Krispy Kreme, Inc. Common Stock 2026 Q2 Earnings Call

Steve, please go ahead. Good morning, everyone, and welcome to Krispy Kreme's second quarter 2026 earnings call.

Joining me are President and Chief Executive Officer, Josh Charlesworth, and Chief Financial Officer, Raphael Duvivier. The second quarter earnings release and accompanying presentation are available on our investor relations website at investors.krispykreme.com. This call will also be available on our website and contains forward-looking statements. Forward-looking statements, including those of expectations, future events, or financial performance, 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 in 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 is available in our earnings release. Any reference to percentage growth when discussing second quarter results is a comparison to the second quarter of 2025, unless otherwise indicated. I will now turn the call over to Josh.

Thank you, Steve, and good morning, everyone. Second quarter highlighted continued significant progress on our turnaround to strengthen the balance sheet, reduce leverage, and drive sustainable, profitable growth. Our year-to-date results demonstrate the success of the actions we are taking to grow the business and improve profitability. We remain confident in our ability to deliver our 2026 financial targets and are maintaining our previously issued guidance. Krispy Kreme remains a compelling global growth story, supported by increasing consumer demand for our iconic fresh donuts, even in a dynamic macro environment. Unlocking that demand remains our priority, and we are doing so through our two largest opportunities, profitable U.S. expansion and capital-light international franchise growth. In the second quarter, demand for our fresh iconic donuts across the U.S. and international markets drove system-wide sales growth of 2.6%, excluding the impact of the now ended McDonald's USA partnership from last year.

Overall, our goal remains to deliver system-wide sales of more than $2 billion in 2026. Adjusted EBITDA margin significantly increased by 340 basis points as our focus on optimizing operations and logistics, along with driving more profitable sales per door in fresh delivery, is translating into stronger financial performance. Now let's move to the four pillars of our turnaround plan and the progress we are making on each. One, refranchising. Two, improving returns on capital. Three, expanding margins. Four, driving sustainable, profitable U.S. growth. Our first pillar, refranchising, enables us to drive more profitable system-wide sales growth while accelerating new shop development through a capital-light model. This year, we have completed two transactions that advanced this strategy in Japan and the Western U.S., both of which contributed to a reduction in net debt. Last year, approximately 25% of system-wide sales were generated by franchisees.

Today, franchisees account for 42% of system-wide sales. Through additional refranchising efforts, our goal remains to reach approximately 50% of system-wide sales generated by franchisees beginning next year. As we evaluate additional refranchising opportunities, we remain focused on identifying the right partners, both in international markets and the U.S., to maximize value and position our brand for long-term growth. The second pillar of our turnaround is improving returns on capital. Across the business, we are significantly reducing capital intensity and improving our utilization of existing assets, while our franchisees invest to support brand growth. As a result, we reduced our CapEx in the first half of the year by 70% compared to last year, which will contribute to achieving positive free cash flow in 2026.

We are pleased to have entered into agreements for three new international franchise markets this year, including the Netherlands, Estonia, and Mauritius, achieving our goal of three to four new markets in 2026. The continued strength of the Krispy Kreme brand is reflected in the interest we see from prospective franchise partners around the world, and we remain focused on pursuing additional opportunities to expand our global footprint through our capital-light franchise model. Year to date, we have opened 59 new shops driven by growth in Japan, Brazil, South Korea, and the Middle East. All but two of these shops were opened by franchisees, and we remain on track to achieve our goal of opening at least 100 shops in 2026. While our international development pipeline remains an important driver of capital-light growth, we are also focused on U.S. growth by leveraging existing manufacturing capacity to expand fresh delivery.

Our current network utilization is only about 25%, demonstrating the opportunity to expand to more locations without incremental capacity investment. Walmart and Target, along with other strategic partners, are still significantly under-penetrated, and we can support additional growth through the same facilities that currently deliver to more than 7,600 doors nationwide. The third pillar of our turnaround is expanding margins. We are simplifying the business and reducing costs across the P&L, resulting in significant margin improvement versus last year, driven by the U.S. segment. In the U.S., we are making donuts more efficiently through enhanced production planning, labor optimization, and streamlined hub operations, all leading to a meaningful reduction in labor spend. We continue to increase delivery efficiency through improved route management, demand planning, and the optimization of production and delivery schedules.

Now that we have successfully outsourced our U.S. logistics, we have greater cost predictability and reduced operational risk, enabling our teams to focus on what they do best, making fresh donuts. After completing a successful test of a new AI-enabled platform for fresh delivery demand planning, we are now rolling it out across our company network. Based on the preliminary results, we expect this advanced technology solution will reduce out-of-stocks on the shelf while also minimizing returns. The fourth pillar of our turnaround is sustainable, profitable growth in the U.S. across our donut shops, digital channels, and fresh delivery partners. Our donut shops are the largest driver of sustainable, profitable growth in the U.S.

The strength of our donut shops has been driven by our recently expanded core menu, led by our iconic Original Glazed doughnut, supported by five seasonal donut collections each year, and a steady cadence of innovative limited time offerings. Each plays a key role, but it's the combination that makes them so successful. Our core menu provides consistency and value. Our seasonal collections deliver new flavors and variety, and our LTOs create excitement and cultural relevance. Together, they keep the brand fresh and engaging for consumers, stimulate curiosity, and drive sustained demand. We further support demand through targeted marketing and promotional programs that reinforce value and encourage larger purchases. Promotions such as our discounted Second Dozen offer provide value for consumers while driving donut sales and growth in average ticket size.

Sales through our growing digital channel have grown 8% year-over-year and now represent approximately 22% of total U.S. retail sales. This is driven by improvements in our proprietary digital platforms, including easier payment options and the growth of our loyalty program. This now includes nearly 18 million members in the U.S. who visit typically 30% more frequently than non-loyalty members. In fresh delivery, we know that when our donuts are available in the right places and in the right quantities with strategic partners, we can generate higher average weekly sales and profitability. During the second quarter, we added more than 200 doors with strategic partners such as Walmart, Target, Kroger, and Sam's Club. A key component of our continued success in increasing average weekly sales per door is strengthening our relationships with these key strategic partners.

Target is a great example of how deeper collaboration can unlock additional growth opportunities and create value for both organizations. We are expanding our relationship with Target to enhance merchandising and checkout placement, and beginning in September, Krispy Kreme products will be available for purchase on target.com. We believe this expanded relationship reflects the confidence leading retailers have in the strength of our brand and creates additional opportunities to increase sales and expand our fresh delivery network. Much of our progress in fresh delivery has been led by Sukh Nicholas, who we recently announced as our Chief Commercial Officer. Her primary focus is to accelerate growth, expand key partnerships, strengthen customer relationships, and build world-class commercial capabilities across markets. Additionally, we continue to stay closely attuned to evolving consumer trends, including the use of GLP-1 and other weight loss medications.

Last quarter, I discussed the conclusion from our research, which found Krispy Kreme consumers who use these medications are just as likely as non-users to purchase sweet treats for holidays and special occasions. With our differentiated fresh doughnuts, typically purchased 2 to 3 times per year, primarily for sharing occasions, we believe Krispy Kreme is well positioned in this context. While we continue to monitor this trend, among other macro factors, we remain focused on expanding the ways consumers experience and share Krispy Kreme, including through our high-performing Minis category. Featuring Minis, Doughnut Dots, and Mini Crullers, this category offers consumers compelling value and greater variety. Overall, we are pleased with the continued progress on our turnaround, extending the momentum that began late last year.