Krispy Kreme Inc (DNUT) 2020 Q4 法說會逐字稿

Hello, and thank you for standing by. Welcome to the Krispy Kreme Q4 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Rob Ballew, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Krispy Kreme's Fourth Quarter 2021 Earnings Call. Thank you for joining us today. Our fourth quarter earnings release and an accompanying earnings presentation deck are available on the Investor Relations portion of our website at investors.krispykreme.com.

Joining me on the call this morning is Mike Tattersfield, President and Chief Executive Officer; Josh Charlesworth, Chief Operating and Financial Officer; and Joey Pruitt, Chief Accounting Officer. After prepared remarks by Mike and Josh, there will be a question-and-answer session.

Before we begin, I'd like to remind you that this call will contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events or future financial performance. Forward-looking statements involve a number of inherent risks and uncertainties, and we caution investors that these risks could cause actual results to differ materially from those contained in any forward-looking statements. These factors and other risks and uncertainties are detailed in the company's registration statement on Form S-1.

Forward-looking statements made today speak only as of today. The company assumes no obligation to publicly update or revise any forward-looking statements, except as may be required by law.

Additionally, today's call will include certain non-GAAP financial measures. A reconciliation between non-GAAP financial measures and their closest GAAP measures can be found in the company's fourth quarter earnings press release, which is available at investors.krispykreme.com.

With that, I'll now turn the call over to Mike.

Good morning, and thank you, everyone, for joining us today. We are pleased to review our fourth quarter and full year 2021 results and share more today about the continued advancements we are making here at Krispy Kreme on our journey to becoming the most loved sweet treat brand in the world.

I want to start by thanking our amazing group of Krispy Kremers, our team members for their dedication to our business and our customers each and every day. Their efforts have enabled us to produce strong results, and we've worked to transform our business over the past 5 years.

Notably, they've done this during a very difficult and complicated time globally. We will continue to take care of our Krispy Kremers, which is central to our mission. This allows us to attract quality people, which, in turn, helps us to mitigate the impact of this challenging labor and operating environment.

The purpose of our company is to enhance the lives of others through the joy that's Krispy Kreme. Our Krispy Kremers truly make this happen. Because of the excellent work they do every day, we're able to give back to our communities around the world.

Before I became the CEO, I would have never imagined how a doughnut company could become such a powerful force of positive change. For example, last year, our community fundraising program helped generate more than $30 million for local communities around the world.

Additionally, we have implemented timely promotions that allow and encourage our customers to choose to make a positive impact in their communities. Last month, we partnered with the American Red Cross to raise awareness for the nationwide blood shortage by giving a free Original Glazed dozen to anyone who donated blood. Giving back to the community rewards us with very positive feedback, including 2 billion impressions globally from this campaign and allows our customers to connect to the brand in a positive and powerful manner.

We are proud to be a global company operating in more than 30 countries. We have an incredibly strong beloved brand. We also have a proven strategy that gives us a very clear path to significant growth in the coming years.

Turning to our performance in 2021. Our progress on our long-term objectives was evidenced by our strong financial and operating performance in the fourth quarter and the full year. We produced results which were at or above the top end of our expectations and guidance range.

Our hub and spoke model, where we leverage our hubs to increase points of access in a capital-efficient manner supported by world-class omnichannel strategy and e-commerce capabilities are the core of our fresh doughnut business. Every day, these assets help us deliver millions of doughnuts to people around the world. The hub and spoke model, combined with buzzworthy seasonal and limited time offerings of fresh doughnuts with limited purchase frequency, gives us strong ability on pricing, including several price increases in the U.S. and across our global markets in 2021.

While Josh will go into more detail on our results in a few minutes, I wanted to highlight a few key metrics from an outstanding year. In 2021, we grew our global points of access by more than 2,000 to over 10,400, a 25% increase over 2020 with strong growth in our points across the globe.

Growing our presence allows us to increase organic revenue by 12.5% for the year or 21.4%, excluding the exit of our legacy wholesale business. The increased revenue and the efficiency of our hub and spoke model was also demonstrated on the bottom line as we grew adjusted EBITDA by 29% to $187.9 million and increased our adjusted EBITDA margin by 60 basis points to 13.6% for the year.

In the U.S. and Canada segment, we were pleased with our fourth quarter and full year performance driven by the strength of our fresh business and Insomnia Cookies. Organic revenue grew 9.1% for the fourth quarter and 5.5% for the full year. Excluding the legacy wholesale exit, U.S./Canada organically grew 17.3% and 18.3%, respectively, for those time periods.

Our DFD business continued to gain momentum as we added over 1,000 points of access for the year, bringing us roughly to 5,700 in the U.S. and Canada. The hub and spoke model allowed us to expand adjusted EBITDA margins by 290 basis points in the fourth quarter.

We made significant progress on the branded sweet treats in the quarter, where we improved fulfillment rates from 65% in the third quarter to over 85% in the fourth quarter, thanks to the efforts of our new Global Supply Chain Chief and his team. This led to December being the highest month of scan sales since launching in 2020 at Walmart. These products continue to resonate with our consumers, and we expect to see notable improvement in revenue and profitability from branded sweet treats in 2022. We now have more than 15,000 distribution points for branded sweet treats and expect this to grow in 2022.

Turning to Insomnia Cookies, our digital-first cookie company, which completed another fantastic year. Revenue for Insomnia for 2021 increased by more than 30% and by nearly 20% excluding new store revenue. We continue to see incredible opportunities for the brand as we are well on our way to over 600 locations domestically with plans to grow internationally over time.

Our International segment performed exceptionally well in the quarter and this past year. It is truly an outstanding business, which continues to grow and strengthen the worldwide appeal of our brand. Organic revenue growth for the year was 37%, and the segment grew 19% on a 2-year stack basis, highlighting our ability to grow significantly beyond prepandemic levels. We see a significant runway for growth across the entirety of our International segment.

Let's talk about a few more exciting initiatives. The proven and high-growth hub and spoke model is the primary driver of our International segment performance. We added more than 500 doors for the year, bringing us to approximately 2,900 total points of access without adding a single hub.

Sales per hub internationally grew from $6.4 million in 2020 to $9.1 million in 2021. And with each hub leveraging roughly 80 fresh points of access on average, we're able to achieve 25% adjusted EBITDA margins. We saw a strong growth in all of our international equity markets, each of which put up another quarter of more than 25% organic revenue growth.

Krispy Kreme today is truly a loved global brand. Roughly half of our system sales are outside of the U.S., and more than 50% of our adjusted EBITDA comes from our international Market Development segment. Going forward, we expect to open at least 3 new countries per year.

Highlighting this opportunity, I am very pleased to announce that we are now adding 2 new franchise venture partners for us in Europe and South America. More specifically, later this year, we will open up Krispy Kreme hubs in Switzerland and Chile.

In addition, our existing partners have direct line of sight to enter into new countries now that we have a strong proven expansion model. We expect to announce further country entries in the coming months.

Overall, we see a great deal of runway for international growth and are working to expand efficiently, particularly in neighboring markets where we can both leverage existing core equity markets and franchise partnerships. This balanced approach will ensure quality is not compromised while opening up access to more consumers. This will also allow us to realize economies of scale and as a result, increase total company profitability and brand reach.

Turning to a few other drivers of our growth. E-commerce is a core pillar of our omnichannel strategy. In 2021, 17% of our retail sales came from e-commerce, up from less than 10% prepandemic with a global goal to achieve e-commerce penetration of over 25% over the long term.

We benefit from the fact that the majority of our e-commerce business comes from directly through our own channels. And we continue to strengthen our capabilities, exemplified by our recent Day of Dozens in December as promotional activity on our e-commerce channel drove a 50% increase in sales that day from the prior year.

In addition to e-commerce, innovation, branding and marketing are key capabilities that drive our business segments and keep us relevant across the consumer touch points and our omnichannel model. The appropriate blending of these unique capabilities, combined with operational rigor, support the global growth of our brand and products.

Innovation remains a significant driver of frequency as we create and introduce premium fresh and buzzworthy offerings to customers across our points of access. We had extremely successful seasonal activations across the globe in 2021, including our most recent Halloween and winter holiday assortments in the fourth quarter.

In general, our teams rally around seasonal events, which is when fresh sweet treats really matter such as Valentine's Day, which happens to be one of the top events for Krispy Kreme across the globe. Chinese New Year would be another example of a growing gifting celebratory event.

The product, the packaging, the emotional storyline connection really matter for our customer. In 2021, 30% of guest purchases were to celebrate special occasion and events. All these initiatives, driven by innovation and premiumization, give us strong pricing power, sometimes up to 50% more per individual item than our Original Glazed doughnut and continue to be scalable opportunities for our business. These also hit right in our sweet spot of gifting and purchasing treats in larger quantities for sharing and celebrating, which we see significant opportunity for growth with e-commerce leading the way.

Finally, we completed our shift in early 2021 to 100% fresh model, which increases pricing power and purchase frequency. Our customers have told us that the most important attribute for a sweet treat purchase is freshness. In fact, it is twice as important to our customers versus just the price. Krispy Kreme today utilizing its proven hub and spoke models able to delivering freshness with significant scale daily across the globe.

Looking at 2022 and beyond, we see significant upside opportunity. We operate in the sweet indulgent category, which is currently a $650 billion global industry and growing.

Today, we have just over 10,000 points of access, but we expect to grow to more than 50,000 points of access in just our existing and target countries over the coming years or a 5x increase. We are confident we can grow our points of access by at least 10% annually or more than 1,000 a year in a capital-efficient way.

Those 50,000 points of access that we are targeting are just a fraction of the 1.3 million grocery and convenience stores in the countries we currently operate or with current plans to enter. We plan on opening at least 3 countries on an annual basis from now forward.

The increase in points of access when combined with e-commerce growth will allow us to significantly increase our sales per hub while driving efficiently efficiency and profitability. We'll continue to drive purchase frequency by increasing our points of access, growing our e-commerce capabilities and innovation.

A key focus for driving frequency will be maximizing special sweet treat occasions and gifting. In addition, new doughnut fresh LTOs will drive brand engagement and premiumization.

We are also exploring new access points for delivery coverage. After a successful pilot in the U.K. where we have achieved national delivery coverage with more than 50 dark shops, we are now building up capabilities into the U.S. and the Mexico markets in '22 -- 2022. This will allow us to expand our e-commerce capabilities in a capital-efficient manner from our existing hubs.

Our dark shops will piggyback on existing spoke routes, which ensures a fresh doughnut distribution daily and opens up further access to more customers. We believe these initiatives will generate double-digit organic revenue growth this year. Combined with our hub and spoke model efficiency and strong flexibility on pricing will allow us to offset inflation, labor challenges and continued COVID challenges while expanding margins.

Before I wrap up, I want to once again state how enthusiastic we are about the growth in our business and reiterate our confidence in advancing our omnichannel model, particularly as we build new hubs and spokes globally and continue to transform our U.S. operations. The transformation over the last 5 years, accentuated by the strong performance we achieved in 2021, show that our strategy is working. And we are excited to continue on our journey to become the most loved sweet treat brand in the world.

I'll now turn it over to Josh to walk you through the financials and our 2022 outlook. Josh?

Thanks, Mike, and good morning, everyone. I will start by echoing Mike's comments on how pleased we are with the strong results in 2021 and on the progress we've made on our strategic initiatives, thanks to the hard work of our Krispy Kremers.

In the fourth quarter, net revenue grew 13.8% year-over-year to $371 million or 21.5% growth, excluding the impact of an additional 53rd week in 2020. For the full year, net revenue grew 23.4% to $1.38 billion. We saw strong growth across the world in 2021 in our doughnut and cookie shops, through e-commerce, and most of all, from our fresh daily doughnut deliveries to local grocery and convenience stores.

Organic revenue for the fourth quarter grew a robust 13.9% or 19.6%, excluding the legacy wholesale exit we made in 2020. Although we saw Omicron disrupt operations in December, the impact on our revenue was not significant with demand remaining strong across all our sales channels.

For the full year, organic revenue grew 12.5% or 13.7% on a 2-year stacked basis. Excluding the legacy wholesale exit, organic revenue for the full year grew 21.4%.

Our strong performance during the quarter and the year was driven by the strength of our capital-efficient hub and spoke model. In the fourth quarter, we increased global points of access by 386 to 10,427. For the full year, this means that we increased points of access by more than 2,000. Going forward, we expect to add at least 10% more points of access each year, primarily through adding low-cost Delivered Fresh Daily doors.

These fresh doughnut merchandising units in grocery and convenience stores typically cost only $2,000 to $10,000 per door and are enabling us to drive economies of scale from our 411 local production hubs around the world, most of which are experiential Hot Light Theater Shops.

In the fourth quarter, adjusted EBITDA increased 14.4% to $47.7 million, which is above our expectations. Hub and spoke efficiencies and price increases in September and November more than offset labor and commodity cost increases as well as increased corporate overhead driven by public company costs and short-term incentive compensation.

Adjusted EBITDA margins in the quarter rose 10 basis points to 12.9%. We believe that recent pricing actions will allow us to offset inflation, and we will continue to review pricing if inflation increases more than expected.

For the full year, adjusted EBITDA increased 29.2% to $187.9 million, with margins increasing 60 basis points to 13.6%. As a reminder, we expect to achieve 15% company-wide margins in 2023.

In the fourth quarter, GAAP net income was $4.3 million or $0.01 diluted EPS compared to a GAAP net loss of $24.8 million or negative $0.21 diluted EPS in the same period a year ago. Adjusted net income for the quarter was $16 million, a 17% year-over-year increase. Adjusted diluted EPS in the fourth quarter was $0.08, a decline of 20% due to the increased share count from the IPO. Weighted average diluted shares outstanding for the quarter were 169 million.

For the full year, GAAP net loss declined 76% to $14.8 million, which is impacted by $15 million of IPO costs during the year. Adjusted diluted EPS for 2021 was $0.37, an increase of 23% compared to 2020.

We were cash positive again in the fourth quarter, delivering $6.4 million free cash flow, helping us to finish the year with a net debt leverage of 3.6x, which is a reduction versus the prior quarter.

In the U.S. and Canada segment, total revenues in the fourth quarter increased 10.5% to $249 million or 18.8%, excluding the impact of the additional 53rd week. Organic growth in the fourth quarter increased 9.1% or 17.3%, excluding the exit of our legacy wholesale business.

We saw all our product lines and sales channels perform well in the quarter. And our September and November price increases proved successful, demonstrating the strength of our fresh daily doughnut business. Organic growth was also a robust 17.3% on a 2-year stack basis for the quarter.

For the full year, total revenues grew 18.6% in the U.S. and Canada to $928 million, with 5.5% organic growth or 18.3% organic growth, excluding the exit of our legacy wholesale business. Organic growth 2-year stack was 15.4%. And e-commerce revenue for 2021 was $134 million, an increase of 15% compared to 2020.

Adjusted EBITDA for the U.S. and Canada in the fourth quarter increased 42% to $31.8 million, with margins expanding 290 basis points to 12.8%. The increase in margins was driven by strong revenue growth in our fresh doughnut business, specialty sales per DFD door with pricing offsetting wage and commodity inflation.

In November, I highlighted that U.S. cities that have fully implemented the change from legacy wholesale to Delivered Fresh Daily are seeing a 300 to 400 basis point benefit to margins, which continued in the fourth quarter. This is due to the higher price points achieved with these fresh daily doughnuts and the efficiency benefits of a local delivery model, especially in covering fixed costs back at the production hubs.

I gave the example then of the Tampa market, which has seen local EBITDA margins grow to over 20%. This time, I will showcase the Albuquerque market, which has increased revenue per hub by 29% year-over-year to $5.7 million driven by a 350% increase in DFD revenue year-over-year. This has led to a 700 basis point increase in local EBITDA margins, which were over 20% in the fourth quarter.

Both of these cities are former franchisee markets, which we previously acquired and are now showing how implementing the hub and spoke model proven in international markets also works in the U.S. The success there and this strategy in other U.S. cities explains our high level of confidence in the U.S. and Canada segment going forward and our ability to achieve our goal of 15% adjusted EBITDA margin for the segment within 3 years.

Revenue per hub in the U.S. and Canada increased to $4.0 million in the fourth quarter compared to $3.8 million in the previous quarter and $3.5 million a year ago. The biggest driver of the fourth quarter growth was a 55% year-over-year increase in sales per DFD door, which averaged more than $600 per door per week for the first time.

Points of access in the U.S. and Canada increased by more than 1,000 in 2021 to 5,723 driven by DFD door expansion. We expect to add about 150 fresh points of access in the first quarter of 2022 in the U.S. and 500 for the full year as we expand the program in both existing and new cities. Hubs and spokes in the U.S. and Canada increased by 5 during the fourth quarter to 126.

One milestone this quarter came from our digital Insomnia Cookies business, which now, for the first time, has adjusted EBITDA margins on par with our U.S. doughnut business. We continue to see tremendous potential for this rapidly growing brand.

We also saw good progress on profitability in our start-up business, branded sweet treats in the fourth quarter, where we've more than doubled our production capacity this year, which, in turn, has helped us to reduce our cost per unit. While branded sweet treats are not yet profitable in the fourth quarter, the losses reduced considerably. And we remain on track to be profitable by the middle of 2022 as demand continues to grow.

Net revenue in our International segment, which consists of our equity markets in the U.K., Ireland, Australia, New Zealand and Mexico, grew 26% in the fourth quarter to $90 million, while organic revenue grew 31%. Organic revenue growth on a 2-year stack basis was 22%.

For the full year, net revenue grew 45% to $333 million, while organic revenue grew 37% or 19% on a 2-year stack basis. International adjusted EBITDA for the fourth quarter grew 25% to $20.7 million on margins of 23%, in line with the prior year.

For the full year, adjusted EBITDA grew 83% to $81 million driven by the strong performance of our omnichannel model across all of our international markets. Adjusted EBITDA margins for the year expanded 510 basis points to 24.5% driven by the efficiencies gained from the strong performance of our hub and spoke model.

International sales per hub increased from $6.4 million in 2020 to $9.1 million in 2021, leveraging the 36 existing hubs to deliver doughnuts to more fresh points of access, 518 points of access more for the year and 82 more for the quarter. Revenue per DFD door was over $1,000, which explains the high levels of profitability in our International segment.

Turning now to our Market Development segment, which is made up of our franchise business and equity-owned Japan market. Total revenues in the fourth quarter grew 9.9% to $31.4 million, while organic revenue grew 8.8%. Strong performance in Japan and our franchise markets was partially offset by franchise acquisitions.

For the year, Market Development revenue increased 12.7% to $123 million, while organic revenue for the year grew 11%. Adjusted EBITDA in the fourth quarter for Market Development was flat at $11 million but grew 4.5% for the year to $41 million.

We continue to be very optimistic about our growth potential, which is reflected in our 2022 outlook. For 2022, we expect revenue growth of between 11% and 13% and organic growth between 10% and 12%, which is above our long-term guidance of 9% to 11%.

We expect all 3 reporting segments to contribute to this growth. And as a reminder, we will no longer be lapping the exit of our legacy wholesale business in 2020. We plan to add more than 1,000 points of access in 2022, mostly DFD doors.

We expect adjusted EBITDA to grow faster than sales in 2022, up 12% to 16% to between $210 million and $218 million, with margin expansion in both the U.S. and Canada and International segments. We anticipate an income tax rate between 23% and 25% and adjusted net income diluted of $65 million to $69 million, an increase of 18% to 24%.

We expect adjusted diluted EPS of $0.38 to $0.41. And when comparing EPS in 2022 to last year, it is important to remember that we will be impacted by share count dilution from the IPO in the first half of the year. Excluding that impact, adjusted EPS growth will be similar to the adjusted net income diluted growth of 18% to 24%.

While we do not provide quarterly guidance, in general, earnings growth will accelerate through the year as the benefits of our hub and spoke model continue to come through, COVID disruption subsides, footfall traffic in New York increases, the profitability of branded sweet treats improves, and we continue to absorb inflation through pricing as needed.

In January, we have seen some operational disruption from Omicron and a higher number of winter weather events than usual, which will only modestly dampen our Q1 results. Demand remains high. For example, we saw good growth for Valentine's Day, so I do not believe these to be significant impacts for the full year.

In 2021, we spent 8.6% of revenue on capital expenditures. In 2022, that will drop below 8% to around $115 million to $120 million. Our 2022 CapEx includes investing in approximately 15 production hubs, largely experiential Hot Light shops as well as more than 30 Insomnia Cookies locations. Over time, we expect CapEx as a percentage of revenue to decline to 6% or below.

In 2022, we will continue to pay down debt and expect to end the year below 3x leverage with a long-term goal of approximately 2x. As our balance sheet improves, our EBITDA increases and our CapEx as a percentage of revenue declines, we expect our free cash flow conversion to also improve from approximately 10% in 2021 to more than 20% in 2022 and over time, grow to 50%.

Lastly, we continue to remain confident in our long-term growth algorithm of 9% to 11% annual organic revenue growth, 12% to 14% annual adjusted EBITDA growth and 18% to 22% annual adjusted diluted net income growth.

Operator, we can open the call up to Q&A now, please.

(Operator Instructions) Our first question comes from John Glass of Morgan Stanley.

First, Josh, just as a high-level question. I think I heard you correctly but correct me if I'm wrong that the enterprise EBITDA margin for '23 should be around 15%. If that's correct, I think this year, '22, it's maybe 14% plus or minus. So it's a large step-up. Can you just walk through what the -- I understand the efficiencies gained in the business, but is there anything in particular assumed in '23 that would drive -- or what are the pieces that were assumed in '23 that would drive that bigger step-up in EBITDA versus '22?

John, thanks for the question. And you're right, 2022, the guidance we've given implies around about a 50% basis point improvement in margin. And we continue -- and we expect thereafter to continue to drive up margin as we benefit from the hub and spoke model.

I gave examples earlier in the call around cities which are seeing Delivered Fresh Daily add to the margin. On top of that, e-commerce continues to grow strongly, also leveraging the hub and spoke model. And the branded sweet treats business, although small, is going to become profitable this year as well as markets like New York in the long run. So all those combined to give us that level of confidence in the long-term profitability of the U.S. and Canada segment.

Got you. But your -- the 15% was an enterprise goal, correct, in '23? I just want to verify that.

Yes, absolutely. And I think that the U.S. is the biggest driver of that. We're very pleased with the ongoing momentum and profitability in international. And hence, you're right, 15% overall.

And just finally, what is the full pricing now that you've taken a couple of price increases in the U.S., what -- in U.S. and Canada? What is that running now? And what is your assumption on overall inflation in the P&L in '22, so we can gauge how that offsets that inflation, please?

Yes. I mean, Q4 obviously has shown a fresh premium sweet treat business like ourselves. We can manage that inflationary environment that you referenced with price increases. After the November 1, we effectively ended the year with double-digit price increase for the year in the U.S., high single-digit on average across the world.

The guidance we've given here today does assume that we're able to manage both from that price increase and if we so choose, if needed, further price increases to still grow our margins in 2022.

More specifically to your question, I mean, on wage inflation, we did see it accelerate through 2021. It's more stable now. We're assuming high single digit for 2022. And on the input cost side, we have a great line of sight of that because we have actually already covered more than half of the year. Sugar is fully covered for the year, oil and gasoline through 2023. So it means we have a lot of confidence in our ability to deliver on the margin increase that we've been talking about already.

Our next question comes from John Ivankoe with JPMorgan.

I noticed that the DFD doors in the U.S. actually ticked down in the fourth quarter relative to the third. And I just want to see if there's any symbolism in that as you're focusing on fewer higher profit types of accounts if the amount of learning that you have in the DFD segment is kind of increasing your confidence in terms of generating more profitable accounts. And if you can put that decline in the fourth quarter relative to the increase in DFD doors that we're expecting in fiscal '22?

Sure thing, yes. I mean, it's always really important for us the Delivered Fresh Daily doors are in high-traffic locations and deliver the margin growth that we expect. And we're going through a transformation in the U.S. We've completely transformed from this legacy wholesale business over the last 18 to 24 months.

In international markets, the churn on those DFD doors, very, very low, less than 1%. As we go through the transition in 2021, we've definitely been learning as we go and have identified doors that aren't as efficient. But overall, the churn is still well below 5% and dropping.

Q4, there's a lot going on in the grocery stores and the convenience stores, seasonal occasions. And so it was great for me to reference that we've already got new doors going in, in the new year for 2022. We expect 150 new DFD doors in the first quarter in the U.S. and around 500 for the full year, over 1,000 across the world. So a good momentum with our customers, good momentum across the U.S. cities and internationally on DFD, a key driver of growth and margin progression.

And if I may, and this is just a clarification from the release. I mean, there was a fairly sizable sale leaseback gain in the quarter. Could you talk about what that was? It does look like it's excluded from your consolidated adjusted EBITDA, but I just wanted to make sure that was the case in the segment levels as well.

Sure. I have Joey with me here. Do you want to just reference that, Joey?

Yes, sure. So we did have a sale leaseback of a few properties in the fourth quarter, generated a little over $11 million in cash for us. It was an $8.7 million GAAP gain that we did add back for the adjusted EBITDA. So I wanted to make sure that, that was represented appropriately.

Our next question comes from Sara Senatore with Bank of America.

I wanted to ask about maybe some of the underlying dynamics happening in your access point. So you mentioned all product lines and sales channels performed well. But was there any mix benefit you saw either opening in higher sales volume markets? Or you did say there was disruption from Omicron. Did you see any mix shift to DFD from drive-thru and/or other?

Just trying to understand the underlying dynamics there. And whether there's any reason to think that either they persist in the coming quarters and maybe there's a bit of a reversal as sort of demand and patterns normalize? And then I just have a quick follow-up from that.

Yes. So first off, one of the things that really happened in the quarter, the demand curve that really drove the businesses, particularly around our seasonal approach, so you'll see the Halloween assortment and holiday assortment really did thrive. They did exceptionally well.

When you saw the COVID impact as it moves around, we saw minimal impact on that in the business as a whole. And you just saw the fresh DFD business as it continues its assortment and you start to see a bit of mix even from holiday doughnuts to start to go in there, they also get a pickup as well. So it gives you an idea how that business and how the channels work.

We see the same approach even starting the year in January and even parts of February. As you can see, the potential of the DFD is it drives fresh really drives that DFD business. That's the #1 attribute that customers continually ask us all of the time. They value fresh more than anything else of what we do.

When we can apply this omnichannel approach, the mix, the pricing potential that you have because when we get into different assortments, you can choose the assortment that you want to have inside of the retail. You can choose the assortment you want to have in delivery. You can choose the assortment you want to have in DFD as well.

And perhaps I'll just add, Sara, the -- on the channel perspective, in the U.S., which is obviously a big driver of growth overall, we actually see all the channels are growing. The biggest though, the biggest contributor to your next question is Delivered Fresh Daily.

But e-commerce, it grew in the fourth quarter. We expect that to accelerate a little bit from a growth versus prior year point of view in 2022 because obviously, we're lapping a big, big impact to the pandemic in 2020.

We see the shop growth coming through. We see the drive-thru coming through. We see Insomnia coming through. So we're actually seeing a balance of growth across all those channels in the U.S. and international. So it's quite a balanced profile that we're now selling into.

Now, of course, in 2022, we'll no longer be lapping the exit of our legacy wholesale business. And hence, that should be reasonably even through the year as well.

Great. Very helpful. And then just on the margin, you mentioned improved fulfillment rates for sweet treats, which is interesting because most restaurants have difficulty managing supply. Could you just talk about whether that had any impact as an offset to the improvements you made in supply chain and perhaps talk about what's left to be done to improve fulfillment further?

Absolutely. Our branded sweet treats business, which is the products we make are on shelf for Walmart and now increasing in other grocery and convenience stores, the doughnut bites and mini crullers, a launch we had made, in fact, a start-up business, less than 5% of U.S. and Canada segment sales. A launch we made in the pandemic, we definitely had fulfillment challenges. As it expanded, it grew even faster than our supply chain was able to manage in the third quarter, which impacted profitability.

In the fourth quarter, thanks to great efforts from the team and we put in additional lines, production lines, we're able to significantly improve that, as Mike referenced. And that reduced the profit impact that we had suffered in Q3.

Q4, we're still not profitable on branded sweet treats as it continues to grow. We'll move into profit by the middle of 2022. And we're keeping up with demand now, which is great. Demand, as Mike referenced, continues to build at record levels with over 15,000 distribution points across the U.S. So we're pleased with that progress and pleased that we are moving towards what will be a margin maybe potentially even accretive business in the long run.

Our next question comes from David Palmer with Evercore.

A question on the sales per hub. You have points of distribution growing per hub, and you have that maybe we can call it out the front door sales. How much do you imagine your out the front door sales have been hindered, not just in the markets like New York, but overall, by COVID caution? Do you view this as sort of a easy recovery and some percentage points that could come in sales per hub just from the out the front door sales?

So David, it's a really good question. When you think about it, we are -- the business really thrives in particular around when those seasonal events happen. So when Halloween happened, when the holiday assort happens, when Valentine's Day happens, we do not see that impact from COVID.

People want to access our brand because of the gifting nature of it. We know right now just so how you can think about that, 30% of actually every dozen box that's purchased is actually a gift.

You can also see when we actually play in the channels, we did something on 12/12, which was this Day of the Dozens. We did something in actually delivery channel. We can drive the business sometimes up to 50% increase just in e-commerce. So we have the ability to move around, and our customer moves around that.

Our #1 focus is how do we make sure our Krispy Kremers can be safe every day, and we can operate. And we didn't lose a lot of operating days. So they shift around. But I don't see that as a massive change when it opens up because our customers really used to how they want to engage with our brand.

Yes, there's no demand impact that we see even from Omicron recently. When we -- when I referenced Omicron disruption, it's purely Krispy Kremers, unfortunately, testing positive and just the operational disruption around that. We've estimated that just for the last week of December and partial in January at less than 2% of sales. So for a double-digit growing business, it's just not a meaningful change for us.

And then just sort of follow-up on the points of distribution gains, you talked about double-digit growth in those. And one of the feedback that we get on this company and the stock is that there's a lot of moving parts, that people have a hard time being confident about the sources of growth. And the points of distribution is a big part of that. Is there any sort of comment that you can make about your pipeline and the visibility you have into that double-digit points of distribution growth?

Yes. So if you think about the pipeline today in the U.S. and even in the international markets where we're trying to grow 10% a year, those are existing customers. We're really comfortable about how that pipeline will grow.

We just talked about that you'll have mix shifts sometimes between particular inside of the U.S. and Canada market as I take a look at of better optimizing that. So there's a clear line of sight.

What we really see is that from 10,000 where we are today is we actually see the 50,000 potential of how to really get into those points of access. We see that as every single one of our core markets is able to drive -- the U.S. will drive another 10,000 points of access.

We see the international markets, which is split between the International segment and the Market Development segment, another 30,000 points of access. It's the simplicity of the model, which is you get that Hot Light shop and then you leverage, whether it's 40 or 50 up to even 90 spokes that you apply to that shop. And that a lot will depend on if it's in an urban market, if it's in a self-urban market.

But the model is proving itself everywhere we are across countries. So we're pretty comfortable about what's there. It is different as people like to have a very typical franchise models, which is just open up shop, run same-store sales. That's not how we want to run a sweet treat shop, which is really about how we maximize the doughnut opportunities, which is around the seasonal part and then making sure we get to customers where they are through this whole omnichannel and hub and spoke model.

That also starts to become simple when we start to say, "Can you execute that consistently?" And we've had the privilege of doing this for the past 6 years, right? The public is now seeing this actually in the past almost a year as they start to see the hub and spoke model and truly the DFD system come to life.

Our next question comes from Brian Mullan with Deutsche Bank.

Just a question on the Insomnia business. It looks like you added 26 units last year on a net basis, about 14% growth. Can you speak to how the business handled that pace of growth last year from an operational perspective? Are you pleased with what you saw?

And then related, what kind of pace of unit development do you think that you could get to over the next several years there? Is 40 to 50 units something you think they have the ability to grow into?

Yes. So the pacing, as the team starts to scale, they start to have talent. They start to be able to get the right management bench. They can manage the growth. In fact, we've seen as they've adjusted even in their own omnichannel model because it's not just the shop and the delivery, right? There's a gifting business that they've also managed well.

We do see that 40, 50 cookie shop opportunity continue to be there. Right now, they've looked at their version of how do they think about the business, which is 600 cookie shops when they think about that as a long-term potential.

That's just where they are today. They are defining what's the size of a potential of a market like that. That will probably continue to grow as we start to see how these new shops are performing, both in the urban markets as well as the collegiate.

You're seeing a bit of a shift. They're really starting to maximize the collegiate markets where they grew, right? Now you can start to see that same opportunity exist in the urban markets.

So seeing that potential, very comfortable with how they're managing both the top line of the cookie shops, the margins of the cookie shops as they're able to do that and then see really how to expand that 40 out of a base of [216] where we ended the year is very manageable to them. In fact, they have a line of sight to already 85% to 90% of that pipeline, which is great when you start to see how a business will start to develop that.

Okay. And then just a question on the balance sheet capital allocation. Reference getting leverage below 3 turns exiting this year. Long-term guidance reflects in leverage of 2 turns. So can you just talk about what that path down from 3 turns to 2 turns look like? Do you try to go there as fast as you can on a glide path? Or you perhaps start to explore share repurchases along the way?

When Mike referenced a moment ago 50,000 points of access global opportunity compared to the 10,000 we have today, it's a real reminder of how much growth we have. And with the confidence we have in the returns that we get from investing in that growth, our primary focus is investing for the future, getting those returns back and continue to reinvest in the business.

Now to your point, around 3x to 2x, I mean, over the course of 2022, we'll grow our EBITDA 12% to 16%. We expect that to continue in the long run. And so yes, naturally, we signaled that, that will pay down our debt because we're a strong free cash flow business.

Our next question comes from Bill Chappell with Truist Securities.

Want to follow up on kind of pricing the outlook for this year, and this is kind of simplistic. But you're looking for 10% to 12% top line growth, which is slightly above your long-term algorithm. I think you're implying that at least mid- to high single-digits benefit from pricing. But in your original algorithm, obviously, I don't think you had that much pricing.

So is it an assumption that there's some elasticity this year? Is it just we're only in February, and so we're being very conservative on kind of what volumes do? Or is it -- are there tougher comps that's offsetting? Just any color of how -- it would seem to apply that it's a lower-than-average volume growth this year with that pricing to get to your 10% to 12% number. So just help me bridge that would be great.

Sure thing. I mean, the first thing I want to say is that our expectation for '22 -- 2022 has not changed. We've come in with guidance that is above the long-term algorithm. And we start the year very optimistic in terms of being able to deliver that guidance.

We see all segments contributing. Valentine's Day was a nice start, and we saw strong demand there. So nothing has changed on that. Yes, we have a number of puts and takes all the time going on in the business.

And as we start the year, coming out with guidance range above the long-term algorithm has been our focus. Pricing and premiumization, as Mike has talked a lot about, with a fresh sweet treats such as ourselves always been in our strategy. And we will drive volumes and transactions this year not just grow from pricing, which, you're right, is implied at the moment in the high single digits for 2022. But we'll see how we go. We are also very pleased to, of course, use it to cover that inflation. We have to adjust accordingly as we see fit. So no change to the model.

Okay. And just to be -- maybe I understand. As the year progresses, let's say, commodities or labor or other things get better, would you kind of make up the -- would you offset some of the pricing with more promotions, other things just to continue to drive volume? I assume you have a lot of arrows in your quiver to attack it.

Yes. I mean, that's not the first step that we look at. It's -- we really look at maximizing again that seasonal approach where you get the right assortment, the right packaging, the right storyline, that drives Krispy Kreme. And you can see it from our holiday, that was volume driven. The Halloween, that was volume driven. Josh just mentioned again Valentine's Day. They're volume-driven when we actually really drive the merchant approach to the business. And it's volume driven when it's also at a premium, right? So it's pretty unique. So we continue to do that. We can elevate our brand and get volume and price.

Our next question comes from Jared Garber with Goldman Sachs.

I've had maybe a higher-level strategic question. As we think about that 50,000 points of access opportunity, obviously, you've gone through a period of, I guess, premiumization, I would say, with the fresh doughnut products. How do you balance the brand positioning of that more premium fresh product with the opportunities maybe that might be -- some might consider maybe downmarket in terms of convenience store accessibility. And then I have just one follow-up on the commentary on ghost kitchens.

Right. So if you look at the 50,000 that we put out there, you still have to do that in a fresh spoke -- hub and spoke model. 50,000 to give you another snapshot from the grocer and convenience aspect, there's 1.3 million doors. We're not even getting close to 5%. So access to the fresh product will still be scarce.

And we look at how you represent the doughnuts, whether it's from cabinets and the display from the merchandising, the DFD that also goes through on top of delivery, et cetera, is a really big opportunity. Adding on, I know you're going to talk about ghost kitchens, but we look at -- we could look at that, but we also look at dark shops, which actually piggyback along where our routes and spokes are today.

So we control the quality. What you want to make sure is that the doughnuts are fresh. It's the #1 thing that the customer continues to look at. And again, in the space of 1.3 million potential doors, being disciplined about just doing the 50,000, which is significant growth. It's a 5x growth story right now. We're pretty comfortable about maintaining that scarcity and the hubs, which really are going to be unique that drive that brand awareness. And you can get all the channel approaches that you want to see.

Great. That's definitely helpful. And yes, I call them ghost kitchens. I'm not sure when you're talking about them as dark shops, is that -- I'm not sure that's exactly the same thing as how we would typically think about it. Maybe -- just maybe there's some additional clarity there would be helpful.

But I just wanted to understand the strategy there. I guess what's the benefit of doing something like that versus just opening up a fresh shop where you also have that consumer access point? Is it really just maybe lower cost shops that can drive the e-comm business? Any commentary there would be helpful.

So a ghost kitchen is -- that's not what we're doing today, right? Ghost kitchen is something that exists in the marketplace where they're actually building the kitchen through somebody else and delivering products, right?

What we do with dark shops is just another opportunity to get another spoke, which increases the ability of having delivery along the route, which we couldn't do directly from one of just our hubs, for example. So it's a low-cost investment, but it gives you a fresh doughnut drop that can then get to that customer in there. And it gives you a delivery radius where people will want to use the e-commerce channel where you can now get the doughnuts because you're not -- you're 20 minutes away from our shop, and you wouldn't be necessarily getting that delivery from the business.

And to make sure you can then maximize that, you get to the dark shop, which is basically think of that as another spoke that then uses a cabinet that is primarily just for delivery, which is what a dark shop can do.

Yes. It's like a DFD door where only the Uber driver can go to it. So it costs us less than $1,000 versus fresh shop or even a DFD cabinet. So it's a great innovation that we started in the U.K., trialing now in the U.S. Looks really promising as a way of getting more access to people in a low-cost way, and that's why we're doing -- going out.

You've got to deliver fresh, right? That's what the customer has their expectation. And this is what this hub and spoke system can do, including -- even including the dark shop in that portfolio.

That's definitely helpful. And then just one more follow-up, if you don't mind. Can you just update us on maybe now that you've gone through the full year of '21 where sort of the customer frequency landed? I know as we went through the IPO process, a lot of the commentary there was on increasing that frequency from about, I think you said 2.5x at the IPO or so and getting that higher to that 4x a year over the longer term? So any update there would be really helpful.

Yes. We're still at 2.5 that our customer does that and a heavy user tends to be at 4. We'll drive that seasonal piece, and we'll start to collect more customers in that space. We can look at our loyalty customers versus our -- just people who shop without a loyalty business. They probably have about a 20% increase from their frequency. But again, it's still within below 3 if you start thinking about it that way.

The big opportunities continue. How do you continue to drive that premiumization around the seasonal activity of how this brand does a sweet treat business and then capitalize on that. And then people start to think about us always as a gifting occasion that will happen.

I do think there's an opportunity for -- more gifting opportunities as the world gets back and people start to celebrate a bit more, but we don't build that in. We just want to see that as an upside to our frequency.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Mike Tattersfield for any further remarks.

Yes. So thank you, everybody, for joining us today. I hope you get a sense from Josh, I and all the Krispy Kremers, the tremendous work they did last year to have just a very successful year, especially as the first year as a public company. We're not where -- our expectations for '22 are exactly where we called them out, which they're still above our long-term algorithm even in this type of environment, which we think our omnichannel model can handle really well.

And I'm truly appreciative of all the Krispy Kremers, just doing an incredible job for our company every day. Thank you for spending some time with us. And I look forward to continued chats throughout the year.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.