $30,553 | $215,254 | - The company completed its Initial Public Offering (IPO) on July 1, 2021, selling 29.4 million shares of common stock at $17.00 per share, receiving aggregate net proceeds of $459.7 million after deducting underwriting discounts and offering expenses[40] - The company operates and reports through three segments: 1) U.S. and Canada, 2) International (including U.K., Ireland, Australia, New Zealand, and Mexico), and 3) Market Development (global franchise operations and company-owned shops in Japan)[39] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2021 performance, highlighting 42.5% net revenue growth and 22.5% organic growth, driven by omni-channel strategy and global expansion, alongside liquidity and capital resources Overview and Key Performance Indicators The company reported strong Q2 2021 momentum, with 22.5% organic revenue growth, driven by omni-channel expansion, increased global points of access to 9,575, and improved Sales per Hub Q2 2021 Financial Highlights vs. Q2 2020 (in thousands) | (in thousands) | Q2 2021 | Q2 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Net Revenues | $349,186 | $244,972 | 42.5% | | Net Loss | $(14,996) | $(11,685) | -28.3% | | Adjusted Net Income | $20,469 | $5,780 | 254.1% | | Adjusted EBITDA | $52,393 | $29,469 | 77.8% | - The company generated 22.5% organic revenue growth for the quarter ended July 4, 2021, and 15.2% for the two quarters then ended[123] - Global points of access increased significantly to 9,575 as of July 4, 2021, from 5,635 as of June 28, 2020, primarily driven by the expansion of Delivered Fresh Daily (DFD) doors[132] - In the U.S. and Canada, average Sales per Hub reached $3.6 million on a trailing twelve-month basis, up from $3.2 million in 2019. In International markets, Sales per Hub reached $8.0 million, up from $6.4 million in the previous year[152] Results of Operations Q2 2021 total net revenues grew 42.5% to $349.2 million, with 22.5% organic growth, driven by strong International recovery and U.S. & Canada expansion, despite increased net loss due to IPO costs Quarterly Net Revenue Growth by Segment (Q2 2021 vs Q2 2020) | Segment | Total Net Revenue Growth % | Organic Revenue Growth % | | :--- | :--- | :--- | | U.S. and Canada | 25.3% | 3.9% | | International | 159.3% | 125.9% | | Market Development | 10.4% | 17.0% | | Total Company | 42.5% | 22.5% | Year-to-Date Net Revenue Growth by Segment (H1 2021 vs H1 2020) | Segment | Total Net Revenue Growth % | Organic Revenue Growth % | | :--- | :--- | :--- | | U.S. and Canada | 27.8% | 7.8% | | International | 63.8% | 46.5% | | Market Development | 9.7% | 9.0% | | Total Company | 32.6% | 15.2% | - Operating expenses as a percentage of revenue increased to 45.2% in Q2 2021 from 42.5% in Q2 2020, driven by franchisee acquisitions, labor investments for DFD expansion, and staffing for post-COVID recovery[189] - Selling, general and administrative (SG&A) expenses increased by 46.9% in Q2 2021, primarily due to $6.7 million in IPO preparation costs and increased share-based compensation expense[190] Capital Resources and Liquidity The company's liquidity improved significantly in H1 2021, with net cash from operations reaching $56.8 million, and successful debt restructuring including the repayment of a $500 million Term Loan and $344.6 million in Related Party Notes post-IPO - Net cash provided by operating activities increased to $56.8 million for the first two quarters of 2021, compared to $13.9 million for the same period in 2020, due to improved operating results and working capital management[233][235] - In June 2021, the company borrowed $500.0 million under a new Term Loan Facility, which was paid off in full and terminated on July 7, 2021, using IPO proceeds and a drawdown on its revolving credit facility[230][242] - The company paid off its Related Party Notes, with an outstanding balance of $344.6 million as of January 3, 2021, in full during the second quarter of 2021[240] - As of July 4, 2021, the company was in compliance with its 2019 Facility covenants, with a Total Net Leverage Ratio of 2.92 to 1.00, an improvement from 3.98 to 1.00 at the end of fiscal 2020[244] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from commodity price fluctuations, interest rate changes on variable-rate debt, and foreign currency exposure, which are mitigated through derivative instruments - The company is exposed to commodity price risk for ingredients like flour, sugar, and shortening, as well as gasoline for its delivery vehicles[252] - Regarding interest rate risk, a 100 basis point increase in the one-month LIBOR would result in a $1.4 million increase in annual interest expense on the company's unhedged variable-rate debt[253] - For foreign currency risk, a 10% change in the exchange rates of the British pound, Australian dollar, and Mexican peso would have impacted fiscal 2020 total net revenues by approximately $23.0 million[255] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of July 4, 2021, with no material changes to internal control over financial reporting - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of July 4, 2021[258] - There were no changes during the fiscal quarter ended July 4, 2021, in the company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting[259] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, including a $0.4 million class action settlement for Insomnia Cookies and ongoing disputes with K Asia Ventures and TSW Foods, LLC, none expected to materially impact financials - A class action lawsuit against Insomnia Cookies regarding employee wages has reached a settlement in principle for $0.4 million[93] - The company is engaged in ongoing legal proceedings with K Asia Ventures and TSW Food, LLC, and intends to vigorously defend its position in these matters[91][94] Risk Factors No material changes to the risk factors previously disclosed in the company's IPO Prospectus for the fiscal year ended January 3, 2021, have occurred - No material changes to the risk factors disclosed in the IPO Prospectus have occurred[263] Unregistered Sales of Equity Securities and Use of Proceeds The company completed its IPO on July 1, 2021, raising $459.7 million in net proceeds, used to repay a $500.0 million Term Loan and repurchase shares, with an additional $56.1 million from an over-allotment option - The company completed its IPO on July 1, 2021, selling 29,411,765 shares at $17.00 per share, resulting in net proceeds of $459.7 million[264][265] - The net proceeds were used to repay the $500.0 million Term Loan Facility and to repurchase approximately 2.3 million shares of common stock from certain executive officers[266] - On August 2, 2021, underwriters exercised their over-allotment option, purchasing an additional 3.5 million shares and providing the company with another $56.1 million in net proceeds[267] Defaults Upon Senior Securities No defaults upon senior securities were reported - The company reported no defaults upon senior securities[268] Mine Safety Disclosures No mine safety disclosures were reported - The company reported no mine safety disclosures[269] Other Information No other material information was reported - The company reported no other information[270] Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, material contracts, and required certifications from the CEO and CFO - A list of all exhibits filed with the quarterly report is provided, including corporate governance documents, material contracts, and required certifications[272]