The shares of Krispy Kreme lost almost a quarter of their value after the Charlotte-based doughnut retailer withdrew its previous full-year financial forecast, partly due to an unprofitable start for its national McDonald’s rollout. Shares closed at $3.26, down 24.7%.
First quarter revenue sank 15.3% to $375.2 million, hurt by last year’s sale of a majority stake in Insomnia Cookies and a U.S. consumer pullback that offset an increasing number of locations selling doughnuts, the company said in a statement.
Krispy Kreme also discontinued its quarterly cash dividend of 3½ cents a share, after saying in its annual securities filing in February it expected to continue paying a dividend, with the final quarterly payout to shareholders on Wednesday, May 7. It plans to redirect the money to reducing debt.
“In this challenging macro environment, we are prioritizing paying down debt and deleveraging our balance sheet, generating positive cash flow and pursuing only profitable growth based on sustainable revenue streams,” CEO Josh Charlesworth told analysts on a conference call.
In a blow to its national expansion, Krispy Kreme is pausing the addition of new McDonald’s restaurants until it can figure out how to generate profitable sales through the fast-food giant’s outlets. Since last year, it’s begun selling in more than 2,400 McDonald’s locations.
“We are seeing that after the initial marketing launch, demand drops below our expectations,” said Charlesworth, explaining the decision to add no new McDonald’s distribution in the second quarter. While confident about long-term prospects, he said, “We really need to make sure we’re positioned for profitable growth before we expand any further.”
Last quarter, Krispy Kreme began outsourcing doughnut delivery, part of its effort to simplify operations. Aiming to improve efficiencies, it’s going to curb sales in lower-volume regional grocery chains and convenience stores. It’s also reducing the number of days it offers discounts while focusing on efforts to sell its original glazed doughnut, relatively inexpensive for customers and more profitable for the company.
Krispy Kreme is also seeking to spur sales with improvements to drive-throughs, offering larger packages in membership club stores and adding secondary displays in discount and supermarkets.
“Given the scope of these actions, the macroeconomic softness and uncertainty with McDonald’s, we are withdrawing our prior full year outlook and not updating it at this time,” CFO Jeremiah Ashukian told analysts.
In February, the company projected organic revenue growth of 5% to 7%, with net revenue of $1.55 billion to $1.65 billion and adjusted EPS of 4 cents to 8 cents.
Krispy Kreme estimated $5 million in operational inefficiencies related to an information technology hack last year. At that time, it said in a securities filing it anticipated that the loss of online sales and other costs from the cybersecurity incident will result in “a material impact” on the company’s business operations and finances.
Looking ahead, Charlesworth told analysts Krispy Kreme plans to open five to seven production hubs this year, mainly to improve coverage for national customers such as Target Corp.
