I feel Krispy Kreme may be undervalued and could represent a good hold over the next 18 months. I've taken a deep dive into the company over the past couple of weeks and currently hold 350 shares. The fundamentals aren't perfect but I believe there is a lot of potential for growth that is going by underappreciated.
Business model
Krispy Kreme sells donuts. They have a long and solid reputation and the business structure is easy to understand. They operate via a “hub and spoke” model where donuts are produced and sold at hubs. The donuts are sold at varying other points of access through their “Delivered Fresh Daily” (or DFD, for short) scheme. These DFD doors include grocery stores, convenience stores and, most recently, McDonald's, which I believe is key to future growth.
Value
Krispy Kreme is currently undervalued at yesterday's closing price of $11.27. The average analyst one-year price target is 17.06. Krispy Kreme is currently unprofitable but is trading at a Price/Sales ratio of 1.1 which is below the hospitality industry average of 1.3.
Since April, one analyst (JP Morgan) have maintained their rating to “Overweight”, with a price target of $14, while two other analysts have upgraded them to a buy. Most recently, Truist had the following to say (quoted from Yahoo Finance):
“Truist Securities upgraded their recommendation on Krispy Kreme to buy from hold, reversing their October downgrade on the stock. The overhang from the drugs known as GLP-1s “is already here,” and fully reflected in the stock’s current valuation, analysts led by Bill Chappell said.
Truist’s Chappell said the potential of Krispy Kreme’s new partnership with McDonald’s Corp. — the announcement of which triggered a record surge in the stock — was being undervalued by investors. A nationwide rollout is expected by the end of 2026.”
I think it's worth noting that Truist made this upgrade after downgrading the company to a Hold back in October 2023 at the height of the Ozempic concerns.
Growth
Revenues have been growing steadily at Krispy Kreme, increasing by 10.54% in 2022 and 10.35% in 2023 annually in the US. Earnings are currently negative, but DNUT is projected to become profitable by next year. Its losses have reduced over the past 5 years at a rate of 16.9% per year.
There are currently 14,814 global points of access and a further 12,000 points of access are expected to be added in the US alone by the end of 2026 through their agreement with McDonald's. The team from Truist recently met up with chief executive and finance heads from Krispy Kreme and came away with the view that accelerated revenue growth will be achieved “well before the McDonald's rollout is complete”. Furthermore, because Krispy Kreme hubs have the potential to reach many more points of access than they currently do, this increased return on capital can be achieved at minimal additional expenditure, in my opinion. I also believe that the profile of customer that likely eat out regularly at McDonald's are not the same clients that would be able to afford/make regular use of appetite suppressant drugs like Ozempic.
“We believe the easiest way to get comfortable with the forecast is to simply haircut it,” the analysts wrote. “Let's say that it only generates 75% or 50% incrementality post rollout; that still represents +25% or +17% revenue off the existing trailing 12-month U.S. base, and +16% or +11% off the total company TTM revenue base, respectively.
Those assumptions would allow the company to easily hit its top-line algorithm of 9% to 11% annual sales growth, which is well above where most packaged goods or restaurants are expected to grow in the next few years, based on industry data, said the note.” – Truist.
Finally, I think International Markets are also being underappreciated. The latest opening in Winnipeg had people waiting in line for hours for a donut. Paris was also immensely successful. Anecdotally, I can say that doors at my nearest Tesco grocery stores are very popular. The standard glazed donuts are always sold out by the end of the day. Colleagues bring the occasional box of Krispy Kreme into work to share and they feel that Krispy Kreme donuts are tastier than competitors.
Health
This is where a couple of red flags come in, free cash flow and debt. While Krispy Kreme's Debt/Equity ratio has reduced over the past 5 years, it still has a debt/equity ratio of around 70% (as per Simply Wall Street). Free cash flow is negative (-45,769,000 as per the company's last earnings report, which has improved from Q4 of 2023).
CONCLUSION
I should preface this by saying that I do not have a lot of experience with deep fundamental analysis, and that this is not financial advice, but I really feel that Krispy Kreme is undervalued at it's current price, and that it can achieve considerable growth over the coming 12-24 months through its business model of increasing points of access both in the US and abroad and increasing the productivity of available hubs. I feel that the company has a clear path to profitability and that current headwinds have been blown out of proportion. Furthermore, the share price has declined steeply from its 40% rise following the announcement of the McDonald's deal for no clear new reasons.
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