Is Krispy Kreme Stock a Good Consumer Discretionary Investment?

By Kirsteen Mackay

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Krispy Kreme, Inc. (NASDAQ: DNUT) stock is trending after upbeat Q4 earnings. The donut vendor aims to deliver double-digit revenue growth again in 2022.

Krispy Kreme, Inc. (NASDAQ: DNUT) stock is down 26% year-to-date. The company went public via IPO in July 2021 at $19 a share. It fell to a 52-week low in October, then climbed back to $19 in December. Today it trades around $13.76.

Krispy Kreme announced its Q4 earnings on 22 February 2022 and the stock is rebounding slightly.

What is Krispy Kreme?

Krispy Kreme is an American doughnut company and coffeehouse chain. It offers yeast-raised doughnuts, pies, coffees and espresso drinks, chillers and iced beverages.

Krispy Kreme was founded by Vernon Rudolph, who bought a yeast-raised recipe from a New Orleans chef, rented a building in 1937 in what is now historic Old Salem in Winston-Salem, North Carolina, and began selling to local grocery stores. 

Krispy Kreme operates in over 30 countries through its unique network of doughnut shops, partnerships with leading retailers, and a rapidly growing e-commerce and delivery business. It operates through the following segments: US and Canada, International, and Market Development.

Krispy Kreme’s North American segment includes all Krispy Kreme’s company-owned operations in the US and Canada, Insomnia-branded retail shops and consumer packaged goods operations.

The company’s International segment consists of all of Krispy Kreme's company-owned operations in the UK, Ireland, Australia, New Zealand, and Mexico.

Meanwhile, its Market Development segment handles Krispy Kreme franchise operations across the globe, as well as Krispy Kreme company-owned shops in Japan.

How does Krispy Kreme make money?

Doughnuts or donuts? The spelling is optional, but Krispy Kreme makes money selling a wide variety of doughnuts. For instance, this month the company announced a new collaboration between Krispy Kreme and Twix candy in the form of three limited-time doughnuts.

DNUT Financial Overview and Metrics

  • P/BV: 1.9

  • P/S: 2

  • Forward P/E: 29

  • Market Cap: $2.2bn

  • Dividend Yield: 1% 

  • Cash and cash equivalents: $38.5m 

  • Total Current Liabilities: $526.1m 

  • Total Liabilities: $1.8bn

Krispy Kreme Q4 2021 (to Jan 2) Highlights:

Krispy Kreme reported strong financial results for Q4, 2021.

  • Net Revenue: $370.6m (up 13.8% Y/Y)

  • Operating Income Margin: 4.4%

  • GAAP Diluted Earnings Per Share: $0.01

  • GAAP Net Income: $4.3m

Strong holiday sales helped it turn a profit but inflation is a challenge.

Unfortunately, earnings missed Wall Street expectations:

  • Adjusted EPS: $0.08 ($0.09 expected)

Full Fiscal Year Ended January 2, 2022 Highlights:

  • Net Revenue: $1.3bn (up 23.4% Y/Y)

  • Operating Income Margin: 3%

  • GAAP diluted Earnings Per Share: ($0.18) 

  • Organic revenue growth was negatively impacted by $17.2m in Q4 2021 and $98.8m in full-year 2021 due to the exit of its legacy wholesale business.

Mike Tattersfield, Krispy Kreme CEO commented:

“Our fourth quarter and full year results demonstrate the benefits of our omni-channel model and global expansion strategy, which allow us to meet consumer demand with premium, fresh doughnuts. Our global Halloween campaign and seasonal limited time offerings resonated strongly with consumers which really maximizes the gifting and sharing occasions of the brand.

2022 Projections:

The company offset wage and commodity inflation in 2021 by continuing to scale the business. In the last 12 months, Krispy Kreme added over 2,000 locations where fresh doughnuts or cookies can be purchased. While also successfully initiating price increases in September and November.

Mike Tattersfield, Krispy Kreme CEO also stated: 

“Looking ahead, we are well-positioned to deliver another year of double-digit revenue growth in 2022. Our performance will be led by the expansion of our omni-channel model, as we continue to significantly expand our points of access. We are incredibly excited for the opportunity to open in at least three new countries in 2022 and expand our global footprint for years to come.”

Krispy Kreme issues the following guidance for the full year 2022:

  • Net Revenue: $1.53bn to $1.56bn (+11% to +13%)

  • Organic Revenue Growth: 10% to 12%

  • Adjusted EBITDA: $210m to $218m (+12% to +16%)

  • Adjusted Net Income to Krispy Kreme shareholders, Diluted: $65m to $69m (+18% to +24%)

  • Adjusted Diluted EPS: $0.38 to $0.41

  • Approximately 170 million weighted average diluted shares outstanding, (approx. 150 million in 2021) primarily driven by the IPO

  • Income Tax rate: 23% to 25%

  • Capital Expenditures: $115m to $120m

  • Net Leverage: under 3x

Krispy Kreme also reiterated the following long-term outlook:

  • Organic Revenue Growth: 9% to 11%

  • Adjusted EBITDA Growth: 12% to 14%

  • Adjusted Net Income Growth: 18% to 22%

  • Net Leverage: approximately 2x

Krispy Kreme stock: $20 Price Target from Evercore ISI

David Palmer, senior managing director at Evercore ISI, reiterates his July share price target of $20, maintaining a Buy rating on Krispy Kreme stock.

Analyst outlook is optimistic, and FactSet consensus has an Overweight rating on DNUT shares with a consensus target price of $18.60.

Risks to investing in DNUT

Pandemic restrictions have wreaked havoc on restaurant and food businesses, including reduced hours, reduced seating capacity and less staff.

Inflationary headwinds continue to pose a problem affecting operational costs. Plus, if consumers have less money to spend, treats become less of a priority. However, doughnuts are an affordable treat that may do well in a downturn.

The Krispy Kreme business faces many of the same risks other food services companies face today. These include competition, digital growth, competing for third-party delivery services, carefully managing social media and avoiding fraud and cyber attacks.

Krispy Kreme’s biggest concern is inflation because to keep serving high-quality doughnuts, it needs to charge a premium and continue to attract customers willing to pay.

Staffing and labor shortages are other concerns, leading to cost fluctuations. The same goes for ingredient costs.

If Krispy Kreme fails to grow its business in the way it envisions, the share price could suffer.

Who are Krispy Kreme competitors?

Krispy Kreme rivals and comparable companies include:

  • Jack in the Box (NASDAQ: JACK)

  • BJ’s Restaurants (NASDAQ: BJRI)

  • JD Wetherspoon (LON: JDW)

Is DNUT a good investment?

The doughnut retailer has some good revenue growth going for it. But its share price could easily have further to fall as its financial metrics suggest it may be overvalued.

Many retail investors prefer funds to individual stocks as financial professionals operate them with inside knowledge and insight. 

Krispy Kreme shares could alternatively be purchased via a mutual fund to potentially reduce investment risk and volatility. 

For instance, Krispy Kreme stock is currently included in:

  • Baron Partners Fund (MUTF: BPTRX)

  • Fidelity Greater Canada Fund (FIDGCDF)

  • Ethna – Aktiv

  • Vanguard Total Stock Market Index Fund (MUTF: VTSAX)

  • Vanguard Small Cap Index Fund (NYSEARCA: VB)

If you’re interested in investing in restaurant stocks, why not check out our recent article on Chipotle Mexican Grill.

We’ve also produced in-depth reports on ESG investing and Healthcare investing. Or check out our 12 investing themes for 2022.

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In this article:

Topics:
Restaurants
Food Distributors
Food Retail
Food, Beverage and Tobacco
Industries:
Consumer Discretionary
Companies:
Krispy Kreme

Author: Kirsteen Mackay

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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