Well, thank you. I am Brian Mullan, restaurant analyst here at Piper Sandler. Very happy to have the Krispy Kreme team. We got Josh Charlesworth, Chief Operating Officer, Jeremiah Ashukian, Chief Financial Officer. Thank you both for being here.
Hopefully, we could just start with the US business. You know, you've got a network of hubs across the country that, for the most part, they're effectively Krispy Kreme stores or restaurants. And in many of those hubs, you're serving spokes around those hubs. Since coming public, you were originally targeting just drug and convenience, and now you've expanded that quite a bit, or excuse me, grocery and convenience, and now you've expanded that. On the most recent earnings call, you made an interesting comment.
You essentially said, "Maybe the hub network isn't designed entirely for the, the breadth of opportunity you see across DFD." So I was wondering if you could just maybe elaborate on that, give a little insight on, on what's behind that, what you're thinking if you, if you were to expand the capacity, production capacity?
You bet, Brian. And, yeah. Hi, everybody. Still good morning. So I'm Josh Charlesworth. And, yeah, it's really interesting how we've changed the model of Krispy Kreme. It's all about two things: getting access to the brand. Number one reason why someone might not purchase Krispy Kreme, they just can't get it. And putting it top of mind because don't tell anybody, but nobody needs a donut in their life, but let's make it something that they're excited, a little moment of joy, to get behind. So, the way we've done that is by taking these Hot Light Theater Shops, which can sell retail on their own, typically on average, about $2-$3 million.
They can do more, but $2-$3 million a year, and actually take those donuts to where the customers are, off-premise, to these grocery convenience stores, but then additionally, additionally, new channels. So we have 225 of these production hubs, we call them, where we make the donuts. But 143 of them are then also sending the donuts off-premise. Just actually in the U.S., 6,500 points of access. Globally, 12,500 points of access, places where you can get our fresh daily donuts made that morning at the local donut shop. We call that channel Delivered Fresh Daily.
It's been growing consistently over 20% for a couple of years now, and represents 24% of sales already in the U.S. now. You know, these hubs, these 143 hubs that do these off-premise sales, instead of $2-$2.5 million of retail sales, they're doing more like $4.7 in the last quarter, $5 million, some of them doing up towards $10 million annual revenue because they don't rely on those people who have to travel on average. They actually do travel on average 10 miles to the donut shop. They can go to local Walmart, local Kroger, interestingly, in new channels, Walgreens, the Costco, or indeed, a test we're doing with McDonald's at the moment.
So many places, it's still a fraction of where they could be, but many places where we're doing that. These hubs, though, these Hot Light Donut Shops, some of them are decades old. They were never built with this in mind, so they have big lobbies, restaurant areas, but people don't come in anymore, particularly since the pandemic, or at least not in the same volumes for that. It's great to have the donut case. They want to see and have a hot donut off the line. They love that, but they generally want to move on with their lives. The drive-thru is more popular than ever before. Most of the stores have a drive-thru, and it's more than half the sales. E-commerce, of course, is a big channel now as well.
So the whole donut shop has changed and evolved. When you look forward, 24% of sales now, but in the U.K., Australia, we've been doing this for longer, more than 40% of our sales are in this Delivered Fresh Daily channel. So the production hubs in the U.S. of the future are gonna need to evolve. Bigger back of house, really be scaled up using automation and other techniques, to be able to service trucks out the back and be ready for that kind of expansion. And the donut lines themselves can do $10-$12 million of revenue. So, we've got a much better model now looking forward for return on capital and profitability, and the productivity is coming through in those places where we've done this.
Thanks, Josh. That's a, that's a great overview. It's helpful. So if I heard it right, 225 hubs, you know, 143, essentially with spokes. You know, just remind everyone, I think you've gone through a process of optimizing, maybe how many of you either closed or converted over the last 12 months and where you are in that process? And then importantly, you know, the hubs you have are servicing, I think you said 6,500 DFD doors. I think you've said in the past, you think you can service about 12,000 just with the existing hubs. So do I have that right? And to service 12,000, hypothetically soon, you know, does that require any capital investment, or that's... Should we think about it like minimal capital investment?
Minimal, yeah.
Just the hubs that are open.
Yes, when we explained a lot of the model at our Investor Day in December. There's also material from that, if those of you interested in looking it up, and we said then there were 127 hubs and spokes. That was in December. We've gone up to 143. What we've been doing is converting hubs without spokes, the ones that have the lower sales, and therefore lower productivity and profitability, to do this. Why can't we go faster? It's not so much like capital, it's more just physically, how do you rearrange a store, move the counter, how do you get access for a truck in the back? That kind of thing.
We actually chose to close 14 of the hubs without spokes because we realized that we couldn't apply this model there, and they weren't high-performing, often in quite remote locations, often many, many years old. We still have some hubs without spokes in the U.S., but they're generally beloved by their local communities, and people love to go to them, particularly in the Southeast. And so we'll keep those. They're a nice generator of funds for the expansion that you talked about. So yeah, you know, we service 6,500 points of access in the U.S. today.
We've done some work, particularly triggered by the recent test with McDonald's, to see what it would take to expand faster than we talked before. We said that our long-term objective was to get from 6,500 we have today to about 15,000 points of access. And so we started to say, well, what, you know, what is—we didn't expect that this would all go as fast as it's going. I mean, it's going really well. We're being approached by new potential partners all the time. We just announced a deal with Amazon Fresh, which could be interesting if we can get on their Fresh platform, and obviously, e-com delivery. We are doing a test with Target, and indeed, McDonald's has approached us.
So to get from 6,000 to 12,000 would require us to expand the fleet, add more drivers, adapt some operating procedures in the back of the store, minimal capital investment, but that's about as far as we go, and it does leave some parts of the country still underserved. So that would require us to go forward and invest in more production hubs, which we've been largely focused on getting what we can out of the existing ones because of that capacity, that production line is, you know, you can get more donuts. 270 dozen an hour, those machines can make. So it's a lot of donuts, and we want to make sure we leverage that before we've been investing in new.
Thank you. That, that's a good overview, which is a segue to, you know, where I started on the call, you know, potentially looking at investing in more production capacity. I think you laid out for investors, which is very helpful. You know, you believe in order to service another 8,000-10,000 DFD doors, in the U.S., it would require about a 10%-15% lift in hubs. It sounds to an outsider, you've really done a lot of work on this already. You've alluded to it just now, but, you know, so how do you want investors thinking about if you were to do this, how much each hub might cost?
And how long would it take to build a hub, and would you envision them looking like the Hot Light Theaters now, or could this be a mix of where some of these are what I might think of as a factory, a production factory without customers coming in?
It's a really interesting time for us. I mean, we only really moved to this Delivered Fresh Daily model in 2019. In a meaningful way, in 2020, we really started to roll it out, and obviously, it was a big part of our IPO communication in 2021. And so, you know, when you start to look at these additional channel opportunities, you can start to think about this, this is a really big opportunity. And so you start looking ahead, the drug initially, we went into drug.
That was quite promising, particularly in the New York area with Duane Reade. It's opened up Walgreens more broadly. I think that the QSR channel is just so much bigger. I mean, what, what-- how many QSRs are there? Probably about 400,000 out there in the U.S.
Total TAM, yeah. If you, if you look at kind of grocery CPG, roughly 300,000, it's closer to 400,000-500,000 with QSR contemplated in that, so.
Yeah, it's suddenly, you know, an ambition of 15,000 looks a little short. And, you know, you realize what the opportunity can be. This test with McDonald's is really interesting because what we're finding in this case, and the same in club and grocery and drug, is they're almost fully incremental. People don't go to the Walmart to buy Krispy Kreme. They go into Walmart and they go, "Oh, wow, there's a Krispy Kreme. I'll grab that." It's an infrequent purchase, it's an impulse purchase, it's a shared purchase, it's something that's often gifted. Now we've seen they go to McDonald's, and they're doing the same. Different usage occasion.
The McDonald's might be in next on the same pad as a Krispy Kreme, and it might well be in the parking lot of a Walmart, and we're not seeing noticeable cannibalization between them, which is really interesting. So we've started to think more and more about what it would take to deliver to more and more sites. You know, we picked a number of 8,000-10,000 for an obvious reason, because that would be enough to cover McDonald's, which is obviously a trigger for doing the work. But we haven't decided with McDonald's. I'm sure we'll talk about them in a moment, yet to roll out, but we are preparing as if we would, either with McDonald's or somebody else, because the case study is there.
You know, we believe in it now as a growth channel for Krispy Kreme. So we've identified about 30-35 production hubs will be required to cover a partner like McDonald's across the country. And there will be different types because there's still a role for the Hot Light Theater Shop, particularly in places where you can't get a donut today. If you're in Boston, if you're in basically New England, if you're in Minneapolis, you can't get a Krispy Kreme, and we get asked all the time, "Why can't we get one?" Our number one complaint is, you can't get one. And so, you know, we would build out sites like that there with the traditional load-out docks.
But in some parts where we already have the Hot Light present, we can go faster by going to commercial industrial real estate. We can go faster by using existing buildings and put a production line, some trucks out the back and get going pretty quick. We make the production lines in-house ourselves, and we're in North Carolina. We have no issue with the ingredients and the sourcing of all the upside there. It would just be drivers and trucks, and naturally, we've been ordering trucks. That's not a difficult one to make a decision around. So, you know, you're talking, what? $3 million-$6 million for a hub?
On average, yeah, depending on the size and how many lines and those types of things, square footage. But yeah, in roughly nine to 12 months, depending on the complexity of it, to open and establish, so.
Yeah. And, if you put two lines in, which we could do, I could do $20 million.... We're testing some automation right now. So you could start to get paybacks instead of six or seven years, which was traditionally the Krispy Kreme model, which has been improved by this off-premise sales. You start to get under three years, which obviously is a lot more attractive.
That's really very interesting, and thank you for all that detail. I think it's very helpful. And you referenced McDonald's, there's a test. Whether it's McDonald's or someone else, a large chain, you know, the opportunity seems to be there for Krispy Kreme. It feels, again, on the outside, is there a little bit of a chicken or the egg situation in terms of you'd have to invest the capital upfront? Again, whether it's McDonald's or someone else, would you need a partnership? How much visibility would you need to commit company capital to build? And then or is it? Have you seen enough across all the channels, QSR, drug? Like, what do you need to see to start building ahead of partnerships?
The model I've described is happening today. It's not dependent on some moment. We have sites in the U.S. that are seeing productivity increase and profitability increase because we're adding DFD, and we're doing it through multiple partners. So we can invest and are investing anyway. The question of how much, how fast is, if we obviously had a national deal with a rollout of that scale, then you would go faster. And you might make some different decisions to meet the needs of that customer. But you know, we, Krispy Kreme is not successful, whether on- with or without McDonald's. It's successful because people are looking for the convenience.
They're looking for reasons to go and find it more easier for them, and McDonald's is a great possible partnership in doing that. So would another QSR, so would a grocery club, convenience, gas station, or even our own fresh shop. So they all count. I don't know if you want to say any more about the capital and where it come from-
No, I mean, we have-
-how you think about it.
Great liquidity, so that's not an issue for us in terms of how we're thinking about that. Obviously, the EBITDA generated on an expansion like that would be significant and help pay for it as well. As Josh kind of mentioned, this is part of our plan as well. We've been continuing to build confidence in this model, and so it's a rollout plan. It's an acceleration of that, for sure, but it's no different than the strategy that we've had. So we feel pretty good in terms of affordability, and we're replacing capital to do this.
Thank you. And, you know, whether it's QSR or club or drug, a prominent national partner, you know, it hasn't happened yet, but if it were to happen, would that partner want exclusivity, and would Krispy Kreme be willing to give exclusivity? And, how important is that or not?
You know, around the world, we have done that very rarely. The Krispy Kreme brand is an incredibly powerful brand. We spend very little on media, yet we get media impressions equivalent or better than a Reese's or an M&M's. 40 billion media impressions typically a year based off earned media, where because people love to associate themselves with the brand. We just did a strawberry glaze partnership with Hailey Bieber, very successful. Successful for her, top Instagram follower influencer, and very successful for us. We don't pay any—we're not paying money for these things.
These are things because the brand is so successful, people want to be associated with it. People want to interact with the brand. So we don't have to give up the brand in order to expand. On the other hand, for the right commercial terms-
Mm-hmm.
Of course, you know, for the right assurance, we would obviously make the right commercial call that we need to. We have an exclusive deal in petrol convenience in Australia. Maybe one other somewhere, I can't remember.
That's worked very well. We built the brand together in Australia. So it's not like it can't work, but it's definitely not our going in point. And we're not there yet anyway. McDonald's has not decided to roll this out. They've not decided not to roll out either. They, they're obviously making other decisions around their product portfolio, which point to, you know, point positively. And certainly, you know, we know that operationally, they like the
Yeah, the execution for McDonald's has been great. You know, typically, you know, their existing McCafé-type products, 17, 18 touches in the back of house for their labor, to one or two with us, which is super, super powerful in terms of labor efficiency.
We believe the quality has been strong, service level strong.
Mm-hmm.
So, you know, I think, you know, from our point of view, it works. You know, they have to decide whether or not it works for their brand. We love the way they've represented the brand, on the menu board, separate packaging, it's very clearly Krispy Kreme. So they've been a great partner, so we hope it works out. And obviously, it's even a global opportunity given how many... I mean, we're in 35 countries, and there are many more, but there aren't many vendors like that, that they would be able to do that with. So it's, you know, it's an exciting opportunity. We look forward to seeing how it plays out in the coming months.
Great. Thank you. I'm gonna pivot a little bit here. I wanted to ask about just the Insomnia Cookies brand in the U.S. Maybe a little bit for those that aren't as familiar with the investment thesis behind that. How has it gone since you've taken ownership, and just talk about the domestic development opportunity and the pace, and I believe there's an innovation center build. What was behind that? Just really your outlook on that brand.
Maybe I'll go back in the history as Jeremiah wasn't there, and I'll hand over to Jeremiah. You were there, like, last week, weren't you?
Yeah, we were there last week.
So, back in 2018, it came on the market. It was a bit of a reactive moment, as sometimes these things are. Hot cookies, hot donuts, I mean, well, so you've got to take a look. 50% e-com business, growing consistently double digit, skewing heavily to a younger demographic. Krispy Kreme, at that stage, skewed more to an older demographic, no e-com business, and we knew we could help them, and we could learn from them. And since then, we've launched our e-com platform. It's now a significant part of our sales, 18.8%, like that, right?
Yeah.
We have supported them in procurement, supported them in financing and what have you, but it actually runs as an independent operator. It's really nice how it's gone national. So not many brands can do east and west as the Rockies and Mississippi, so it's great to see that.
They've done that through their young demographic, and we've seen the Krispy Kreme business become more and more of a younger skewing brand. 28% of our sales now are 18-24, and that continues to grow, which is great to see. So we've learned from each other. It's a great symbiotic relationship, but it's... We've never integrated them. We never wanted to do the combo like that.
It was more to back a business we were excited about, and a leader, a founder, CEO, who's remained there, and continues to grow fast and take that opportunity, and most recently, even international growth.
Yeah.
Do you want to give an update?
Yeah, for sure. No, and we continue to be on track and pleased with the progress. We're gonna open another 30-40 cookie bakeries this year, which is the highest they've ever opened, so we're building a capability and a muscle and organization expand fast.
'Cause we've got about 230?
230 currently.
Yeah.
So significant kind of growth potential there. Obviously, we talked about TAM around 4,000, so it's tremendous potential, both domestically and internationally. So we were up in Canada, oh, gosh, a couple of weeks ago.
Toronto, soft opening; Manchester in the U.K., soft opening. So those are up and running now, which is great. And so just a lot of kind of outlook, a positive outlook in terms of where this business can go in the future. The innovation center should open in Philadelphia in the next month or so. So we were up there last week, checking it out. Had a bit of speed wobble from a margin point of view that we're working through now.
But all in all, when you get a return like you do, $300,000-$400,000 to open up a cookie shop, AUVs of over $1 million, so the payback's nine months, you know, over 100 cash-on- cash return. It's just a great investment for us, and we continue to want to expand that rapidly.
Thank you. That's all great color. As the brand goes internationally, I didn't realize the soft openings were happening. That's encouraging to hear. How does... when you're going in a new market, when Insomnia is going in a new market, just consumer brand awareness, what's the approach? How do they go about that?
We have gone in both cases with the same model, which is associating ourselves with the student population.
Yeah.
So the one in the U.K. is in Manchester, right in the heart of the student area, and the same, the one in Toronto-
Yep
... York.
York University.
Yep.
Yeah.
We say they're soft openings, but there's lines out the door.
Mm-hmm
W hich is a good sign, and you know, it's a word-of-mouth, social media approach, which is the same that they've taken to get across the U.S. I mean, unlike so many other brands, it's so hard to go national in the U.S. They found it good because the students were all the same community. And so the way, certainly the way we're thinking about the U.K. launch is build up credibility in the U.K., Manchester, and then go to London. Obviously, London will be the big prize, but build credibility with that population in Manchester first, and that's the current thinking. Krispy Kreme is helping in the U.K.
Mm.
Insomnia is doing it themselves in Canada. And so we'll see how it plays out.
Yeah, and it's... To be honest, it's a very unique consumer when you think about that, you know, warm, delivered, late night. So 80% of the sales happens after 5 P.M., which is quite interesting. So when you think about even competitive set, we operate in different spaces, which we're able to coexist and not feel a kind of pressure from it.
I think it's like 40% after 11 P.M.
Yeah, 40% after 11 P.M. at night. So it's a very unique offering, and it's a very distinct kind of consumer, which has been great.
Understood. Thank you.
I don't blend in after 11 o'clock.
Yes, yeah.
Sorry about that.
You and me both. Just want to ask on the balance sheet. I think you're trying to get net leverage to about four turns by the end of this year, and you've got to target 2-2.5 turns by the end of 2026.
So delevering over the next couple of years. How did you want investors thinking about that within the confines, if you move forward on the production? How can you manage? If you were to go on an aggressive production capacity expansion, would that change those leverage targets? It might make perfect sense, but just how do you balance or how
Yeah, no, I mean, it's a great question. So the short answer is no. There's no change in terms of our confidence to reduce leverage over time, and get to that 2-2.5 times by 2026. Josh kind of laid out a plan to expand points of access from, at least in the U.S., from 6,000 to 12,000 without adding significant capital, repairs and maintenance and some trucks, but nothing material like the amount of hubs we would need.
We currently spend roughly 6%-7% revenue on capital, most of that directed towards the highest return growth kind of oriented capital. So, there's enough room in capital budgets over the next three years or four years that we can absorb a chunk of a fast rollout.
There'll be incremental capital for sure, which is where some of the terms that Josh referenced in conversations with McDonald's as we progress there around length of term and making sure we get the right paybacks and financially how it works. But for the most part, you know, there's no kind of change to how we feel about where leverage is headed.
And then presumably any, you know, EBITDA growth that came behind-
Any EBITDA growth-
Should help with the leverage.
... should just help fund and fuel. Yep.
Okay. At this point, I just want to see if anyone in the audience had any questions for Josh or Jeremiah. All right.
We've already run out of donuts, so.
Yeah, that's-
All right. Well, thank you both for being-
Well, there's one last one.
Oh.
If you don't mind.
No, I don't mind.
I don't know if you can speak to this, but I know McDonald's tried McCafé in a number of different ways over the years. When you're piloting this, is it still in tandem with McCafé? It is. Okay.
They've actually disclosed they've discontinued McCafé in the U.S.
Yeah, their sweet baked goods-
Oh, really?
... portfolio, yeah.
Nowhere.
Yeah. So, we don't know if that's correlated or not. We don't see it's bad news, but they obviously... That, you know, that's obviously related to their, why they came to us to talk about the opportunity. Obviously, what was, what they were doing wasn't working for them, whether it was operationally or financially or incrementally. And it's been great that the Krispy Kreme brand has been at the forefront.
They've been great partners because they've very much honored that. They've not tried to make it like McCrispy Kreme or something like that. They understand what they're doing. They're very impressive, very professional partners, and yeah, we're just, we're pleased that they, they've been doing that, and we're looking forward to seeing how it plays out next.
All right. Well, we're up on time. Thank you. Thank you both for being here.
Yeah, appreciate it. Thank you.