Krispy Kreme on Wednesday said that it bought out another franchisee and plans to close 10 stores that don’t fit with its evolving model, but investors appeared more concerned with the company’s thinning profit margins and a diminished outlook.
The company’s stock fell more than 14% through early-afternoon trading on Wednesday. The company said that its net income, after adjustments for one-time events, declined 28% in the period to $14.6 million, or 8 cents per share.
Adjusted EBITDA declined 9.6% to $47.4 million, and adjusted EBITDA margin fell 240 basis points to 12.6% of revenues.
But the company also lowered expected revenue for 2022 and said that net income and adjusted EBITDA would be substantially lower than initially projected.
All of that sent the chain’s shares falling 15% at one point during the morning, nearing its all-time low on Wednesday. The stock is down by more than 25% so far this year.
Company executives often found themselves on the defensive in speaking with analysts on Wednesday.
“So nothing has fundamentally changed from the model, right?” CEO Mike Tattersfield said. “The macro environment is challenging consumers everywhere in the world. It just shows you the resilience of our brand. It’s actually growing in every single one of our countries where we operate today.”
Still, executives blamed its problem on challenges in the U.K., where the economy has been faltering, along with the strong dollar. But it also said its legacy shops underperformed during the period because of high labor and food costs.
Krispy Kreme has been working to shift its U.S. business from a “traditional doughnut shop” into one in which its larger shops operate as factories that ship doughnuts daily to various outposts, including smaller shops and kiosks in grocery stores and gas stations.
Yet the Charlotte-based company has 118 locations, or “hubs,” that do not have these outposts, which the company calls “spokes.” Those are the locations that underperformed, leading Krispy Kreme to say it plans to close 10 such shops that do not have any spokes.
“There are 118 shops in the U.S. without spokes,” CFO Joshua Charlesworth told investors on Wednesday. “A significant number are still performing well. But there’s also a significant number that aren’t, hence our decision to close approximately 10 that are not sustainable in the long run.”
Executives believe that their hub-and-spoke model generates stronger profit margins over time because it makes those larger shops more efficient and productive.
In the U.K., where the company has already converted into such a model, profit margins are more than 20%. That included the second quarter when the market faced challenges due to difficult comparisons and a weak economy.
“Sales per hub” in the U.S. and Canada are up 22% over the past 12 months to $4.4 million. But in international markets, where the model is more developed, those sales per hub totaled $9.8 million over the past 12 months.
“The uniqueness of the model is, how do you drive a business from a traditional doughnut shop, which is what it was in the past, into a hub-and-spoke system?” Tattersfield told investors. “When we do that well, and we get more access points, we can really drive the business.”
To do that, the company has been de-franchising, buying out operators so it can better control the market.
Krispy Kreme announced plans to acquire a 6-unit franchisee in the Midwest for $18.5 million, which it said will over time lead to the creation of another 100 outposts, which it also calls “DFD Doors,” or “delivered fresh daily.”
Over the past three years, Krispy Kreme has acquired well over 100 units from franchisees. The number of franchisee locations has declined by more than two-thirds over that time, from 205 in 2019 to 66 at the end of last year. The more recent acquisition will bring that down further.
Krispy Kreme believes the acquisitions will help it to speed the move to the hub-and-spoke model, which works better under corporate control rather than a franchise. The company believes that its six-unit Midwest acquisition could yield more than 100 of its low-capital “DFD Doors,” or the small shops and kiosks where its doughnuts are delivered daily.
“The whole plan was [to] evolve the system more to this omnichannel model and the hub-and-spoke,” Tattersfield said. “The hub-and-spoke model really allows us to drive our revenue per hub, which you start to see happen.”
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