Talk about ending the year with a bang.
Shares of Krispy Kreme (DNUT) (down 44% YTD) have cratered this month, falling 35% since December 2. This name has been on my watch list since going public for the second time in July 2021, but I've yet to pull the trigger.
This is not my first go-around with Krispy Kreme. I first bought the shares when the company was an all-but-forgotten busted growth story back in 2010. Once of "cult stock" status, the company nearly went under as it expanded too quickly, and suffered through accounting issues in the years following its April 2000 IPO. By the time I stumbled onto it, Krispy Kreme was quietly righting the ship, paying down debt, growing again.
In 2016, serial acquirer of restaurants, JAB Holdings acquired Krispy Kreme for $21/share, after upping the ante a few times. Still, to this day, that final price gets my goat. I really thought JAB got Krispy Kreme on the cheap.
The new incarnation of Krispy Kreme has been a disaster for investors. While it debuted at $17/share, well below the expected $21-$24 range, it still closed at $21 the first day of trading (7/1/2021). This year it has bounced around quite a bit, hitting an intraday high of $19.41 in January, and closing at an all-time low of $10.37 on Tuesday.
December's meltdown was likely brought on by a combination of disappointing company guidance from the recent 2022 Investor Day, along with general year-end market conditions, and perhaps compounded by tax-loss selling. The shares are still not cheap, trading at 26x 2023 consensus earnings estimates, and 23x 2024 estimates. In addition, the company has missed earnings estimates in five out of six reported quarters since the IPO. The company has yet to prove that it can be wildly profitable.
In addition, there is considerable debt on the books, $779 million as of the end of the third quarter, to go along with just $28 million in cash, putting the enterprise value at about $2.5 billion. The company's early adoption of a dividend, currently 3.5 cents/quarter (1.35% yield) also makes little sense.
Krispy Kreme has yet to prove consistent profitability, and that dividend will cost it more than $23 million a year. No one is buying DNUT for the dividend, and that cash would be better used paying down debt.
This could be a great story: an incredibly well-known and popular brand name, that also has owns a majority stake in Insomnia Cookies. But expansion plans are aggressive (we've heard that story before); in 2016, Krispy Kreme had 4,800 "Fresh points of access," which has grown to 11,700 this year. The long-term goal is a whopping 75,000. That will take some doing, including flawless execution, and capital.
As a donut lover, I have personally not had a Krispy Kreme doughnut in ages. While they are by far my favorite doughnuts, they've gotten too expensive. The closest "fresh point of access" is a Walmart (WMT) about 12 miles away, but I turn my nose up at the cost of the ½ dozen and dozen boxes they sell in-store. I wish I could say that I'm abstaining for health reasons, but that's not the case.
If you told me earlier this year, that I'd get a crack at DNUT for $10/share, I would have been excited. But price (P) is just one part of the equation; the other side of it -- earnings(E) -- has not yet materialized.
I'd pay 15x 2023 earnings estimates. That would put the stock price at less than $6.
