Executive Summary / Key Takeaways

• Krispy Kreme (NASDAQ: DNUT) is undergoing a strategic pivot, prioritizing debt reduction, deleveraging, and generating positive cash flow in response to a challenging macroeconomic environment and recent operational setbacks.
• First Quarter 2025 results reflected significant headwinds, including a 15.3% net revenue decline (driven by the Insomnia Cookies divestiture and a 1.0% organic revenue drop) and a substantial decrease in Adjusted EBITDA, impacted by lower transaction volumes, U.S. expansion costs, and the lingering effects of the 2024 Cybersecurity Incident.
• The company has withdrawn its full-year guidance due to macroeconomic uncertainty and the reassessment of the McDonald's rollout schedule, where initial demand fell below expectations, prompting a pause in Q2 expansion efforts while working to improve profitability.
• Decisive actions are being taken to strengthen the balance sheet and drive profitable growth, including discontinuing the quarterly dividend, evaluating the refranchising of international markets, accelerating the outsourcing of U.S. logistics, and strategically pruning underperforming U.S. doors.
• While facing near-term challenges and execution risk, the long-term investment thesis hinges on the successful implementation of the refined strategy focusing on capital-light international growth and optimized, profitable U.S. omni-channel expansion leveraging the unique Hub and Spoke model and brand strength.

Setting the Scene: A Beloved Brand's Omni-Channel Ambition

Krispy Kreme, Inc. commands a unique position in the sweet treat market, anchored by its iconic Original Glazed doughnut and a brand recognized globally for moments of joy and indulgence. The company's strategic vision centers on transforming into a larger, more efficient business by making its fresh doughnuts more accessible through an omni-channel model encompassing traditional Doughnut Shops, Delivered Fresh Daily (DFD) Doors, and digital channels. This strategy is fundamentally supported by its differentiated Hub and Spoke distribution network.

In the competitive landscape of quick-service restaurants and baked goods, Krispy Kreme operates alongside giants like Starbucks (SBUX), McDonald's (MCD), Restaurant Brands International (TICKER:QSR - Tim Hortons), and Yum! Brands (YUM). While these larger players offer broader menus and possess significant scale advantages in areas like supply chain efficiency and marketing spend, Krispy Kreme carves out its niche through the experiential appeal of its fresh, often hot, doughnuts and a strong emotional connection with consumers. Its brand loyalty is a significant asset, driving recurring revenue and potentially supporting better margins in its core offerings compared to more commoditized competitors. However, DNUT's smaller scale relative to these rivals presents challenges in achieving comparable operational efficiencies and pricing power across all segments. The company's strategic response has been to leverage its unique product and brand through expanding reach via the capital-light DFD model, aiming to increase volume and density to improve the efficiency of its production and distribution network.

The core of Krispy Kreme's operational differentiation lies in its Hub and Spoke model. Hot Light Theater Shops and Doughnut Factories serve as centralized production Hubs, creating fresh doughnuts daily. These are then distributed to various Spokes, including Fresh Shops, Carts and Food Trucks, and importantly, DFD Doors in grocery stores, convenience stores, and QSRs, primarily through a company-operated delivery network. This model is designed to ensure product freshness and quality across a wide footprint. The intended benefits include leveraging excess capacity in Hubs, increasing distribution density to improve route efficiency, and ultimately driving operating leverage and profitability as sales volumes through Spokes increase. While larger competitors like MCD and SBUX have highly optimized supply chains for their standard offerings, Krispy Kreme's model is specifically tailored to the logistics of delivering a highly perishable, fresh product daily across diverse retail environments. The company has been actively investing in and refining this network, including exploring technological and operational improvements like outsourcing logistics and value engineering new Hub locations to enhance capital efficiency.

Evolution and Recent Performance: Headwinds and a Strategic Reassessment

Krispy Kreme's journey has seen a focus on expanding its global footprint and diversifying its access points. The company has a history of consistent organic sales growth, achieving 18 consecutive quarters leading up to Q1 2025, demonstrating the underlying demand for its products and the effectiveness of its expansion strategy over time. A significant recent development was the divestiture of a controlling interest in Insomnia Cookies in fiscal 2024, a move aimed at simplifying the business and sharpening the focus on the core fresh doughnut strategy. This divestiture, while strategically beneficial for focus and deleveraging, significantly impacted reported net revenue comparisons in Q1 2025.

The first quarter of fiscal 2025 highlighted the impact of both external pressures and internal challenges on the company's performance. Net revenues declined by a substantial 15.3% year-over-year to $375.2 million. While the Insomnia Cookies divestiture accounted for a significant portion of this decline, organic revenue also decreased by 1.0%. This organic contraction was primarily attributed to lower transaction volumes in traditional Doughnut Shops, reflecting broader consumer softness in a challenging macroeconomic environment. Despite this, the company continued to execute on its expansion strategy, increasing Global Points of Access by 21.4% to 17,982, largely driven by the addition of 420 net new DFD Doors. Pricing increases of approximately 1.0% also partially offset the volume decline.

Profitability metrics saw a notable deterioration. Adjusted EBITDA fell by 58.8% to $24.0 million, with the Adjusted EBITDA margin compressing significantly to 6.4%. This margin pressure stemmed from several factors: the impact of lower transaction volumes on operating leverage, costs associated with the acceleration of the U.S. national expansion (including the McDonald's rollout), and an estimated $5.0 million impact from operational inefficiencies related to the 2024 Cybersecurity Incident that occurred in Q4 2024. Selling, general and administrative expenses decreased in absolute terms, partly due to the Insomnia divestiture and prior restructuring efforts, but were partially offset by $4.4 million in remediation costs related to the cybersecurity incident. Depreciation and amortization increased, reflecting investments in capital assets to support the U.S. expansion. Interest expense rose due to a higher average debt balance. The net result was a net loss attributable to Krispy Kreme, Inc. of $33.4 million in Q1 2025, compared to a loss of $8.5 million in the prior year period.

Segment performance mirrored these trends. The U.S. segment saw a 20.1% net revenue decline (Insomnia impact) and a 2.6% organic revenue decline, with Adjusted EBITDA dropping 62.7% and margins contracting sharply due to the factors mentioned above, including the estimated $5.0 million Cyber Incident impact. Average Revenue per Door (APD) in the U.S. decreased to $587, reflecting the changing customer mix with the introduction of lower-volume QSR doors like McDonald's. The International segment experienced a 4.1% net revenue decline (FX impact), but managed 1.5% organic growth driven by pricing and POA expansion, though lower transaction volumes in key markets like the U.K. and Mexico pressured operating leverage and resulted in a 27.5% Adjusted EBITDA decline. The Market Development segment's net revenue declined 13.7% (impacted by prior franchise acquisitions), but organic revenue grew 2.7% from continued international franchise expansion, and the segment demonstrated margin expansion (400 basis points) driven by a favorable revenue mix.

Strategic Pivot and Outlook: Focusing on Profitability and Deleveraging

In light of the challenging Q1 results, macroeconomic softness, and specific performance observations from the McDonald's rollout, Krispy Kreme has announced a significant strategic pivot. The company has withdrawn its full-year outlook, signaling increased near-term uncertainty. The focus has shifted decisively towards strengthening the balance sheet, deleveraging, generating positive cash flow, and ensuring that future growth is profitable and based on sustainable revenue streams.

A key element of this pivot is the reassessment of the U.S. national expansion plan, particularly concerning the McDonald's partnership. While the rollout reached over 2,400 locations by the end of Q1 2025, management noted that demand dropped below expectations after the initial marketing push. This has led to a pause in launching into any additional McDonald's restaurants in Q2 2025. The company is now working closely with McDonald's to identify levers to increase sales and simplify operations to achieve a profitable business model for all parties before expanding further. Despite this near-term adjustment, management reiterated their belief in the long-term opportunity of the U.S. national expansion.

To support the renewed focus on financial health and profitable growth, Krispy Kreme is implementing several concrete actions:

• Dividend Discontinuation: The quarterly dividend has been discontinued to retain capital for debt reduction and enhance financial flexibility.
• Deleveraging Initiatives: The company is committed to deleveraging through working capital improvements and inorganic opportunities. This includes evaluating the refranchising of certain international equity markets (U.K., Ireland, Australia, New Zealand, Japan, Mexico, Canada), with potential proceeds earmarked for debt pay down.
• Enhanced Liquidity: A recent amendment to the 2023 Facility secured an additional $125.0 million in term loan commitments, expected to be used primarily to pay down the revolving credit facility, increasing available liquidity.

• Operational Efficiency: The company is accelerating the outsourcing of U.S. DFD deliveries to third-party logistics providers, aiming for full outsourcing by mid-2026. This is expected to bring cost predictability and potential savings compared to the in-house model, while freeing up internal resources to focus on core operations.
• Portfolio Optimization: Management plans to strategically prune underperforming DFD doors in the U.S., potentially exiting 5% to 10% of the network. While this will have a negative revenue impact ($10 million to $15 million expected in 2025), it is anticipated to immediately improve margins.
• Capital Discipline: The company is prioritizing high-return investments and value engineering its footprint, such as retrofitting existing buildings for new Hubs (like Minneapolis) to achieve capital savings (e.g., 20% savings in capital/real estate costs for Minneapolis). They still expect to open 5 to 7 new production hubs in 2025 to support expansion in underserved geographies.

For the second quarter of fiscal 2025, the company provided specific guidance, expecting net revenue between $370 million and $385 million and Adjusted EBITDA between $30 million and $35 million. This reflects the ongoing impacts of macroeconomic conditions, the pause in the McDonald's rollout, and the costs and benefits of the strategic actions being implemented. Management expects margins to remain pressured in the first half of 2025 due to lingering Cyber Incident impacts and upfront investments, with operating leverage and margin improvement anticipated in the second half as revenue grows and Hub and Spoke efficiencies improve. The company expects to deliver positive operating cash flow in 2025 by reducing capital intensity and improving working capital.

Risks and Competitive Dynamics

Despite the strategic pivot, Krispy Kreme faces material risks. The uncertainty surrounding the McDonald's partnership is significant; failure to improve demand and profitability could limit or halt this key expansion driver, impacting future revenue and efficiency gains. The challenging macroeconomic environment poses a continued risk to consumer spending and transaction volumes across all channels. Lingering impacts from the 2024 Cybersecurity Incident, while back-of-house systems are operational, could still affect efficiency and costs. Geopolitical uncertainty and commodity price volatility (flour, sugar, shortening, fuel) could pressure product and distribution costs, impacting margins. Underperformance in the U.K. market remains a drag on the International segment, requiring successful execution of the new management team's turnaround plans. Furthermore, while currently compliant, the company's debt levels and leverage ratio (3.94x as of March 30, 2025) require careful management to avoid potential covenant issues, which could restrict financial flexibility.

In the competitive arena, Krispy Kreme's operational model, while unique, faces efficiency challenges compared to the scale and automation of QSR giants like McDonald's, which can achieve significantly lower operating costs per unit. Starbucks' strong digital platform and brand loyalty in the coffee/snack space also present a formidable challenge, potentially capturing market share in overlapping segments. Restaurant Brands International (Tim Hortons) competes directly in the coffee and baked goods market, leveraging its established network and supply chain efficiency. While Krispy Kreme's differentiated product and brand offer a competitive moat, its financial performance (e.g., recent negative net margins) lags behind these more established, profitable competitors. The success of the strategic pivot, particularly the outsourcing of logistics and optimization of the Hub and Spoke network, will be crucial in closing this efficiency gap and improving profitability relative to peers. Customer and supplier dynamics, including dependencies on key ingredients and the need to secure favorable terms with large DFD partners, also influence the company's competitive standing and profitability.

Conclusion

Krispy Kreme is at a critical juncture, pivoting its strategy to prioritize financial discipline and profitable growth in a challenging operating landscape. The recent Q1 2025 results underscore the headwinds from macroeconomic softness, operational disruptions, and the complexities of large-scale expansion. The decision to withdraw guidance and reassess the McDonald's rollout highlights the need for a more cautious, profitability-focused approach.

The core investment thesis now centers on the successful execution of the refined strategy: deleveraging the balance sheet through retained earnings, potential refranchising proceeds, and optimized working capital; enhancing operational efficiency via logistics outsourcing and Hub/Spoke optimization; and focusing growth efforts on the most profitable DFD opportunities while pruning underperforming assets. While the long-term potential of the U.S. national expansion and capital-light international franchising remains, the near-term outlook is marked by uncertainty and execution risk. Investors will be closely watching for signs of improved profitability, progress on deleveraging, and clarity on the path forward for key partnerships like McDonald's as the company works to become a "better" business to support its ambition of becoming a "bigger" one.