Is Krispy Kreme Stock a Buy?

Krispy Kreme’s shares have surged following a major collaboration with McDonald’s. With the stock climbing more than 17% over the past month, is it a buy now?

With operations in more than 35 countries, Krispy Kreme, Inc. (NASDAQ:DNUT) is renowned worldwide for its signature hot-glazed doughnuts.

Since its Initial Public Offering (IPO) in 2021, the company has consistently rewarded shareholders with quarterly dividend payments.

Krispy Kreme grabbed investors’ attention following its recent announcement of a partnership with McDonald’s Corporation (NYSE:MCD), one of the world’s largest fast-food chain restaurants.

As a result, DNUT shares rallied by more than 43% to hit a 52-week high of $17.84 on March 26, 2024. However, as investors slowly digested this news, the stock has lost some of its gains since then. So what does the future hold? Is all the good news priced in or is this just the beginning of a sustained rally?

Why Krispy Kreme + McDonald’s Partnership Matters

Following strong demand for its doughnuts across 160 McDonald’s restaurants in a testing phase, Krispy Kreme announced plans to offer some of its most popular and cherished doughnuts in McDonald’s restaurants nationwide.

The rollout is scheduled to begin in the second half of 2024 and end in 2026. According to the CEOs of the two companies, this partnership is a significant step toward growing their respective businesses.

The collaboration appears to have significant potential to bolster Krispy Kreme’s top line in the upcoming quarters.

While the company experienced solid growth in its fourth quarter top line, fueled by increasing consumer demand for its doughnuts worldwide, it incurred an operating loss of $5.34 million.

Total net revenue rose 11.4% year-over-year to $450.90 million, while revenue from the U.S. and international segments saw notable 9.3% and 15.2% year-over-year increases, respectively.

The company’s organic revenue for the quarter grew 13.2% year-over-year to $446 million, beating prior guidance. Krispy Kreme President and CEO Josh Charlesworth attributed the growth to strong consumer demand in all sales channels and enhanced availability of its fresh doughnuts worldwide.   

Further growth in revenues stemming from the partnership are only likely to improve the profit and loss statement, which as you will see needs to work on the bottom line.

Financial Snapshot: Revenue Up But Earnings Slid

At the same time, adjusted net income and adjusted earnings per share dropped by 18.8% and 18.2% from year-ago levels to reach $15.10 million and $0.09, respectively. The company’s fourth-quarter adjusted EBITDA margin improved by 40 basis points on an annualized basis to 14.2%.

With capital expenditures of $32.8 million during the fourth quarter, the company has significantly invested in information technology and remodeling activity to drive operational efficiencies.

As of December 31, 2023, Krispy Kreme’s total available liquidity amounted to $197.2 million, including $38.2 million of cash and cash equivalents, plus an undrawn credit line of $159 million. Meanwhile, during FY 2023, free cash flow came in negative to the tune of $73.88 million.

For 2024, management forecasts net and organic revenue to grow between +5% and +7% and between +6% and +8%, respectively.

Adjusted EBITDA is expected to grow between +8% and +11%, while adjusted EPS is expected to be between $0.27 and $0.31. For reference, the company’s adjusted EPS for 2023 was $0.27.

The top brass at Krispy Kreme projects capital expenditures for the year to land between 7% and 8% of net revenue.      

Overall, Krispy Kreme’s mixed fourth-quarter results and guidance for the current year failed to excite investors, as evidenced by shares remaining nearly flat after the results were announced. 

Is Krispy Kreme Stock’s Dividend Safe?

Despite losses or faltering earnings growth, Krispy Kreme has remained committed to returning shareholder value. It has maintained a consistent quarterly dividend payment of $0.035 per share since its public debut in 2021.

The company’s forward annual dividend of $0.14 translates to a 0.94% yield on the prevailing price level. Moreover, it maintains a healthy dividend payout ratio of almost 50%, with the remaining half of earnings allocated toward future growth endeavors.

Considering the lack of growth in dividend payments thus far and a not-so-attractive dividend yield, Krispy Kreme is not a stock income investors should latch onto anytime soon.

While the company has been able to maintain dividend payments, it is important to acknowledge that it only has a limited history of making quarterly dividend payments.

Also, the company’s declining earnings per share and negative free cash flow generation, as revealed in the latest financial results, make future dividend payments somewhat hard to predict with a high degree of confidence.

Where Will Krispy Kreme Stock Be In 1 Year?

Analysts expect Krispy Kreme shares to reach a value of $16.06 per share over the next year, which suggests a modest upside of 7.9%.

On the whole, Wall Street analysts recommend that investors should take a wait and see approach. Only one of the seven analysts suggests buying the stock, and the remaining advise to Hold.

With that said, Krispy Kreme’s financials are likely to materially improve thanks to the partnership with McDonald’s and a flip on the bottom line from red to black is likely to catalyze higher share price movements.

For now though, the stock trades 52.17x forward non-GAAP earnings, more than 200% higher than its sector median. Compared to the 5-year average price-to-earnings, Krispy Kreme trades at a 29% premium.

While Wall Street analysts expect a 23.6% increase in the company’s earnings over the next three to five years, a non-GAAP price-earnings-to-growth of 2.21x looks somewhat expensive relative to the sector average of 1.54%.

Moreover, it looks expensive in terms of forward price-to-sales. It trades at 1.41x forward sales, almost 55% higher than the sector average.    

The bottom line is the investment case for Krispy Kreme stock is not overly compelling at this time unless revenues and earnings to materially spike as a result of the partnership.

Clearly, some investors have been willing to make the bet that the results will be impressive while conservative-minded investors may be better off taking a wait-and-see approach.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.