Krispy Kreme Is Baking Growth for Its Shareholders

Krispy Kreme (NASDAQ: DNUT) is a staple for many when it comes to purchasing doughnuts and other baked goods, though it has recently been introduced to investors, going public only two quarters ago.

While its initial reception was rather lackluster, Krispy Kreme has introduced initiatives focused on rapid growth; not only has this resulted in favorable Q3 results, but full-year 2021 guidance was also recently raised.

This announcement led to a 19% increase in stock price over the past month. With this momentum carrying into 2022, the company may be an investment just as attractive as its offerings.

Krispy Kreme, headquartered in Charlotte, North Carolina, currently operates in 31 countries, serving its famed baked goods. Most notably, Krispy Kreme is recognized through its iconic glazed doughnut with an emphasis on the freshness of its products, many of which can be enjoyed right off the production line.

With less than 5% of the world as current customers, 165 countries are left untapped with a sweet treat market valued at $330 billion. Aided by a 94% global brand awareness, enormous growth potential is evident.

I’m bullish on Krispy Kreme.

Appetizing Financial Potential

While Krispy Kreme has always delivered delicious products to consumers, it has recently followed suit with regard to reported financials.

Illustrating the growth the company sets out to achieve, revenue grew 18% year-over-year in Q3 2021.

Adjusted EBITDA grew 9.6% to $41.4 million, translating into a 12.1% adjusted EBITDA margin. Similarly, net income increased 7.1% to $12.6 million in the quarter, though this was contrasted by a GAAP net loss of $3.8 million; this loss was mainly attributed to IPO and acquisition-related expenses, however.

Consequently, a GAAP diluted loss per share of $0.04 was reported, with adjusted diluted EPS decreasing from $0.08 to $0.06.

While these metrics may not impress many, strong momentum in the fourth quarter resulted in updated 2021 guidance, which was already appealing.

Net revenue is now expected to have a low of $1.37 billion and a high of $1.385 billion, up from a low of $1.34 billion and a high of $1.38 billion, which would equate to a 22% to 23% increase compared to 2020.

Moreover, adjusted net income was increased to a low of $65 million and a high of $68 million, from a previous low of $62 million and a high of $68 million. This suggests a 53% to 61% improvement.

Long-term outlooks, which are expected to be achieved in 2022, were also solidified, with an adjusted EBITDA growth of 12% to 14% and adjusted net income growth of 18% to 22%.

Lastly, net debt decreased from $1.133 billion in Q2 to $681 million in Q3, with $11 million of positive free cash flow generated, imperative for reinvestment into the business toward improvements and growth.

While current statistics may not convince investors, future outlooks for performance are certainly promising. Success, however, will be determined by the outcome of new growth initiatives.

Omni-Channel Delivery

Krispy Kreme has traditionally operated retail stores, but like many other retailers, the company realizes the importance of an omni-channel approach to sales.

To begin, Krispy Kreme is not entirely terminating the use of brick-and-mortar locations, referred to as Hot Light Theater Shops. Instead, such locations will be limited and strategically placed to achieve the highest brand impact, such as the flagship location in Times Square.

Most locations will aim to be an “experience” for customers, with attractions such as observing the baking process, as well as areas to sit and enjoy offerings. This may seem familiar, perhaps taking the “third-place” aspect of Starbucks (SBUX) to an elevated level.

In addition, a more capital-friendly approach to retail is also utilized in the form of Fresh Shops. These are small locations and kiosks which can be located in areas with high foot traffic, such as train stations, airports, and malls, targeting those who wish to quickly stop and purchase coffee or doughnuts on the go.

For those who don’t have access to Krispy Kreme retail locations, branded sweet treats — or pre-packaged offerings — have been created to distribute to retail stores, which can easily introduce the brand into new markets and quickly respond to changing needs.

Likewise, to preserve the freshly made quality of doughnuts and contrasting pre-packaged items, a new Delivered Fresh Daily program transports dozens of doughnuts from retail locations to local grocery and convenience stores, once again, connecting with additional customers.

Finally, consumers can order doughnuts for pickup or have them delivered directly to their homes through Krispy Kreme’s e-commerce site as well as third-party delivery apps. Furthermore, such service is also exploited to order products as gifts.

CEO Michael Tattersfield credited this approach for proliferating financial performance, stating, “Our third quarter results demonstrate the benefits of our omni-channel and global expansion strategy, which allow us to meet consumer demand with premium, fresh doughnuts, in a capital-efficient manner.”

Recognizing that the few large competitors of Krispy Kreme, namely Starbucks and Dunkin’, create an oligopolistic market, strengthened by barriers to entry to such as a well-known brand and offerings, he continued to say, “… our pricing power means that we are able to quickly adapt to this inflationary environment with the full impact of the pricing action we have already taken still to come in the fourth quarter.”

Hub and Spoke Operating Model

Although such a degree of differentiation from the omni-channel approach may seem difficult to manage, Krispy Kreme has also developed a plan to ensure efficient and effective operations.

To preserve the freshness of doughnuts while providing sufficient supply, Krispy Kreme has created the Hub and Spoke model, which places a Hot Light Theater Shop and Doughnut Factory at the center, with spokes branching out from this location comprised of the remaining outlets.

Emulating the characteristics of a franchise model, with a core unit supporting peripheral units, this allows for quality monitoring at each level and enables additional spokes to be added to existing hubs, increasing margins.

This model not only safeguards normal operations, but is prepared to facilitate Krispy Kreme’s growth efforts with ease.

Wall Street’s Take

Krispy Kreme currently has a Hold rating based on two Buy ratings, four Hold ratings, and one Sell rating. The average Krispy Kreme price target of $16.17 implies 13.2% downside potential, with a high price target of $20 and a low of $14.

Conclusion

Krispy Kreme did not do a great job creating confidence in shareholders when it went public, with thin margins and losses. However, the company has created means of achieving substantial growth with great promise.

While the effects of these strategies are only beginning to be seen, one could hope that it continues to prompt performance, and returns, as sweet as its products.

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Disclosure: At the time of publication, Brandon Humbert did not have a position in any of the securities mentioned in this article.