Krispy Kreme, Inc. is a renowned producer of doughnuts, operating both in the United States and internationally.
In March 2024, they announced a partnership with McDonald’s (MCD). Since then, the share price has gradually declined and is now substantially below pre-announcement levels.
Financial Results
Krispy Kreme reported strong financial performance in the first quarter of 2024, beating analyst estimates both on top and bottom lines. The quarterly revenue of $442.7 million, representing a 5.7% YoY growth, exceeded expectations by $8.6 million, while Non-GAAP EPS reached $0.07, $0.01 above the forecasted figure.
Revenue and Profitability
The firm attributed its strong revenue growth to robust demand, increased digital presence, and successful global brand activations. Additionally, the number of points of access (POA) significantly contributed to higher sales figures.
Geographically, Krispy Kreme performed well both in the United States and internationally, showcasing diversified growth.
It is important to differentiate between organic growth and growth driven by opening new stores. While expanding geographically is crucial in the early stages, organic growth indicates strong demand and is a better long-term indicator. Krispy Kreme achieved high single-digit revenue growth in both the U.S. and international markets.
However, it is essential that growth does not come at the expense of profitability. While the firm achieved profitable growth in the U.S., with expanding adjusted EBITDA margins, international margins have been contracting. M
onitoring this development is crucial to ensure that growth is driven by operational efficiency improvements and not just new locations.
Future Outlook
For the full year, Krispy Kreme expects this growth to continue, projecting further increases in the number of global POA to reach 33,000 by 2026, nearly double the current figure. The McDonald’s partnership is a key driver, accounting for approximately 12,000 new locations. The long-term goal is to achieve 100,000 POA.
Comparing Krispy Kreme’s growth metrics with its peers in the restaurant industry, the firm is on the higher end of the scale. Additionally, the growth from McDonald’s partnership could further benefit Krispy Kreme.
The firm’s ambitious goals, strong execution, and partnership strategies make it an appealing candidate for growth investors.
Bottom Line
Despite increasing sales and EBITDA, the firm’s EPS has declined year-over-year, driven primarily by non-cash expenses like depreciation and amortization. Share issuance has also impacted the EPS. While raising capital through equity is sometimes necessary, it is typically not the most appealing method.
Valuation
To evaluate Krispy Kreme’s valuation, we compared a set of traditional price multiples with the sector median and the firm’s historical values. Despite high growth, Krispy Kreme’s fundamental metrics are not significantly better than those of its peers, suggesting that the stock may be overvalued.
High-growth companies often have higher price multiples, but there is a risk of overpaying for expected growth. If expectations are not met, the share price could fall due to poorer performance and multiple compression.
This risk must be considered before starting or adding to a position in DNUT. Additionally, the firm’s increasing number of shares and dividend payments are questionable, as a high-growth firm should prioritize expansion over dividends.
Valuation May Be Slightly High
Krispy Kreme’s global expansion, partnership with McDonald’s, and organic growth are positive indicators of future success. However, the stock remains expensive, and profitability metrics need improvement. Capital allocation should focus on reducing debt and avoiding dilution, potentially by eliminating the dividend.
The firm’s strategic initiatives and strong brand presence position it well for long-term growth, yet investors should remain cautious and consider the risks associated with its current valuation and financial strategy.
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I’m Elizabeth Monroe, a writer who brings you stories from around the world. I’m passionate about sharing important global news and amplifying the voices of those often left unheard. Through my writing, I aim to make the world feel a bit closer and more accessible.
