Krispy Kreme Stock: Still Some Holes In The Bullish Case (NASDAQ: DNUT)

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Krispy Kreme, Inc. (NASDAQ: DNUT) is recognized for its classic glazed donut and other sweet treats, which are now sold at over 11,000 locations in 31 countries. The company is approaching the one-year anniversary of its July 2021 IPO with the stock facing plenty of volatility, balancing strong growth trends against a lofty valuation. Shares are down about 27% in 2022 which is in the context of the broader market selloff.

DNUT’s latest quarterly result was highlighted by ongoing financial momentum despite challenges including inflationary cost pressures and even some impacts of the Omicron COVID wave at the start of the year. While management maintained an upbeat outlook for the rest of the year, we believe macro headwinds add uncertainties to the operating environment and keep risks tilted to the downside.

DNUT Earnings Recap

Krispy Kreme reported its Q1 earnings on May 11 with non-GAAP EPS of $ 0.08 which beat expectations by $ 0.01. Revenue of $ 372.5 million climbed 15.8% year over year and was also above estimates. The company benefited from an ongoing expansion along with the “reopening” dynamic compared to deeper pandemic disruptions in 2021. The Q1 operating margin at 4.6% climbed by 30 basis points from the period last year, while the adjusted EBITDA margin at 13.1% was down from 14.4% in Q1 2021, in part reflecting some one-off costs related to the IPO last year.

Krispy Kreme metrics

source: company IR

Part of the growth success is based on the company’s unique “hub and spokes” business model, with the hubs referring to the locations where donuts are produced and also work as a retail site. While 72% of total sales are from the shop and drive-through stores, Krispy Kreme counts on several different distribution channels including delivered fresh daily (DFD) locations like grocery stores that carry the items, along with a smaller e-commerce direct to consumer (DTC) segment.

At North America and Canada locations, total access points increased by 14.3% to 5,941 which includes DFD locations. The company is also seeing strong trends in its international business, which currently represents about one-quarter of total sales, with 31% y / y growth this quarter. In total, Krispy Kreme counts on 11,027 access points globally with plans for further expansion.

A key point here is that the international segment is currently more profitable, generating a 24% EBITDA margin over the trailing twelve months compared to 12% in the US and Canada. The strategy is to increase sales per hub by adding more access points, which are expected to drive margins through scale as CAPEX requirements decline as a percentage of revenue.

Krispy Kreme segment results

source: company IR

In terms of guidance, management is re-affirming its 2022 outlook, targeting net revenue growth between 11% and 13% over 2021. The goal is to open in at least four new countries this year with deals signed in Switzerland, Chile, Costa Rica , and Jordan. The 2022 EPS target is between $ 0.38 and $ 0.41 which compares to $ 0.37 achieved last year.

Separately, Krispy Kreme is making an effort to deleverage, targeting a net leverage ratio under 3x by year-end compared to 3.6x at the end of Q1. We note that the company also pays a modest $ 0.035 per share quarterly dividend that yields 0.7%.

Krispy Kreme double-digit growth outlook

source: company IR

DNUT Stock Price Forecast

Shares of DNUT have traded in a relatively tight range between ~ $ 15.00 and $ 13.00 over the last few months since selling off from a high near $ 20.00 at the end of 2021. We sense that the Q1 results were good enough to keep a bid on the stock , at least buying some time to see how the next quarterly report plays out.

The recent low in the stock at $ 12.00 now represents an important area of ​​technical support the bulls will need to hold. On the upside, we believe DNUT is going to need to make a strong move above $ 15.50 to really gain positive momentum. Our base case here is to expect volatility to continue in line with the broader market trading action.

DNUT Stock chart

Seeking Alpha

Looking at the consensus estimates, what stands out is the current forecast for 2022 full-year revenue at $ 1.56 billion and EPS of $ 0.41 are at the top end of management guidance. The market expects the sales momentum to be maintained in 2022 and 2023 while earnings accelerate higher to reach $ 0.66 by 2024 with an upside in margins.

Krispy Kreme revenue and EPS metrics

Seeking Alpha

The concern here is that these estimates may end up proving to be too aggressive, particularly in the current economic environment. While there is a natural growth runway as the company opens new locations, uncertainties regarding the strength of consumer spending can still represent a headwind for the rest of the year in terms of organic and comparable sales.

While we’re not suggesting sales are going to collapse, it’s fair to say that there is a greater chance now Krispy Kreme underperforms expectations over the next few quarters. Simply put, persistently elevated inflation and rising interest rates can squeeze consumer spending, leading to a direct impact on the company’s operating environment. We argue that Krispy Kreme donuts lean on the side of a discretionary item that consumers may look to cut back on while focusing on staples and food essentials, at least at the margin.

As it relates to valuations, a forward P / E of 35x on the current consensus P / E or even 26x on next year’s 2023 earnings estimate keeps DNUT in a tight spot. Even as shares are down by more than 25% this year, the stock is hardly at a level that would appear “cheap”. The outlook for strong EPS growth is positive, but again, a lot can happen over the next few quarters that may require adjustments to the outlook.

Finally, the other point here is that DNUT trades at a premium to most other “restaurant” names. While there aren’t any direct comparisons to the company given its unique donut model, we can bring up Starbucks Corp. (SBUX) as a peer along with emerging high growth names like Dutch Bros Inc. (BROS) which focuses on coffee and breakfast snacks. There was also “Dunkin Donuts” which was taken private back in 2020. The segment is facing similar headwinds between rising costs and demand uncertainties.

Compared to SBUX, DNUT trades a valuation spread while less profitable. Even at the long-term EBITDA margin guidance from Krispy Kreme management to reach + 15% by 2024, the company would still be below Starbucks, which generated an 18% EBITDA margin last quarter and levels average above 20% historically. Putting it all together, DNUT is still expensive in our book.

Krispy Kreme vs Starbucks P / E ratio

source: YCharts

Final Thoughts

We’re rating DNUT as a hold, giving the company a benefit of the doubt that it will be able to execute on its growth strategy and that earnings have room to fill out higher. The stock doesn’t stand out as a great buying opportunity or a great short.

In our view, the next move in the stock is largely going to depend on how risk sentiment towards equities evolves from here. Weaker economic indicators across retail spending, employment, and inflation could open the door for another leg lower into the next quarterly report. On the other hand, there’s room for DNUT to lead higher on better-than-expected macro data, with the market valuing its segment leadership and brand strength.

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