New Partnership Could be Sweet for Krispy Kreme

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Doughnut maker Krispy Kreme (NASDAQ:DNUT) knows how to capitalize on a marketing opportunity. Just in time for the solar eclipse that cut a swath across North America on Monday, Krispy Kreme started offering a Total Solar Eclipse Doughnut, a glazed treat with chocolate icing, silver sprinkles, and a whole Oreo cookie in the center, signifying the moon.

That sounds delicious, but it is not why the company’s stock price was up over 3% on Wednesday to nearly $15 per share.  The catalyst was likely a partnership it recently struck with the world’s largest fast-food restaurant chain, McDonald’s (NYSE:MCD).

Doubling its footprint

In late March, Krispy Kreme announced a deal to put its doughnuts in McDonald’s restaurants throughout the United States. It is a huge opportunity for Krispy Kreme as McDonald’s has some 13,500 restaurants in the U.S., so this new partnership will double the number of locations where customers can buy them.

The company ran a pilot program last year, selling Krispy Kreme doughnuts 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 doughnuts, either individually or in boxes of six, will be rolled out to McDonald’s restaurants in phases. By the end of 2026, the plan is to have them in all McDonald’s restaurants in the U.S.

“Significantly, by making Kreme Krispy [sic] accessible to fans nationwide through this partnership, we expect to more than double our points of access by the end of 2026,” Krispy Kreme President and CEO Josh Charlesworth said. “The partnership accelerates the development of our existing Delivered Fresh Daily channel, creating operating leverage through distribution density and production utilization.”

The company did not issue any guidance or projections on how this initiative will be accretive to earnings, but it is likely to come up in the first-quarter earnings report and call with analysts on May 9.

Krispy Kreme has some momentum as its revenue increased 11% in the fourth quarter to $451 million while its net income reached $1.9 million, up from a $1 million net loss in the fourth quarter of 2022. Last year, the company increased its points of access by 20% to 14,147 locations.

Plans for Europe expansion

Krispy Kreme called for net revenue growth of 5% to 7% with adjusted EBITDA growth of 8% to 11% in 2024. It also projected adjusted diluted earnings of 27 cents to 31 cents per share, which would be up on the mid-to-high end from 27 cents per share in 2023.

However, it is not clear if these numbers took into account the McDonald’s partnership. Charlesworth addressed the McDonald’s pilot program on the Feb. 9 Q4 earnings call, but he only said that discussions about an expanded partnership were ongoing. Nonetheless, he did say that this just scratches the surface of the company’s expansion plans.  

“We have previously shared our long-term goal of opening at least 75,000 points of access around the world; yet, this still represents less than 3% of the total addressable market, and we are adding new customers all the time,” Charlesworth said on the Q4 call.

The firm also expects to launch Krispy Kreme in “three to five new countries” in 2024, targeting markets in Europe and Brazil.

Game changer

Analysts are bullish on Krispy Kreme stock, as several raised their price targets after the news broke last week. Piper Sandler analyst Brian Mullan called the partnership a “game changer” for Krispy Kreme in a recent research note, upgrading the stock to Overweight with a $20 price target, reported Quartz.

“What the partnership does for [Krispy Kreme] is [it] gives management the confidence and ability to significantly increase its donut production capacity investments in the U.S. which it will now be able to do on an accelerated basis,” Mullan stated.

Citigroup also raised its price target, bumping it up to $19 and estimating that the deal could add $400 million in revenue and $85 million in EBITDA once it’s fully rolled out, according to The Fly.

Investors may want to wait for the May 9 earnings report to learn more about the deal, its impact and how it will be executed. One concern is rising long-term debt, so investors will probably want to hear more about plans to bring that down.

However, the overall long-term view is positive if Krispy Kreme can execute on this McDonald’s deal and leverage it into additional expansion. At this price and valuation, it looks like a decent value.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.