Doughnut maker Krispy Kreme (NASDAQ:DNUT) knows methods to capitalize on a marketing opportunity. Just in time for the solar eclipse that cut a swath across North America on Monday, Krispy Kreme began offering a Total Solar Eclipse Doughnut, a glazed treat with chocolate icing, silver sprinkles, and a complete Oreo cookie in the middle, signifying the moon.
That sounds delicious, but it surely will not be why the corporate’s stock price was up over 3% on Wednesday to just about $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).
In late March, Krispy Kreme announced a deal to place its doughnuts in McDonald’s restaurants throughout the USA. It is a big opportunity for Krispy Kreme as McDonald’s has some 13,500 restaurants within the U.S., so this recent partnership will double the variety of locations where customers should purchase them.
The corporate ran a pilot program last 12 months, selling Krispy Kreme doughnuts in 160 restaurants in Kentucky. Demand exceeded expectations, and each McDonald’s and Krispy Kreme were so pleased with the outcomes that they decided to expand nationwide. Starting this 12 months, Krispy Kreme doughnuts, either individually or in boxes of six, will likely be rolled out to McDonald’s restaurants in phases. By the top of 2026, the plan is to have them in all McDonald’s restaurants within the U.S.
Krispy Kreme is releasing a Total Solar Eclipse Donut in celebration of the entire solar eclipse on April eighth.
The doughnut is dipped in black chocolate icing & silver sprinkles, piped with a buttercream made with Oreo pieces and topped with a complete Oreo cookie in the middle. pic.twitter.com/p9F8SoP24W
— Pop Crave (@PopCrave) April 5, 2024
“Significantly, by making Kreme Krispy [sic] accessible to fans nationwide through this partnership, we expect to greater than double our points of access by the top of 2026,” Krispy Kreme President and CEO Josh Charlesworth said. “The partnership accelerates the event of our existing Delivered Fresh Every day channel, creating operating leverage through distribution density and production utilization.”
The corporate didn’t issue any guidance or projections on how this initiative will likely be accretive to earnings, but it surely is prone to come up within the first-quarter earnings report and call with analysts on May 9.
Krispy Kreme has some momentum as its revenue increased 11% within the fourth quarter to $451 million while its net income reached $1.9 million, up from a $1 million net loss within the fourth quarter of 2022. Last 12 months, the corporate 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 can be up on the mid-to-high end from 27 cents per share in 2023.
Nevertheless, it will not be clear if these numbers took under consideration 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 corporate’s expansion plans.
“We have now previously shared our long-term goal of opening a minimum of 75,000 points of access all over the world; yet, this still represents lower than 3% of the entire addressable market, and we’re adding recent customers on a regular basis,” Charlesworth said on the Q4 call.
The firm also expects to launch Krispy Kreme in “three to 5 recent 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 Chubby with a $20 price goal, reported Quartz.
“What the partnership does for [Krispy Kreme] is [it] gives management the boldness and skill to significantly increase its donut production capability investments within the U.S. which it’ll now have the opportunity to do on an accelerated basis,” Mullan stated.
Citigroup also raised its price goal, bumping it as much as $19 and estimating that the deal could add $400 million in revenue and $85 million in EBITDA once it’s fully rolled out, in accordance with The Fly.
Investors will want to wait for the May 9 earnings report back to learn more in regards to the deal, its impact and the way it’ll be executed. One concern is rising long-term debt, so investors will probably need to hear more about plans to bring that down.
Nevertheless, the general 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 an honest value.
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