Krispy Kreme Donuts May Be Hot Now, But the Stock Will Cool Down

Of all the nationwide efforts to get people vaccinated against Covid-19, giving away free donuts may be the most attractive. This month, Krispy Kreme (NASDAQ:DNUT) announced that it will give Americans who have gotten at least one vaccination shot two free doughnuts every day as part of a weeklong promotion. Although not a stranger to the public markets, the company has been private for many years but went public again through an IPO on July 1 of this year, trading as DNUT stock.

A close-up of a sign for Krispy Kreme (DNUT) donuts.

Source: James R. Martin /

Krispy Kreme is an 84-year old brand that operates as an omnichannel business operating through a network of doughnut shops, retailers and a growing e-commerce and delivery business. In 2018 it expanded into the cookie business by purchasing Insomnia Cookies.

DNUT was founded in 1937 in North Carolina and now operates in over 30 countries. It has become recognized as one of the top “sweet treat” brands in America. The company has approximately 1,400 stores and has developed a Hub & Spoke model that appears to be driving strong organic growth.

DNUT Stock Investment Premise

The iconic Krispy Kreme brand has had proven consumer appeal for decades, but it is still poised for future growth. The company has a relatively new management team that thinks about the business more expansively. The target is the $650 billion global indulgence market, of the which the company has less than 1% market share currently.

The business model leverages its existing asset base, in particular, utilizing its Hot Light Theater Shop locations to expand distribution, drive sales and increase margins. There is plenty of room for growth, as many large metro markets in the U.S. are still underpenetrated. International markets aren’t close to reaching their full potential and provides a growth ramp for many years to come.

Expansion into other related categories such as cookies or packaged treats is still in its infancy. Careful execution of expanding into other areas could add significantly to long-term revenue growth rates. The near-to-mid term earnings growth model should be able to sustain 12-14% EBITDA growth, while growing faster than that in the near term.

Q2 Results

Revenues grew 44% in the quarter with organic revenue growth coming in at 23%. Organic revenue growth for the North American segment was approximately 4%. The company reported they now have 9,575 global points of access which include the Hot Light Theater Shops, traditional stores, cookie shops and unaffiliated retail locations that provide fresh donuts daily.

The company also introduced guidance for the full year 2021 with approximately 19%-23% revenue growth. Organic growth is expected to fall in the 10%-12% range. Adjusted EBITDA (earnings before interest, taxation, depreciation and amortization) is expected to range from $178 million to $185 million, a 22%-27% growth rate. Adjusted net income is expected to fall between $62-$68 million. A longer range outlook was also provide with organic revenue growth of 9% to 11%, adjusted EBITDA growth of 12% to 14%, and adjusted Net Income growth of 18% to 22%.

Leverage and dividend policy was stated as follow:

“We expect total net leverage to be under 3.0x in the next 12 months. In accordance with our dividend policy, we expect to pay an initial cash dividend of $0.035 per share for the quarter ending October 3, 2021. Thereafter, we expect to maintain a stable quarterly dividend until we reach our long-term net leverage policy of 2.0x.”

DNUT Stock Valuation

Earnings per share estimates range widely for 2022, which is expected to be a “clean” year without unusual charges or franchisee acquisitions. The spread ranges from 42 to 55 cents, with a consensus estimate of 50 cents. That implies that DNUT stock trades at 33 times forward earnings, which seem excessive at this time.

While those headline double-digital growth rates are impressive, keep in mind that the organic growth rate for North American market (two-thirds of the overall business) was only 3.9%.

Although somewhat counter cyclical, sweet treats like donuts should average GDP growth rates over time. I don’t think the stock price reflects the inevitable slow down from double-digit growth rates. Yes, that may be far away, but DNUT stock is worth the sum of all future cash flows discounted back at a reasonable rate.

The company is in a solid growth phase led by a strong management team and a restructured business model — but a lower entry point is advisable to account for a much-needed margin of safety.

On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to, and He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University. He also created the kids adventure blog.

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