Krispy Kreme Inc

NASDAQ:DNUT

Earnings Call Analysis

Krispy Kreme Maintains Strong Growth Trajectory

Krispy Kreme capped its third quarter in line with expectations, with both top line growth and improved adjusted EBITDA performance, hinting at mid to high-end full year revenue and EBITDA targets. Net revenue surged by 7.9% to $407.4 million, spurred by effective marketing, pricing strategies, and global omnichannel expansion. Adjusted EBITDA soared by 13.5% to $43.7 million, outpacing revenue growth and demonstrating enhanced operational leverage. The company expects to keep leveraging its successful hub-and-spoke model for further efficiency gains, eyeing leverage below 4 times by year's end and targeting 2 to 2.5 times by 2026. Capital expenditures rose to 8.4% of revenues due to new store openings and investment in growth initiatives, with a full year guidance corrected to 7-8% of revenue.

Expanding the Sweet Taste of Innovation

In an evolving market landscape, Krispy Kreme continues to sweeten its growth with relentless innovation and strategic partnerships. The company has infused vigor into its U.S. expansion, adding 186 new Delivered Fresh Daily (DFD) doors, including collaborations with grocery giants Kroger, Dillons, and Pick 'n Save. Embracing the digital age, Krispy Kreme's delectable offerings have resonated with a younger demographic, showcased by successful campaigns like the delightful M&M's and Hailey Bieber-themed donuts.

Upholding Operational Excellence and Profitability

The operational prowess of Krispy Kreme is evident with a 12% year-over-year increase in weekly sales and a boost in U.S. fresh margins by over 100 basis points, thanks in large part to its hub-and-spoke model efficiency. Strengthening its logistics, the company increased U.S. hubs with spokes and achieved a 9% rise in sales per hub KPI to $4.8 million. Margin improvement was also noted, with a 30 basis point uptick reflecting robust financial discipline despite increased performance-based accruals.

Scaling Production and Exploring QSR Opportunities

Looking forward, Krispy Kreme's high spirits are backed by expansion plans to meet growing demand. Capital expenditures ticked up to 8.4%, attributed to investments in manufacturing capacity and foreign exchange impacts. Discussions are in advanced stages with McDonald's to explore an extended partnership, a move that could beautifully blend the concept of fresh-donut experiences within quick-service restaurants, potentially reshaping the DFD strategy.

Navigating Seasonal Variations and Consumer Preferences

Adroitly maneuvering through seasonal fluctuations, Krispy Kreme has managed to maintain productivity in its DFD doors without significant elasticities impacting sales, signaling strength in its pricing strategies and product popularity. The company has focused on enlarging their premium donut collections, which aligns with their goal of enhancing brand engagement during both peak and off-peak seasons.

Refining Strategic Direction with Insomnia Cookies

Krispy Kreme, in seeking to optimize growth trajectories, is contemplating strategic alternatives for Insomnia Cookies. This pivot reflects a desire to capitalize on the strong performance and scalability of both brands. The potential separation of Insomnia Cookies could have a modest impact on total growth, estimated at 100 to 200 basis points, but with reinvestment strategies in place, the brand is poised for continued advancement.

Ambitious Growth and Accessibility Strategies

The company's ambitious plans to reach 20,000 points of access, particularly in untapped markets like New England and Upstate New York, demonstrate a commitment to increasing brand accessibility. Growth from Insomnia Cookies and Krispy Kreme's successful entry into new markets like Canada and the U.K., alongside a robust delivery strategy, underscores this focus. Moreover, the latest consumer research indicates the primary barrier to Krispy Kreme purchase remains accessibility, reassuring the direction of their growth initiatives.

Leadership Transition and Commitment to Success

In a bittersweet sign-off, CEO Mike Tattersfield expressed full confidence in his successor, Josh, to carry forward the company's legacy. As Tattersfield reflected on his tenure and the inspiration he drew from global Krispy Kremers, he exuded optimism for the brand's future potential, thus concluding his final earnings call with heartfelt gratitude towards investors and employees.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Krispy Kreme Third Quarter 2023 Earnings Call. [Operator Instructions]I would now like to turn the call over to Ms. Stephanie Daukus, Vice President of Investor Relations. Ms. Daukus, please go ahead.

[Stephanie Daukus, executive]

Thank you. Good morning, everyone, and welcome to Krispy Kreme's Third Quarter 2023 Earnings Call. Thank you for joining us today. Our earnings release and associated earnings presentation are available on our Investor Relations website at investors.krispykreme.com.Joining me on the call this morning are Mike Tattersfield, President and Chief Executive Officer; Josh Charlesworth, Global President and Chief Operating Officer; and Jeremiah Ashukian, Chief Financial Officer. After prepared remarks, there will be a question-and-answer session.Before we begin, I would like to remind you that this call contains 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 than those contained in any forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's Form 10-K filed with the SEC for the year ended January 1, 2023, and in the other filings we make from time to time with the SEC.Forward-looking statements made today are 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 comparable GAAP measures can be found in our third quarter 2023 earnings press release and Form 8-K filed today and is also available at investors.krispykreme.com.With that, I'll now turn the call over to Mike.

[Michael Tattersfield, executive]

Thank you, Stephanie. Good morning, and thank you, everyone for joining us today. We have quite a bit of news this quarter at Krispy Kreme with our upcoming CEO succession and our exploration of strategic alternatives for Insomnia Cookies. To frame the call, I want to talk about our history. Afterwards, I'll pass the mic to Josh to dive into our strategy and Jeremiah to cover our financial results and outlook for the remainder of the year.Krispy Kreme has been a loved sweet treat brand since Vernon Rudolph first started making donuts in 1937. Since joining the company in 2016, we've taken Krispy Kreme on a transformation to become focused as a donut company, always creating freaking awesome donuts. Vernon's recipe and its hot fresh donuts is how he built the brand. We further developed the brand, unlocking the power of a truly omnichannel brand. And importantly, we now deliver 100% of our donuts Fresh Daily, up from 50% since 2016.Also since 2016, we've nearly tripled the number of access points where consumers can buy fresh donuts daily and increase the geographies where we operate by roughly 50%, as we are now in 37 countries. We learned that we need to be where consumers want us and develop our points of access beyond the fresh and theater shops to include delivered fresh daily to grocer, convenience, and we are now unlocking new channels, such as club and quick service restaurants. We have profitably reshaped our global ownership network via our hub-and-spoke model and also acquired Insomnia Cookies 5 years ago to help us strengthen our e-commerce and digital platform. Digital orders now represent approximately 20% of consolidated retail sales.Finally, we have continuously invested in innovation and focused the brand on gifting, sharing and premiumization for our consumers worldwide. We know and believe there is nothing we can't do with a donut. And as always, at the core of our company is our purpose to touch and enhance the lives through the joy that is Krispy Kreme, which guides our culture and sets our direction to becoming the most loved sweet treat brand in the world.As I reflect back, none of this would have been possible without our more than 23,000 global Krispy Kremers, our leaders and our culture to drive growth and results daily. This team has transformed our business from a legacy retail and wholesale operation to a fresh, nimble, unique omnichannel business that has more than proven itself. I'm truly grateful and thankful to every Krispy Kremer.Turning to Insomnia cookies. I mentioned our announcement to explore strategic alternatives for the company to enhance both brands' growth trajectories and enable Krispy Kreme to focus on our core strategy of producing, selling and distributing fresh donuts daily. We thank Insomnia for their tremendous partnership in building upon our e-commerce and digital capabilities, all while we help grow the Insomnia business here in the U.S. to roughly 250 cookie bakeries, as well as we expand globally into the U.K. and Canada.Regarding the CEO transition, for some time now, I've been in conversations with the Board regarding my succession plan. Given the progress we've made on our strategy, the phenomenal team and culture we have in place, it was the right time to promote Josh to CEO, effective January 1. I am also excited to transition to a Senior Adviser role on Krispy Kreme Ambassador, where I'll support Josh and continue to spread the joy that is Krispy Kreme.Josh has played a critical role in Krispy Kreme's growth for the last 6 years, has been a tremendous partner to me, and I love his passion for the brand and our Krispy Kremers. All of this gives me confidence in our future success. Josh, I couldn't be happier to transition this road to you and look forward to watching more of your accomplishments as CEO.Now towards Q3. Our results this quarter demonstrate the continued strength of our team, our business model and the power of our brand. We delivered growth on both the top and bottom line, in line with our plans, while delivering adjusted EBITDA margin expansion through our hub-and-spoke model. Our global expansion continued as we made our donuts available in 2 markets, Switzerland and Kazakhstan, and Insomnia Cookies expanded internationally into Canada and the United Kingdom.With that said, I will now turn it over to Josh for a review of our strategy and to discuss the momentum we've seen so far in the fourth quarter. Josh, congratulations once again. Turn on that highlight, Amigo.

[Josh Charlesworth, executive]

Thanks, Mike. It's such a privilege and honor to be asked to leave this great team that you brought together. To represent this incredible brand, which means so much to so many people and above all, to support all our Krispy Kremers around the world as we seek to firmly establish Krispy Kreme as the world's most loved sweet treat. And on a more personal note, thank you, Mike, for the many years of support you've given me, including this period of CEO transition, and I'm very pleased that you'll be staying on as a member of the Krispy Kreme Board.I'm so excited for what is ahead of us at Krispy Kreme. Our strategy is clear, make our fresh donuts available in more places and keep reminding people of the joy that is Krispy Kreme, not just to eat, but to share and give to others. We have made so much progress in leveraging the power of the Krispy Kreme brand under Mike's leadership, now selling over 1.6 billion fresh donuts a year in over 13,000 points of access around the world. And yet, we have so much further to go.Our existing points of access represent less than 1% of the places a customer could in theory by Krispy Kreme donuts and our purchase frequency is less than 3x a year despite the many occasions and celebrations where our consumers can and do enjoy our donuts. We've laid out a great strategy, and we will remain focused on maximizing our global growth opportunity, leveraging our profitable omnichannel fresh donut business.The key elements being: one, expand availability of fresh donuts through more points of access in both new countries and new sales channels, such as quick service restaurants; two, increased purchase frequency by continuing to strengthen our premium offerings for special occasions and improving e-commerce and loyalty programs; three, drive end-to-end productivity in our donut supply chain through operating excellence and automation; and four, improve capital efficiency by leveraging excess capacity in our fresh donut production hubs to supply more capital light points of access. And we are pleased with our progress so far.Our third quarter results were excellent with organic growth just under 10%, adjusted EBITDA margins up by 50 basis points and points of access increasing 14% to 13,394. The 522 points of access that we added in the quarter were across multiple markets, including 453 new delivered fresh daily merchandising displays or DFD doors, 59 fresh shops and 4 hot light theaters. The new DFD doors include OXXO convenience stores in Mexico, Woolworths grocery stores in Australia, and Costco wholesale stores in the U.K., Australia and Canada, reflecting the increasing diversity of our customer mix.This also demonstrates our ability to expand DFD across multiple channels in several markets around the world. The 186 DFD doors we added in the U.S., including 2 more new Kroger divisions with Dillons in Kansas, and Pick 'n Save in Wisconsin, and we also saw significant growth with Publix. We now have just over 6,500 DFD doors in the U.S. with average weekly sales up 12% year-over-year in the third quarter.We're also confident that the quick service restaurant channel is an exciting DFD opportunity for Krispy Kreme, not just in the U.S. but around the world. And we are making investments in the U.S. that reflect our confidence in further scaling our delivered fresh daily network. While nothing has been finalized, we are excited about our continued partnership with McDonald's, and we are in advanced discussions about expanding the relationship.Turning to the consumer. We saw even on our seasonally low summer months, strong engagement with the Krispy Kreme brand driven by premium price, specialty donuts and marketing activation. Our limited time donut collections generated billions of media impressions, significantly increased average transaction values and drove strong overall growth. For example, our partnership with M&Ms in the summer, which included a one of a kind donut path with M&M'S Minis was a huge hit in 17 markets around the world.Our brand continues to grow and over-index with valuable younger consumers with 18 to 34 year olds now representing 40% of our U.S. consumer base, up from 33% a year ago. This is a big contributor to the success of our strawberry glazed donut partnership with Hailey Bieber, which sold out quickly every day we ran it in early September. These partnerships demonstrate our ability to reach beyond seasonal occasions with creative and innovative marketing approaches, especially with our more social media and digital savvy consumers.As we move into the peak holiday season, we have seen growth accelerate so far in the fourth quarter, thanks to a record overall performance in the buildup to Halloween, especially in the U.S., where we brought mystery and monsters to life with a Scooby-Doo Dozen. Looking ahead, we expect to maintain this momentum driven by more premium specialty donut collections, inspired by the holidays and pop culture.Selling the same fresh donuts, both our beloved original glazed and our premium offerings that we make in our production hubs through more points of access is at the heart of our unique hub-and-spoke operating model, making Krispy Kreme more accessible and convenient to more consumers and the hubs themselves more productive and profitable. This quarter, we increased the number of U.S. hubs with spokes from 143 to 148 by adding delivery routes to existing locations.Our trailing 12 month sales per hub KPI was up 9% year-over-year to $4.8 million, helping drive U.S. fresh margins up over 100 basis points compared to the same quarter a year ago. We are seeing continued success in replicating the hub-and-spoke model and leveraging growth and delivered fresh daily doors across several cities, notably, Charlotte, Dallas, Denver, Houston and Miami, which have had some of the largest increases in DFD doors this year.As evidenced by our third quarter results, our strategy continues to produce positive and tangible results, and I'm excited for the future as we continue to pursue establishing Krispy Kreme as the world's most loved sweet treat.I'll turn the call over now to Jeremiah.

[Jeremiah Ashukian, executive]

Thanks, Josh, and good morning, everyone. The third quarter finished in line with our expectations as we delivered growth on both the top line and adjusted EBITDA with improved performance throughout the business. We delivered our strongest third quarter adjusted EBITDA growth since our return to the public markets. And if trends maintain, we continue to track toward the mid to high-end of our full year revenue and adjusted EBITDA guidance.Net revenue grew 7.9% to $407.4 million, driven by successful execution of marketing activations, pricing actions, and further expansion of our omnichannel approach globally and across all segments. Organic revenue grew 9.6% to $400.3 million. As a reminder, organic revenue excludes impacts of acquisitions, foreign currency, and the branded sweet treats business. Growth, pricing, and the shift away from branded sweet treats resulted in product and distribution costs decreasing by 230 basis points year-over-year.GAAP net loss was $40.3 million in the quarter due to the forecasted effective tax rate and attributable noncash income tax expense. Importantly, we continue to expect an adjusted tax rate of between 24.5% and 26% for the full year 2023. Adjusted EBITDA grew 13.5% year-over-year to $43.7 million, exceeding the revenue growth rate. In turn, adjusted EBITDA margins expanded across all reportable segments, increasing 50 basis points year-over-year to 10.7%, demonstrating our ability to improve operating leverage through pricing and productivity initiatives.Diluted adjusted net income declined 3.6% year-over-year to $4.4 million. Adjusted EPS remained flat compared to last year at $0.03 despite net interest expense increasing 44% to $3.9 million. The increase was primarily driven by higher benchmark interest, as well as reducing our reliance on vendor financing.Turning to the segment results. In the U.S. segment, organic revenue grew 10.2% to $258.6 million, driven by effective premiumization opportunities and decreased discounting, leading to an increased average transaction size. Adjusted EBITDA increased 8.8% year-over-year, and margins expanded 30 basis points to 8.6%. Margin expansion was primarily driven by hub-and-spoke efficiencies and mitigating commodity inflation and labor pressures.With the pricing taken from earlier in the year, we continue to be focused on waste mitigation in both materials and labor efficiency, and we're making improvements in both those areas. We expect that these structural improvements should set up for persistent margin expansion moving forward, combined with benefits from our hub-and-spoke system maturing. And finally, Insomnia margins improved sequentially due to pricing actions taken in the quarter to address input costs. In the International segment, organic revenue increased 8.2% year-over-year, driven by increased pricing and points of access growth.Notably, Mexico continues to grow double digits and accelerated both sequentially and year-over-year, driven by strong e-commerce and hub-and-spoke expansion. Adjusted EBITDA increased 17.3%, expanding 30 basis points year-over-year and has returned to over 20%, primarily driven by declines in product and distribution costs as a percent of revenue due to the effective pricing increases. We saw strong operating leverage in the U.K. given actions taken to deploy cost control initiatives and introducing a 9 pack format in DFD.In the Market Development segment, organic growth increased 9.1%, which was partially offset by the timing of equipment sales to franchisees. Notably, Canada grew more than 30% as points of access growth accelerated. Adjusted EBITDA increased $1.6 million or 13.3% with margin expansion of 220 basis points to 32.6%, driven mainly by strong margin improvement in our company-owned Canadian and Japanese businesses from hub-and-spoke efficiencies, combined with fewer lower margin equipment sales to franchisees. Moving to the balance sheet.We have a healthy balance sheet with ample liquidity and expect leverage to close the year below 4x. We are focused on the long-term health of the business and setting up our capital structure to support growth through a strong balance sheet as we explore strategic alternatives. For Insomnia Cookies, we expect to use any proceeds to fund our growth agenda and strengthen our financial positioning, which includes paying down debt and a continuation of a reduction in the usage of vendor financing. Over the longer term, we remain on track to be between 2x and 2.5x net leverage in 2026.Capital expenditures increased to 8.4% of revenues in the third quarter, driven by new store openings and foreign exchange rates. As we continue to invest behind our growth of our omnichannel strategy looking forward and as Josh mentioned, the fourth quarter is seasonally our strongest, and we've observed a strong October with low double-digit organic sales growth, proving that underlying demand remains robust. Today, we are reaffirming our full year guidance ranges for revenue and adjusted EBITDA and continue to trend towards the mid to high-end of the range. Additionally, I want to specifically call out the changes to interest expense and capital expenditure assumptions.We are updating our outlook for interest expense to be between $47 million and $51 million due to the prevailing interest rate environment, as well as our strategic reduction of vendor financing. In addition, we're updating capital expenditures which we now expect to land between 7% and 8% of full year revenues, largely due to strategic investments and growth of our U.S. delivered fresh daily network and foreign currency rates. In summary, we had a strong third quarter and are seeing momentum in the fourth quarter, and we're excited about the future growth opportunities in our business.With that, we will open up the call for questions. Operator?

[Operator]

[Operator instructions] Your first question is from the line of John Ivankoe with JPMorgan.

[John Ivankoe, analyst]

I guess, the question is on U.S. margins, and I know in the past we've talked about DFD profitability really being looked at at a market level. And I wonder if there's any more intelligence or thinking around doing it at a root level or count level or even day-of-the-week level if there's an opportunity for you to actually drive some margin maybe beyond what we saw in the third quarter out of that business in general.And secondly, I think there's been some allusion that Krispy Kreme may use -- potentially use third-party delivery into some DFD accounts as opposed to using your trucks and your drivers. Is that an initiative that is currently being tested or explored or something that we could talk about on this call?

[Jeremiah Ashukian, executive]

John, appreciate the question around margins. I'll open up and say, we were pleased with kind of what we saw this quarter with respect to U.S. margins. We were up 30 basis points, obviously, in the U.S. with the U.S. fresh business up over 100 basis points for the quarter, really driven by some of that hub-and-spoke efficiency that you referenced but also despite needing to absorb performance-based accruals.So we still have bonuses this year that we expect to pay where we're declining those bonuses or decreasing those accruals last year. With respect to your question around -- looking at the business differently, we'll constantly kind of tinker with and explore looking at different ways to investigate how to view the business. And maybe I'll pass to Josh to kind of elaborate more.

[Josh Charlesworth, executive]

I think the primary focus that we look at for the health of the DFD business is the quality of the doors themselves, and then we make sure that the routes that we service them with are as efficient as possible. So the average sales per week of the door, which is over $600 a week, and again this quarter grew 12% after multiple quarters of strong growth demonstrates that we're continuing to add productive doors and keep an eye on the existing base. Generally, it's scale and density in a city that drives the profitability of the DFD routes. Routes that do 15 plus stops, get in, get out quickly, high-quality doors, short driving times is the focus.In terms of between different customers and what have you, we do see C-store be a little higher margin than grocery, but that's more reflecting the product portfolio. There's more loose donuts that we sell in the C-stores. And actually, in grocery stores at the moment, we have an initiative to add more cabinets that create greater display of those loose donuts. We've added over 120 this year. We see that as an opportunity to even improve the margin in the grocery stores. So we do do a lot of analysis around it, and that's how we think about it. But the real quality of the doors and those routes is the primary thing across the different cities.

[John Ivankoe, analyst]

And in terms of perhaps considering a different route or style of distribution versus doing it in-house than potentially using the existing distribution capabilities of a third-party, for example, in various markets, is that an opportunity?

[Josh Charlesworth, executive]

It could be. The routes that we have today are all run by ourselves. As we've built out this model over the last couple of years, we've wanted to move quickly. We've wanted to protect quality. The most important thing is these donuts, which, obviously, fresh daily, always displayed in the highest, best way, and then drive the profitability through the high-quality doors and the efficient routing. But that doesn't say that looking forward third party couldn't play a role, particularly as we look to scale DFD in the U.S. The quick service restaurant opportunity is clearly significant. And to scale at that magnitude, we will need to be flexible in different models. But right now, we're focused on our in-house logistics model and making sure that those donuts are amazing, well served, high service levels, and the system remains strong throughout.

[Operator]

Your next question is from the line of Sara Senatore with Bank of America.

[Sara Senatore, analyst]

Great. Hopefully, you can hear me. I have a question about the McDonald's announcement. It's twofold. One is, is that the CapEx increase? Is that the sort of reason for that? Or are there other initiatives that you're also supporting? And maybe you could give a little color on that. And then with respect to McDonald's, are there findings that you can share about things like pack size or loose donuts, what you know about the customers per your earlier comments about the relative profitability of different DFD doors. Just wondering if there's anything -- any insights that you can share from the early test.

[Jeremiah Ashukian, executive]

Maybe I'll address the CapEx question, and I'll flip it to Josh to address the McDonald's question. Obviously, we continue to focus our spend on the highest returns. CapEx did tick up this quarter to about 8.4% as we continue to invest behind growth and expansion of our U.S. DFD network. But we also saw in our experience in the impact of foreign exchange rates on international investments in the quarter and obviously on a year-to-date basis, which also contributed to some of the tick-up this quarter. Josh, do you want to cover the McDonald's DFD?

[Josh Charlesworth, executive]

Sure thing, Jeremiah. Yes, regarding McDonald's itself, nothing has been finalized, but the opportunity to expand DFD through existing and new channels, including QSR, is clear. And we are discussing the potential for an expanded partnership with McDonald's in the U.S.The learning has been very interesting through the pilot that we've done with them throughout the year in Kentucky, and that is the nature of a lot of the discussions with McDonald's right now, ongoing analysis and discussion with them, covering the operational execution, making sure the donuts always arrive at the right time, right quality, understanding then indeed are the requirements that would be needed to scale beyond Kentucky, and of course, commercial viability of the whole thing. I mean, our confidence in the U.S. DFD opportunity, including now QSR, is what's grown. It's such that we've decided to thoughtfully start making additional investments.We're just getting going, but those investments will be about -- around manufacturing, capacity to support, scale growth because to your point around what have we learned from it, what we've learned is that these QSR outlets behave in a very similar way from our point of view to a DFD door. We're able to provide a fresh donut experience. The portfolio is relatively limited, but that doesn't mean it couldn't be added to over time. We've seen that both the loose donuts and the pre-packed donuts are well received.And so, from our point of view, it's behaving very well and substantiates the brand as we scale it. And as I've mentioned before, we don't see sort of cannibalization of our base business in other DFD doors or indeed in our retail locations. And we're excited for it. Our confidence has clearly grown enough to really start thinking about where we'd invest to support that kind of scale.

[Operator]

Your next question is from the line of Brian Mullan with Piper Sandler.

[Brian Mullan, analyst]

Just a question on Insomnia. I believe you're expecting about $230 million of revenue from that business this year. How should we think about the store level margins associated with that revenue? And related to that, maybe what's a good way to think about the G&A and the D&A allocation we can try to come up with a good sense of adjusted EBITDA? If you'd be willing to share any color, that would be great.

[Jeremiah Ashukian, executive]

Yes, Brian, I can take that question. Look, number one, we're super pleased with the business performance as it continues to grow, and the profitability is improving sequentially. There also continues to be a lot of opportunities for growth expansion, both in the U.S. and internationally, as we're seeing great engagement early on in both Canada and the U.K. in the early stages. I don't want to kind of speculate too much or at least kind of share too much, just given the fact that we're in a process right now and some of the other questions around financials, and I'll probably leave it at that.

[Brian Mullan, analyst]

Okay, understood. Just to follow-up, just related to the potential -- or not the potential, but you're going to be expanding production capacity in the U.S. I think In the past, you said it's a 10% to 15% increase in hubs to be able to serve an additional 8,000 to 10,000 DFD doors on top of the capacity you have. So just how do you want us thinking about the cost to build each additional new hub? Maybe how long would it take you to build? And how many hubs are you thinking you can get to next year in your planning?

[Josh Charlesworth, executive]

Okay. I'll take that. Yes, actually, just stepping back a moment, as it relates to supporting the whole DFD opportunity in the U.S., including QSR, we can add about 6,000 points of access from the existing production hubs with minimal investment. You're just talking trucks, drivers, that kind of thing. But clearly, we want to go beyond that, which is what you're talking about. We want to start investing and increase capacity in underserved markets around the country as well. That can be new markets like New England or Upstate New York, Minnesota but also markets where we're near full capacity with very strong businesses, like California and Florida.So yes, as you talked about going beyond the 12,000 points of access that we can do from our existing hubs, we would add about 10% to 15% of hubs on top of our existing network, and that would serve about another 8,000 points of access. So 20,000 points of access all in, obviously exciting opportunity. Now it's interesting these production hubs in the future, we'll be building them to support more off-premise DFD sales than the hubs that we have today. So they're going to have additional donut making lines.They'll have larger load-out logistics areas. So we're going to evolve to support what is clearly a rapidly growing DFD opportunity for us. And with 10% to 15% more hubs works out at about 25, 35 new hubs over the next few years, about [ $3 million to $6 million ] a hub. Timing depends on a number of factors. As I said, there's nothing finalized with McDonald's, so we'll continue to update you on our plans as we have more information.

[Operator]

Your next question is from the line of Andrew Wolf with CL King.

[Andrew Paul Wolf, analyst]

Great. I just wanted to ask the restaurant industry at large generally had a weak summer, especially August and September, and then it bounced back in October. Was the cadence of sales, certainly within the shops and the hubs, was that similar? And was -- and also, how was the DFD? Was there any similarity to sort of the restaurant industry at large in your sales cadence?

[Jeremiah Ashukian, executive]

Yes. Seasonally, Q3 is actually one of our softest periods traditionally, and Q4 is one of our strongest. So we're kind of seeing that cadence right in line with our expectations. So growth obviously in the quarter was right in line with what we'd expected it to be. In the U.S. specifically, we are pleased with the growth we're seeing in the U.S. and how the underlying business is holding up, given some of the price we've taken, as it grew double digits for the fourth consecutive quarter.With respect to DFD, all of our channels grew, DFD being one of the largest growth contributors at over 20% in Q3. Of that growth in DFD, half was driven by points of access, and half was driven by price and premiumization and bringing specialty donuts into the channel. And we're actually maintaining productivity in existing doors, which is a good sign for us as well. So...

[Josh Charlesworth, executive]

It's really interesting, the seasonality of us versus the industry you referenced. Obviously, to the earlier question, we're learning about QSR restaurants and the way they behave this year. And obviously, the summer season and the ones we've been servicing is quite big. It's a big part of the year for us. It can be a low, obviously related to weather factors and what have you and less holidays during that period. It was actually really exciting that we're able to bring a lot of excitement around the brand in the low season with M&Ms. Pumpkin spice was a fantastic promotion in the U.S., and I mentioned the Hailey Bieber influence strawberry glaze promotion as well. So to be able to create that excitement at this premium specialty donuts in the low season was great.And that applied to the donut shops, e-commerce, in particular, and DFD, where we supplied those specialty donuts across all 3. Now looking ahead, of course, we've got more holidays, more excitement around the brand to think about our high season. And hence, the good start with Halloween was really good to see as well.

[Andrew Paul Wolf, analyst]

Great. Just one follow-up on the comments on the maintenance of sales productivity at DFD doors. It's good to hear. Is that on a dollar basis or on a unit basis? I guess what I'm specifically asking about, it sounds like the premiumization is going well, but is there like an elasticity issue at all? Or is it about what you expect? And so I guess it would end up being the same. Would it translate to any change in shrink in terms of product that didn't get bought?

[Jeremiah Ashukian, executive]

Yes, I think so. I can take that, Andrew. And as I mentioned, half of the growth was driven by price. And when you look at the existing doors, they're maintaining that productivity on a unit basis. So we're not seeing significant elasticities, and they're definitely in line with what we would have expected to see.

[Josh Charlesworth, executive]

And the specialty donuts, there's a lot of demand for them. So in many ways having those become a bigger part of the portfolio is good for productivity because they sell out faster.

[Operator]

[Operator instructions] Your next question is from the line of Bill Chappell with Truist.

[William Chappell, analyst]

Just 2 questions on Insomnia and the announcement intra-quarter on there. I guess, one, as you're thinking about potentially strategic alternatives, can you maybe quantify what that business did for organic sales in the U.S. for the quarter and what that would mean for the year?And then second, just kind of a little more color behind the thought process of that. And from the IPO on, you had been pretty firm about saying it was a key part of the business, and it was something that you could really nurture and build. And this seems like the timing in terms of maximizing value for it when there's a lot of noise about GLPs and what have you is not ideal. So just trying to understand kind of what went behind it and what your thought process is on timing and stuff like that, as well as kind of what it would take away in terms of the [ total organic ] growth.

[Michael Tattersfield, executive]

Bill, this is Mike. 5 years ago, we took on the business of Insomnia. One of the key things that we really looked at is how do we capitalize on the delivery and e-commerce capability of that brand and then how do we help that brand start to expand itself and get scaled in the U.S. and potentially outside of the U.S. So what we've seen and you've seen today, where 20% of our retail sales overall is being driven by delivery, we check that box, right?So when you start to see we're there now at a 250 cookie shop basis -- bakery basis in the U.S. They're starting to unlock in the international, both in the Canada and the U.K. They have a tremendous growth story. Krispy Kreme has a tremendous growth story in front of us. The reason to look at strategic alternatives is to just explore and enhance that growth potential that we have there. So that's why the timing is the right timing right now. That's why we chose this today.

[Jeremiah Ashukian, executive]

Yes, and let me -- I can pick it up in terms of how we're feeling overall in the top line is, I kind of mentioned a few questions ago that, again, we're super pleased with how the business is performing, both on top line as well on -- as well as on profitability, sequentially and year-over-year. With respect to the process, we're super pleased with the strong level of interest we've seen already from very high-quality parties and remain focused on the transaction which will generate a strong return on investment in the business that we made and realize value for our shareholders.And we'll share more news as we have it with you all. With your question around the overall growth impact, we expect it to have a 100 basis point to 200 basis point overall impact on the total growth of the business. But we feel like the Krispy Kreme business has proven it can accelerate and therefore offset some of that. In terms of GLP question, maybe I'll flip it to Josh, and he can address your GLP concern.

[Josh Charlesworth, executive]

Yes, the Krispy Kreme consumer remains strong, and the trends are strong. We don't see any impact of -- from the use of these drugs that you mentioned. It's not surprising. More than 70% of our donuts are sold in sharing sizes, usually at special occasions and celebrations. They're often given to others. Krispy Kreme is an infrequent purchase. It's typically bought less than [ 3x ] a year. And actually, the majority of our sales are from donuts that are under 200 calories each.So we know our customers well. We actually do conduct regular brand research on the purchase barriers. The latest research just from a couple of weeks ago shows that, once again, it's actually accessibility that remains the #1 barrier to purchase of a Krispy Kreme, the availability and convenience of those donuts for our customers.Health considerations remain a low priority and actually are unchanged from the prior survey. So the consumer remains strong, and the trends remain strong for Krispy Kreme. And the growth ambition for Krispy Kreme, as we've talked a lot about today, driven by both points of access, expansion in multiple channels, and the engagement around the brand, such as all these specialty premium donuts that we've seen so much success with recently, is why we're not concerned around the impact on the overall performance from taking out Insomnia. In fact, we see the opportunity to reinvest the proceeds behind the growth and drive the brand -- the Krispy Kreme brand on further.

[William Chappell, analyst]

Got it. And maybe I wasn't clear, I was talking more about the GLP concern on the valuation that you might get for Insomnia, but so be it. In terms of just clarifying, so if you take out Insomnia and it takes out 100 basis points to 200 basis points of the total company, would that mean it's probably about a 300 basis point impact on the U.S. business since it's U.S.? Just trying to understand our numbers as we go forward and kind of the organic growth you're thinking.

[Jeremiah Ashukian, executive]

Yes, I think it might make sense to take that offline, just to debrief in the follow-up conversation. But I think you're probably close-ish in terms of your estimation of the impact on the business in the U.S.

[Operator]

At this time, there appear to be no further questions in the queue. I will now turn the call back to Mike Tattersfield for any closing remarks.

[Michael Tattersfield, executive]

Yes. So thank you, everyone, for your time. On a personal note, this marks my final earnings call as CEO of Krispy Kreme. As I said before, I couldn't be happier to transition this role to Josh. I love his passion for the brand, our Krispy Kremers and freaking awesome donuts. It just gives me the utmost confidence in our continued success, and I look forward to watching how he and the team will accomplish. Again, thank you, all, for all the investors and your continued support of the company, and gracias to all my Krispy Kremers around the world who inspired me throughout my time here. Lots of love. Ciao, Mike.

[Operator]

This does conclude the Crispy Creek Third Quarter 2023 earnings call. Thank you for your participation. You may now disconnect.