Krispy Kreme Outlines Plans to Automate Doughnut Production, Reduce Debt

As a private company, Krispy Kreme focused on improving the quality of doughnuts it sold through third-party retailers like supermarkets and convenience stores. The company implemented what it describes as a hub-and-spoke model, using capacity in its retail locations to deliver fresher doughnuts to other locations nearby. It also acquired many of its franchisees in the process, and racked up debt that it is working to pay down.

“Part of the opportunity now is to increase access and sell products through doors that are not the doughnut theater,” said Sara Senatore, an equity analyst at Bank of America Corp. Krispy Kreme’s shares have declined by just over 38% since its public offering, alongside broader stock-market declines. 

The doughnut maker’s moves to improve revenue and profitability, as well as to cut the debt, come as the economy faces a potential slowdown. Krispy Kreme expects to generate $2.15 billion in revenue by the end of the 2026 fiscal year, up 41% from its projected revenue this year, including by expanding to new markets. The company has raised prices this year to offset inflation, and is also investing in automation to save on labor costs in its doughnut theater shops, said Chief Financial Officer Josh Charlesworth.

“There’s a lot of manual intervention behind the scenes,” said Mr. Charlesworth, who also serves as global president and chief operating officer, discussing doughnut production. For instance, employees manually dip doughnuts into bowls of icing, he said.

Krispy Kreme has begun testing new technology in its shops that would cut back on repetitive labor, and expects to automate about 18% of its total doughnut production over the next 18 months, according to Mr. Charlesworth. The company expects the investment, which has so far cost $6 million, to produce $2 million in annual savings. Krispy Kreme’s capital expenditures during the third quarter totaled $23.5 million.

“We’ll have to learn as we go,” Mr. Charlesworth said, referring to the automation push. The company is committed to maintaining the quality of its doughnuts in the process, he said.

As it looks to boost revenue, the company plans to enter international markets, including France, Chile, Costa Rica and Switzerland, in 2023. It currently operates in 31 countries.

The company reported a net loss of $13.1 million for the quarter ended Oct. 2, and a net loss of $24.5 million for the fiscal year ended Jan. 2. It expects, however, to consistently report an annual profit by 2026, as a result of its growth plans, according to Mr. Charlesworth. 

Krispy Kreme said it plans to achieve a total net leverage ratio—which compares net debt to adjusted earnings before interest, taxes, depreciation and amortization—of between 2 and 2.5 by the end of 2026. The company expects that figure, which stood at 3.67 as of Oct. 2, to come in at about 3.6 by the end of the fiscal year. 

As Krispy Kreme works to reduce its leverage, interest rates on more than 75% of the company’s total debt are fixed through the middle of 2024, meaning they won’t rise as the Federal Reserve continues its campaign to increase rates and fight inflation, according to Mr. Charlesworth. Krispy Kreme’s net debt—which compares cash to total debt—was about $753.3 million as of Oct. 2, up 11% from a year earlier, according to the company. 

Companies across industries and credit ratings are grappling with higher financing costs as a result of the Fed’s moves. “We’re in pretty good shape on that score, thanks to locking in rates before the recent increases,” Mr. Charlesworth said.   

Write to Kristin Broughton at [email protected]