Krispy Kreme Inc

NASDAQ:DNUT

Earnings Call Analysis

Krispy Kreme Reports Growth Amid McDonald's Rollout Strategy

Krispy Kreme's third-quarter earnings showcased a revenue of $380 million, driven by an 18% growth in access points and 3.5% organic growth, marking the 17th consecutive quarter of growth. The company anticipates full-year revenues between $1.65 billion and $1.685 billion, with expected organic growth of 5% to 7%. Adjusted EBITDA is projected at $205 million to $210 million amidst elevated logistics costs. The nationwide expansion with McDonald's is progressing well, aiming for 12,000 locations by 2026, and is supported by robust marketing efforts. Overall, Krispy Kreme is focused on optimizing operations and enhancing customer engagement.

Navigating Change: A Strong Third Quarter

In the third quarter, Krispy Kreme experienced significant transitions influenced by the sale of a majority stake in Insomnia Cookies, finalized on July 17. The focus on expanding access to fresh doughnuts led to an 18% increase in points of access, contributing to a net revenue of $380 million. This marked the company's 17th consecutive quarter of organic growth, achieving a 3.5% increase with robust digital sales driving a 15% uptick. However, adjusted EBITDA fell to $34.7 million, down 20.7%, primarily due to the cookie company divestiture, and adjusted EBITDA margin decreased to 9.1%, pressured by underperformance in the U.K. and increased vehicle accident claims.

U.S. Performance: Strategy for Growth

Within the U.S. segment, organic revenue growth was 2.5%, yielding an adjusted EBITDA of $13.9 million. Points of access in the region grew by 13.7%, mitigating declines in traditional retail traffic. Special promotions like the Labor Day Dr Pepper Doughnut resonated well, whereas summer collections lacked impact compared to prior year successes. The average revenue per door per week was approximately $592, although margins faced a 6.1% decline due to accident claims. Encouragingly, the U.S. segment aims to restore margin growth year-over-year by Q4, coinciding with peak holiday demand.

International Markets: Opportunities Amidst Challenges

Krispy Kreme's equity-owned international markets showed a healthy organic revenue growth of 4.2%, driven by Canada, Japan, and Australia. Despite a decline in adjusted EBITDA margin to 17.4% mainly due to U.K. challenges, the segment is witnessing improved performance elsewhere. The company has welcomed new management in the U.K. to refocus efforts toward regaining profitability. Excluding the U.K., margins improved year-to-date. The company's concentration now leans toward enhancing profitability, with sequential margin improvement anticipated for Q4.

Market Development: Expanding Horizons

In the Market Development segment, organic revenue surged by 8.6%. This growth is attributed to collaborations with franchise partners and new market entrants like Morocco. The adjusted EBITDA margin soared to 54.2%, supported by controlled SG&A expenses. Krispy Kreme is enhancing global reach, boosting overall company performance while promoting expansion strategies.

Guidance Ahead: Revenue and EBITDA Expectations

Looking forward, Krispy Kreme has revised its annual guidance in response to third-quarter results. The expected full-year revenue range is set between $1.65 billion and $1.685 billion, with organic revenue growth targeted at 5% to 7%. Adjusted EBITDA is projected to fall between $205 million and $210 million, while adjusted earnings per share is anticipated to be within $0.18 and $0.22. The company also foresees $8 million to $12 million in SG&A savings annually starting from 2025.

The McDonald's Partnership: A Milestone Initiative

A major strategic shift is underway with Krispy Kreme's partnership with McDonald's, starting with a successful launch in Chicago. The goal is to have doughnuts available at nearly 2,000 McDonald's locations by the end of 2024. This rollout is accompanied by significant marketing efforts, driven by McDonald's, which includes TV, social media, and billboards. As the partnership expands into states like Ohio and Indiana, there is an optimistic outlook, with over 1,000 additional restaurants launching in the coming weeks.

Operational Efficiency: Leveraging Capabilities

Krispy Kreme's operational strategies focus on modernizing production and improving distribution efficiency. The company's U.S. production capacity currently operates at about 25% utilization, compared to an optimal level above 60%. Initiatives are in place to enhance this through the construction of new production hubs and increasing production density in existing facilities. As these efficiencies are realized, financial benefits are expected to materialize, potentially enhancing profit margins in the back half of 2025.

Long-Term Vision: Building a Better Krispy Kreme

As a part of its long-term strategy, Krispy Kreme emphasizes consumer engagement and relevance. The management is restructuring teams to ensure a focused approach towards profitable U.S. expansion while capitalizing on the potential of international markets through a capital-light franchise model. With operational improvements in production and logistics, Krispy Kreme aims to deliver sustainable returns, enhancing shareholder value while expanding brand presence globally.

Earnings Call Transcript 2025-Q3

[Operator]

Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to the Krispy Kreme Third Quarter 2024 Earnings Call.

I would now like to turn the call over to Dre Eldredge, Krispy Kreme Investor Relations. Dre, please go ahead.

[Alexandre Eldredge, executive]

Thank you. Good morning, everyone. Welcome to Krispy Kreme's third quarter 2024 earnings call. Thank you for joining us today.

We will be referencing our earnings release and presentation during the call. These are available on our Investor Relations website at investors.krispykreme.com.

Joining me on the call this morning are President and Chief Executive Officer, Josh Charlesworth; and Chief Financial Officer, Jeremiah Ashukian. 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 from 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 December 31, 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 our closest comparable GAAP measures can be found in our third quarter 2024 earnings press release and Form 8-K filed today with the SEC and is also available at our investors.krispykreme.com website.

Jeremiah will take us through our financial performance in a moment. But first, here's Josh.

[Joshua Charlesworth, executive]

Thanks, Dre. Good morning, everyone, and thank you for joining us.

Consumers ask us every day, when can you bring Krispy Kreme to my town and so our strategy of making our fresh doughnuts more available around the world. The successful start of our nationwide U.S. rollout of McDonald's, which began in Chicago in October and continues next week in Ohio and Indiana is a major milestone on this journey. We now expect the delighting Krispy Kreme fans with our melting of mouth doughnuts fresh daily in nearly 2,000 McDonald's restaurants by the end of 2024. We're building a bigger Krispy Kreme by focusing on our fresh doughnuts available through retail shops, online and delivered daily to grocers, convenience stores and quick service restaurants around the world. While we are already in nearly 16,000 points of access across 40 countries, there is much more growth ahead of us. We expect our beloved doughnuts to be available fresh daily in nearly 35,000 points of access in about 50 countries within 3 years. Not only are we making the Krispy Kreme business bigger, we must also make it a better business, one that maximizes the benefits of the opportunity in front of us and deliver sustainable, profitable returns.

Now well into my first year as CEO, we have streamlined and focused our business with the sale of our majority stake in Insomnia Cookies complete and the acceleration of our U.S. DFD expansion underway. To better align our talent and capital to our business priorities, we are now restructuring our management teams to concentrate on maximizing our profitable expansion in the U.S. while focusing international efforts on the wider adoption of our capital-light franchise model. With our resources prioritized to the things that matter most, I believe that these changes will result in a bigger and better Krispy Kreme.

As we move forward, our team's business priorities are clear; #1, drive consumer relevance. We'll continue to give our fans more reasons to enjoy and share our fresh doughnuts with both our iconic Original Glazed and our buzzworthy specialty doughnut collections; #2, expand availability. With household penetration in the U.S. at only 13%, we'll grow nationwide by reaching more points of access. We're also excited about our international growth prospects, particularly in new markets like Europe and Latin America; #3, increase hub-and-spoke efficiency. We are modernizing doughnut production and increasing distribution density to improve profitability; #4, improve capital efficiency, we are leveraging our existing capacity to increase production hub utilization and making selective high-return investments in regions with limited access to Krispy Kreme today; #5, inspire engagement, the passion and hard work of our Krispy Kremers is key to our success, and we're committed to creating an environment that fosters their growth, celebrates their contributions and empowers them to take pride in their roles. The Krispy Kreme, the spotlight is always on our iconic Original Glazed, our most distinctive, most purchased and most shared doughnut accounting for more than half of our sales. There's just nothing like our irresistible fan favorite. We make sure that it's always so fresh and enjoyed throughout the day in all sales channels, representing excellent value to the consumer. Our buzzworthy innovative specialty doughnuts bring additional fun and relevance to the brand. In Q3, our Barbie 65th anniversary and Dr Pepper football collections were our strongest performing activations, helping generate 28 billion media impressions. We're also continuously striving to enhance our consumers' digital experience, including the U.S. loyalty program that we relaunched earlier this year. For example, this quarter, we saw 15% growth in digital sales.

The nationwide rollout to McDonald's has started well, with fresh doughnuts delivered daily to more than 400 McDonald's in Chicago since mid-October from our 3 production hubs in the city, I want to thank our dedicated Krispy Kremers and McDonald's teams who have partnered closely to ensure a smooth rollout so far. The consumer response has been positive, and the pace of growth accelerates from here with more than 1,000 additional restaurants launching this month alone in Ohio, Indiana, Pennsylvania and West Virginia. We're off to a strong start on our journey to meet our goal of making fresh Krispy Kreme Doughnuts available in more than 12,000 McDonald's by the end of 2026. McDonald's is supporting the launch with a comprehensive local marketing plan, including TV, social media and out-of-home billboards. We expect this increased visibility to benefit Krispy Kreme brand awareness as we expand to more cities across the country.

Availability is also growing through our other DFD customers with the addition of deliveries to more than 150 new Target stores in the third quarter as well as more Walmarts and Krogers. After success in several international countries, we've also started a promising U.S. test of daily deliveries to a small number of Costco warehouses in Southern California. We are well on our way to adding 15,000 points of access in the U.S. by the end of 2026, and we continue to believe in the long-term financial benefit of our profitable U.S. expansion. As we shared earlier this year, we estimate $340 million to $430 million in annualized incremental revenue and $70 million to $100 million in additional adjusted EBITDA, creating significant operating leverage on the business. Increasing doughnut volumes at existing production hubs improves productivity and profitability, as does the modernization of our doughnut manufacturing facilities and processes. For example, our refurbished and improved production facility in Elk Grove, Chicago has increased daily production 3-fold in a matter of days and is already demonstrating significantly improved productivity levels. On average, our U.S. production network operates at about 25% utilization today compared to an optimum above 60%. Nationwide DFD expansion gives us the opportunity to improve the capital efficiency of the existing production hubs, and we also plan to open new high-volume facilities with quicker paybacks in underserved markets like Minneapolis and Massachusetts.

As our company grows, so does the scale and complexity of logistics and delivery. Having run successful pilots in the U.S., we are pursuing third-party managed delivery to DFD customers, a proven approach we use in several international markets. While we continue to successfully build-out our logistics and delivery network in-house, we believe this approach is aligned with our evolved strategy and the desire to focus on what we do best, making fresh melt-in-your-mouth doughnuts every day and spreading the joy of Krispy Kreme.

Krispy Kreme engagement is essential to driving customer satisfaction and deepening the connection to our brand. We are training and developing our teams, so they feel empowered, inspired and well prepared to deliver exceptional experiences. I want to thank our Krispy Kremers for their daily commitment to bringing joy to our consumers through Krispy Kreme.

Now I'll turn it over to Jeremiah to talk about our financial performance.

[Jeremiah Ashukian, executive]

Thanks, Josh. I'll cover our third quarter results, which, as a reminder, are impacted by the sale of a majority stake in Insomnia Cookies, which closed on July 17.

Our strategy of making fresh doughnuts more accessible resulted in points of access growth of 18%, driving net revenue of $380 million for the quarter. As we expected, organic growth for the quarter was 3.5%. This is the company's 17th consecutive quarter of organic growth, driven by 15% growth in both delivered Fresh Daily and digital sales. Adjusted EBITDA was $34.7 million, a decline of 20.7%, largely driven by the sale of a majority ownership stake in Insomnia Cookies. Adjusted EBITDA margin declined to 9.1% due to continued underperformance in the U.K. and incremental vehicle accident claims in the U.S. Recall also that third quarter summer months typically have the lowest volume of the year, which has the largest impact on cost absorption and margin.

Turning to our U.S. segment results. Organic revenue growth was 2.5% with adjusted EBITDA of $13.9 million. Points of access growth was 13.7% year-over-year, which helped offset choppiness in traditional retail footfall. We had several specialty doughnut offerings in the quarter. Our Labor Day Dr Pepper Doughnut coincide with the start of college football season performed well as our specialty doughnut offerings work best when tied to culturally relevant moments. However, our Passport to Paris Collection collection in July intended to celebrate the Summer Olympics didn't resonate as strongly with consumers as we lapped strong performance with M&M'S at the same time last year.

We continue to be pleased with our performance in the DFD channel. Average revenue per door per week was $592, driven slightly lower by customer and product mix. Adjusted EBITDA margin declined 6.1%, primarily due to incremental vehicle accident claims in the quarter, partially offset by pricing and tight control of SG&A costs. We expect the U.S. segment to return to expanding margin year-over-year in the fourth quarter as we focus on delivering a strong holiday season. Within our equity-owned international markets, organic revenue grew 4.2%, led by Canada, Japan and Australia as we continue to expand the network, growing points of access nearly 32% year-over-year. Adjusted EBITDA margin declined to 17.4%, primarily due to pressure in the U.K., where we have welcomed a new management team focused on improving the business. Excluding the U.K., margin in the segment has improved year-to-date compared to the prior year. Sequential margin improvement despite seasonal summer trends, which typically pressure the third quarter was driven by Mexico. We remain focused on recapturing profitability and expect sequential margin improvement in Q4.

In our Market Development segment, organic revenue grew 8.6% as the brand continues to grow globally with our capital-light franchise partners, including new market launch in Morocco during the third quarter alongside continued growth in France, Turkey and Ecuador. Adjusted EBITDA margin improved to 54.2%, driven by royalty flow-through and tight control of SG&A. For the third quarter, we delivered a loss of $0.01 in adjusted earnings per share, a decline from the prior year driven by lower adjusted EBITDA linked to the sale of majority stake in Insomnia Cookies. We again delivered positive cash flow from operations in the quarter, driven by working capital improvements, taking us to $18.8 million year-to-date.

During the quarter, we closed on the divestiture of Insomnia Cookies and received $117.6 million in net proceeds and an additional $45 million from a repayment of a loan due from Insomnia Cookies, which resulted in leverage reducing to 3.9x. We are also protecting our balance sheet and have now hedged $500 million of our long-term debt with an effective interest rate of approximately 6.3% as of quarter-end.

I will now turn to our full year guidance. We are adjusting our full year guide to reflect the third quarter results, the acceleration of our expansion with McDonald's and the completion of the Insomnia Cookies transaction in July 2024. We continue to expect full year revenue between $1.65 billion and $1.685 billion with organic revenue growth of 5% to 7%. We are updating our adjusted EBITDA expectations to be between $205 million and $210 million this year. We now expect between $0.18 and $0.22 of adjusted earnings per share for the full year.

As Josh mentioned, we're now restructuring our management teams to focus on our business priorities to build a bigger and better Krispy Kreme. I believe this will make us more effective and efficient and estimate $8 million to $12 million of annualized net SG&A cost savings beginning in 2025. I remain confident in the potential for value creation as we continue to evolve our business to support our numerous global growth opportunities.

I will turn it over to Josh for his closing remarks.

[Joshua Charlesworth, executive]

Thank you, Jeremiah. Our consumers are asking for Krispy Kreme to bring fresh melt-in-your mouth doughnuts to their towns. The response to the start of our nationwide expansion in the U.S. proves that we have an enormous opportunity ahead. Our priorities have never been clearer and the changes we've announced today to align our talent and resources toward them will ensure we are well positioned to make Krispy Kreme bigger and better, maximizing shareholder value over the long-term.

Operator, let's now open it up to Q&A, please.

[Operator]

And it looks like our first question is from Brian Harbour with Morgan Stanley.

[Brian Harbour, analyst]

With McDonald's, as you start going into some of the other new markets, I mean, is what you've seen on a kind of a revenue per door basis been consistent? Could you talk about sort of -- you said it went smoothly, but could you talk about sort of how that went and any kind of like early observations there?

[Joshua Charlesworth, executive]

Yes. Well, McDonald's customers, they're clearly excited to see our fresh doughnuts on the menu. It's more convenient for a Krispy Kreme fan to pick-up and enjoy our fresh doughnuts any time of the day. So what we're seeing so far is a really good response in line with our original assumptions. We're seeing incrementality in Chicago, no obvious impact on our existing doughnut shops there and plenty of positive feedback from the McDonald's teams. And regarding the reception of the brand in Chicago, I think that the strong support McDonald's is putting behind this is no doubt part of that. And indeed, you heard us reference earlier today, the confidence that we have from the success is having us sort of accelerate to service more restaurants as fast as we can, all align with our strategy of becoming bigger and better. So we're really pleased with the start, both from a consumer response point of view and the reception we've got from the McDonald's team about our service and quality doughnuts.

[Brian Harbour, analyst]

Okay. In the International segment, we've been talking about the U.K., I think, for some time. So what's your confidence in sort of getting that back on track? And I mean, you talked about leaning into more of the capital-light side of international expansion. Do you think that you still want to own all of those markets that are currently in your international segment going forward?

[Joshua Charlesworth, executive]

Well, today, what we're talking about is making sure that our capital is keenly focused on the big U.S. growth opportunity and then being really thoughtful internationally about how we deploy capital and therefore, talent, hence, the management changes towards the more capital-light franchise models, but we still remain very pleased with our international portfolio overall. And indeed, that includes the businesses we own. I mean, nearly all our international businesses are in strong growth, deploying the hub-and-spoke model and the omnichannel expansion that we've shown and proven is the best way forward. In the U.K. specifically, we have seen underperformance, consumer trends there, more broadly, regulatory changes and the brand-new team that we've put in there is really getting to the core of the challenges we see there. And when you look at it, we see, for example, Original Glazed, the absolute heart of our business has a lower proportion of sales and hence, changes we're making to the core menu there. And we see feedback around value, and we're piloting different price points for different product ranges and to really get the Original Glazed and the brand back to confidence. It doesn't require capital as such, it more requires a mastery of the strategy, hence, the new team there. A broader question around franchising, I think that the changes we announced today are much more about getting our teams focused on sort of brand standards, operating procedures, functional centers of excellence, typical of a global franchisor when it comes to the international markets and then really operating and running and getting closer to the U.S. business, which has got this massive opportunity for growth and value creation ahead of it.

[Operator]

And our next question comes from the line of Dan Guglielmo with Capital One Securities.

[Daniel Guglielmo, analyst]

As you all build-out the bigger DFD partnerships with McDonald's, Target, Costco, Walmart, do you expect some of the existing less efficient DFD locations to close or sunset? And if so, kind of what could that be ballpark? What could that look like?

[Joshua Charlesworth, executive]

Yes. Well, I think partnering with these high-quality national players is very much the best way to deliver our goal of making it easier for consumers to buy our fresh doughnuts. We can see that strategy is clearly working. And now by distributing through to the end of 2026 to almost every McDonald's in the country, it clearly gives us a big opportunity to profitably add distribution with other major customers like Walmart, Target, and we also shared this morning, Costco. They're obviously high-traffic locations, great customers and strong weekly sales. We can see that already across those. So obviously, as we expand, we do want to prioritize the biggest growth opportunities. But the way to think about profitability is that it's a lot about the route density, how many stops on a route, what's the most efficient way of delivering to those customers. So weekly sales in a different location is a factor, but there's a number of things around distance and drive times and locations and even the nature of the products that we're dropping off, whether they're loose or pre-packaged, how you deliver to the customer. There's a number of parameters that come to mind. But I think stepping back from all that, it does give us an opportunity to optimize as we go. I think we can make sure that we build-out the most efficient routes and having great customers like this with high footfall, high traffic and high sales of our fresh doughnuts is definitely a big parameter behind that.

[Daniel Guglielmo, analyst]

And then just on the U.S. expansion, in the last quarter presentation, you guys shared 2 hubs were under construction and then 8 had signed contracts. Can you give an update on that progress and maybe how many are under construction to-date?

[Joshua Charlesworth, executive]

Yes. We continue to make good progress overall on all of that. I'm genuinely pleased with the team's identification of locations. We've now got 3 in actual construction, signed contracts up to 10. I've actually personally visited sites in places like Minneapolis and Massachusetts. What's really interesting about what the team is doing is they're not just building out the traditional theaters of the past, but identifying locations that are really good distribution points, leveraging existing buildings where we can to get a better return. And indeed, they're going to be bigger locations with multiple lines that can then distribute to all the locations around them in a really efficient way with scale production, leveraging our most modern techniques. You'll see in the earnings presentation today a map of Chicago now and all the places we now distribute to a really transformative change to the way we run the business. And that impacts the way we think about the way we build these production hubs. But overall, the answer to your question is, yes, we're on track. We feel confident around our ability to meet the obviously accelerated expansion that we're seeing in the U.S.

[Operator]

And our next question comes from the line of Rahul Krotthapalli from JPMorgan.

[Rahul Krotthapalli, analyst]

I just have 2 questions. One on the McDonald's side. Is there any way you guys are able to see the attach rates for the current stores that are offering the product with the McDonald's transactions if they share that data with you guys? I'm just trying to get a sense of how it can translate into a good retail demand and if there is any upside to the numbers we discussed in the past on the weekly sales?

[Joshua Charlesworth, executive]

What we can see is good response from the consumer. Obviously, we're making -- we can track the deliveries. We can track any that are unsold. And indeed, we can see that they clearly sold throughout the day. We're very pleased that the McDonald's team making sure that we're not out of stock and our product is well presented and always the freshest and highest quality. Everything we see gives us confidence that this resonates with the consumer. And the feedback from McDonald's definitely shows that. But indeed, they don't necessarily share all that consumer data, at least not yet. So from our point of view, it meets the need of our Krispy Kreme customer. The response has been fantastic online and directly back to us from Krispy Kreme fans. So we're feeling confident around the projections that we shared in the past.

[Rahul Krotthapalli, analyst]

I have a follow-up. Can you quantify the vehicle accident headwinds and the insurance cost you guys talked about, which were elevated this quarter? Is that a one-time event or is there any things we should keep in mind as we look at margins going forward?

[Jeremiah Ashukian, executive]

Late in the third quarter, we experienced adverse developments in certain insurance claims that resulted in us recognizing almost $3 million of incremental expense in the quarter. We're assuming that the claims return to more normalized levels, but have accounted for these costs in the guide that we provided in addition to our growing fleet.

[Rahul Krotthapalli, analyst]

And 1 last thing. I just want to go back to the McDonald's one. On the awareness side, I know you guys talked about the whole -- like the supporting launch with TV, social media and billboards, whatnot. On the digital side, like is there any big support that you can get through the McDonald's app? I'm just curious if there is any incrementality or any conversations happening on that front.

[Joshua Charlesworth, executive]

Well, certainly, we're really impressed with the social media marketing and activation, so creative. And I must admit, I really love how true it is to what Krispy Kreme is. There's a fresh offering, a fun moment of joy in people's day, not just to consume, but to share. And the McDonald's team really, really get that. Partnership is really tight. And so yes, they're activating across their digital media in a really impressive way. We're available, of course, on their app through their online platform as well. So it's a real comprehensive approach. We indeed are continuously striving to create awareness. We particularly use our specialty doughnut collections. As you see, we create billions of media impressions from those in parallel. So we're pleased with how McDonald's is boosting that, but everyone knows the power of the Krispy Kreme brand already, and it's just really communicating to them that it's available in all these places because I suspect still people are positively surprised when they come across it, which is -- it's great to surprise and delight. But over-time, yes, indeed, we're keen to create awareness that we're available so much easier for people now, and they don't have to make that drive out to the doughnut shop.

[Operator]

And our next question comes from the line of Sara Senatore with Bank of America.

[Sara Senatore, analyst]

Just wanted to ask about the guidance and the outlook. I know you mentioned sort of unexpected, I think that was $3 million. But as I think about the guide for sort of in line or maintaining the top line, but lowering EBITDA, I guess, what are the specific changes? I know you had already anticipated investing pretty heavily into the rollout of McDonald's. So was that greater than even you had thought? Is it pulled forward versus the timing shift versus an absolute dollar amount? And then as you think about like revenue, any sort of changes there? And then I do have 1 follow-up question.

[Jeremiah Ashukian, executive]

And maybe I'll start with the revenue kind of point and work back. But our guide of 5% to 7% organic revenue for the year, reflects our confidence in our ability to continue to grow revenue amidst choppiness in traditional retail locations, which in the guide is being offset. So we're seeing some softness in retail by the small contribution of incremental top line due to the accelerated expansion. So we feel good that we can hold the top line. The full year guide on EBITDA was updated to reflect the impact of higher logistics costs in the quarter, our intentional decision to accelerate start-up costs. So it's a pull forward versus anything unexpected and the carve-out of Insomnia, the largest impact being the logistics cost, followed by the start-up investments and then a small amount on the kind of carve-out of Insomnia. As mentioned on the call, I think it's important to note that we are committed to continuing to drive a better business. We believe we'll return to operating leverage in the fourth quarter.

[Sara Senatore, analyst]

And as you mentioned on logistics, I guess, as you think about third-party managed delivery, is that a potential, I mean I know you said pull forward. How should I think about that? Because I don't think you're planning on using that for McDonald's, I think, right, the agreement is that's done by Krispy Kreme. But as I think about sort of the timing of these third-party managed deliveries, when might we see the benefits of that?

[Joshua Charlesworth, executive]

Yes. We've begun to scale to support the DFD expansion in the U.S., including McDonald's with an existing in-house model, as you mentioned. That being said, our pilots in D.C. and L.A. have proven that working with a third-party partner can deliver excellent quality and service. So on October 9, we launched an RFP with several national and major regional carriers to evaluate leveraging external partners more broadly in our network. I think from a financial impact, and you talked about maybe offsetting costs and those sorts of things, it's probably too early to talk about financial impacts, but we're keenly aware of things like higher vehicle claims costs as well as things like D&A associated with growing a truck fleet. And we're evaluating a transition at the kind of net income EPS level, not just an EBITDA level. And we'll give you an update on when there's more to share.

[Jeremiah Ashukian, executive]

And just one clarity point regarding McDonald's. I do believe that leveraging a third-party approach to logistics can and indeed will be actually part of the McDonald's rollout as well. We don't see McDonald's deliveries differently from other DFD deliveries. Instead, we're building out comprehensive integrated distribution. And McDonald's is great doughnuts, on time. And so we'll absolutely deliver on that, supporting the nationwide rollout as we've aligned with them. But we can and likely will leverage a third-party fleet and drivers and partners if that makes for a better system.

[Operator]

And our next question comes from the line of Bill Chappell with Truist.

[William Chappell, analyst]

Just talking more about the McDonald's kind of costs and the pull forward. I mean, how do we look at 2025 with the thought of you are going to be doing thousands and thousands of doors and maybe you're going to be pulling that forward. I mean, does that mean there's some pretty big upfront costs in the first half of next year where it really impacts profitability or even for the full year? Or is this just a few million dollars here or there this quarter just on a timing issue? Just trying to understand, especially as we move forward and imagine you want to roll-out McDonald's as fast as possible, how that affects the P&L.

[Jeremiah Ashukian, executive]

As I mentioned previously, no surprise on the cost front to ensure a smooth rollout. We intentionally are investing ahead of the opportunity with things like increased training and development, ensuring our teams are prepared for doughnut shop, rollout district manager level, dedicated rollout teams and overstaffing drivers to ensure availability early and ensure that we're driving service. We're also improving capabilities in manufacturing operations and upgrading doughnut production lines and our delivery logistics network. As I kind of mentioned, and I think I talked about this a bit at the Piper conference, we do expect margins to be pressured as a result of some of these start-up costs ahead of revenue throughout the first half of 2025, but we expect U.S. margins to start improving in the back half of next year. Obviously, for things in 2024, as I mentioned, we've included all of that in the '24 guide. And right now, we're not really updating our '25 guidance. We will come back to you on that.

[Joshua Charlesworth, executive]

Yes. Bill, it's important to recognize what we're seeing is across the DFD expansion, really strong, sustained consumer response. They say, Oh, wow, this is great, your doughnuts are here. This is so much more convenient for me. And so yes, absolutely, we want to get those points of access opened up as quickly as we can, but we want to do it right. We want to do it right every time. And so right now, right as a start-up, getting a team behind that in the first market has naturally meant a lot of focus for our teams on that. We've been refurbishing and improving the sites to have them operate at scale. And then quickly, the teams are shifting to, okay, with all these doughnuts being produced, sometimes a line producing 3x or 4x as many doughnuts as it did before, let's get it more productive, and the teams are keenly aware of that. And we're seeing in Chicago, the productivity of the factory more than increased more than 50%, and we expect that to come through. It's just there's a scaling kind of effect as we add the doors through to next year where those benefits from the hub-and-spoke efficiency, both in the factories and on the routes comes through to the bottom line and you get that operating leverage. But it's working. It's actually working even faster than we expected with the additional points of access opening up. So we're confident that it will flow through to the bottom line as we've anticipated.

[William Chappell, analyst]

Okay. And then just a follow-up, when should we expect to hear McDonald's talk about it on more of a national level? I mean I understand they're doing some -- you said TV advertising, but I imagine that's largely local until you have a certain number of thousands of doors or a certain number of regions, it doesn't make as much sense. So I mean, do you expect it to be more of a national advertising McDonald's to have a bigger push behind it at 5,000 doors, 10,000 doors or is it going to be largely local in terms of talking about it marketing it?

[Joshua Charlesworth, executive]

Well, McDonald's is famous for not just doing hobby activities. So they clearly demonstrate to us that this is an important part of their growth strategy, and we're thrilled that they wanted to partner with Krispy Kreme and our teams to make that happen. Naturally, the size of our network, not able to go nationwide straight away, we aligned to this rollout plan that gets us to more than -- I think it's about 85% of their system by the end of 2026. We do expect them to get behind the brand at the national level as we scale near that number. But to be frank, I think it's really fantastic what they've done in the Chicago land area already. What we expect them to do as we roll-out into the further parts of the Midwest in the coming weeks. And so it's clear that they're getting behind it in a big way. And yes, indeed, we expect them to support once we are fully national in the way they would support their other big initiatives.

[Operator]

[Operator Instructions] All right. It appears there are no questions in queue. Dre, did you have a question?

[Alexandre Eldredge, executive]

Yes, I'll take a question from David Palmer via e-mail. Apologies for the technology challenges this morning. Just if you would share any early learnings from the McDonald's rollout? And what are some of the start-up costs associated with the ramp to 2,000 units here by the end of 2024?

[Joshua Charlesworth, executive]

Well, I think the learnings are that it's working as we expected. I think that clearly, the McDonald's team have been making preparations since the Kentucky pilot through to the Chicago launch, which really set it apart. We've talked already about the marketing, but operationally too, very clear that the doughnuts are made available throughout the day. The teams are well trained and ready to accept our fresh doughnuts. And our teams are doing a great job and making sure that they get at the right time, the right quantities and adapting to feedback as it comes. I think probably the biggest challenge has probably been more on the delivery side, making sure that we know all the best routes to all these locations. Imagine more than 400 McDonald's added in a day for us. There's bound to be small operational adjustments needed. But I think the team have really taken that to heart and taken all learning they can and applying it to the pending rollouts. I mean with more than 1,000 going over the next couple of weeks, obviously, this now takes us to another level, and we need to scale and hence, our commitment to get it right. There's a few start-up costs. There's a few extra people making sure that we deliver right first time. But the team will settle into it and certainly been impressed with the partnership from the restaurant operators at McDonald's.

[Alexandre Eldredge, executive]

And just again, a follow-up from the line of David Palmer. Just given the U.S. margin shortfall in the third quarter here, what are you doing to ensure that EBITDA margin can grow in 2025 as you ramp with McDonald's?

[Jeremiah Ashukian, executive]

Yes. Sorry for the technology kind of challenges. What I can tell you is we're meeting daily as we execute the rollout of McDonald's and start to expand in different cities, just to take the learnings, as Josh kind of mentioned, and applying course correct as we go. So we feel pretty good that we're making the right choices, trade-offs. We have an ecosystem in place where we're managing issues real time and making choices where we need to be to make sure that we're seeing the flow-through that we need to. As a reminder, we are investing ahead of the curve right now in the U.S. and things like incremental equipment and facilities, repairs and maintenance, I mentioned training and development, dedicated market roll-out teams. And we do expect that EBITDA margins will start to improve in the U.S. more in the back half of the year, just given some of those start-up costs.

[Operator]

Okay. And with that, I will now hand it back to Josh Charlesworth for closing remarks. Josh?

[Joshua Charlesworth, executive]

Well, thank you very much. Thank you for your interest in Krispy Kreme today. And indeed, thank you to all our committed Krispy Kremers who bring the joy to our customers every day. Really appreciate it. Our priorities are clear, making for a bigger and better Krispy Kreme. Take care. Bye-bye.

[Operator]

Thanks, Josh. And ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.