Krispy Kreme’s New Partnership Could Be Sweet
donut maker Krispy Kreme (NASDAQ:DNUT) knows how to capitalize on marketing opportunities. To coincide with the solar eclipse that swept across North America on Monday, Krispy Kreme has started offering total solar eclipse donuts. The Total Eclipse Donut is a glazed treat filled with chocolate icing, silver sprinkles, and an Oreo cookie symbolizing the moon in the center.
It sounds delicious, but that’s not why the company’s stock rose more than 3% on Wednesday, reaching nearly $15 per share. The catalyst may have been a recently signed partnership with the world’s largest fast food restaurant chain. McDonald’s (NYSE:MCD).
In late March, Krispy Kreme announced an agreement to sell donuts in McDonald’s restaurants across the United States. This is a big opportunity for Krispy Kreme because McDonald’s has about 13,500 stores in the United States. This new partnership will therefore double the number of outlets where customers can purchase McDonald’s.
The company ran a pilot program last year selling Krispy Kreme donuts in 160 restaurants in Kentucky. Demand exceeded expectations, and both McDonald’s and Krispy Kreme were so pleased with the results that they decided to expand nationwide. Starting this year, Krispy Kreme donuts will be rolled out to McDonald’s stores in phases, either individually or in boxes of six. The plan is to introduce it to all McDonald’s restaurants in the U.S. by the end of 2026.
“Importantly, this partnership will provide fans across the country with access to Kreme Krispy(sic), doubling our access points by the end of 2026,” said Josh Charlesworth, Krispy Kreme President and CEO. “We expect it to increase further,” he said. “This partnership accelerates the development of our existing Delivered Fresh Daily channel, creating operating leverage through distribution density and production leverage.”
The company hasn’t released guidance or forecasts on how the plan will contribute to its bottom line, but it will likely appear in its first-quarter earnings report and a May 9 call with analysts.
Krispy Kreme gained some momentum in the fourth quarter, with sales up 11% to $451 million and net income rising to $1.9 million from a net loss of $1 million in the fourth quarter of 2022. Last year, the company increased its access points. 14,147 locations, up 20%
European expansion plan
Krispy Kreme called for net revenue growth of 5% to 7% in 2024, along with adjusted EBITDA growth of 8% to 11%. It also expects adjusted diluted earnings to be between 27 cents and 31 cents per share, rising in mid-2024. -Highest level at 27 cents per share in 2023.
However, it’s unclear whether these figures take McDonald’s partnerships into account. Charlesworth mentioned McDonald’s pilot program during his fourth-quarter earnings call on February 9, but he only said that discussions about an expanded partnership were ongoing. Still, he said this only scratches the surface of the company’s expansion plans.
“We have previously shared a long-term goal of opening at least 75,000 access points globally. But that still represents less than 3% of the total market, and we’re adding new customers all the time,” Charlesworth said on the fourth-quarter call.
The company also plans to launch Krispy Kreme in “three to five new countries” in 2024, targeting the European and Brazilian markets.
game changer
Analysts are bullish on Krispy Kreme stock. This is because several companies raised their target prices after the news came out last week. Piper Sandler analyst Brian Mullan called the partnership a “game changer” for Krispy Kreme in a recent research note and upgraded the stock to Overweight with a $20 price target, Quartz reported.
“What our partnership with (Krispy Kreme) does is it gives management the confidence and ability to significantly increase their investment in donut production capacity in the U.S.,” Mullan said.
Citigroup also raised its price target to $19 and estimated the deal could add $400 million in revenue and $85 million in EBITDA once fully executed, according to The Fly.
Investors may want to wait for the May 9 earnings report to learn more about the deal, its implications, and how it will be executed. One concern is its high long-term debt, so investors will be interested to hear more about its plans to lower it.
However, if Krispy Kreme can execute on this McDonald’s deal and leverage it for further expansion, the overall long-term outlook is positive. At this price and valuation, it seems like a good value.
disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.
