Krispy Kreme(NASDAQ: DNUT) has left shareholders with a glazed-over look of disappointment. As of this writing, the stock has crumbled by a disastrous 69% year to date amid a string of weaker-than-expected financial results.
The donut-making giant is struggling with sliding demand and several setbacks in its global expansion strategy. The headline numbers are far from tempting, but this level of extreme volatility can sometimes offer investors the chance to snag a sweet deal, assuming the company can turn things around.
Image source: Getty Images.
The case to sell Krispy Kreme stock
Founded 87 years ago, Krispy Kreme didn't invent the doughnut, but the company has managed to stand out through its iconic "Original Glazed" recipe. Its stores feature a unique factory-like open kitchen concept, where customers are drawn in by the "Hot Light" spectacle, signaling fresh doughnuts hot off the line that cascade through a sugary waterfall.
Krispy Kreme has translated that success into an innovative hub-and-spoke operating model, where its stores serve as production centers to supply retail partners, including grocery and convenience stores. Today, Krispy Kreme has 426 hubs internationally, servicing 17,982 global points of access (POAs).
Despite its devout worldwide following, Krispy Kreme may have become a victim of its success, now facing the pitfalls of a rapid expansion strategy and struggling to maintain consistent quality and operational efficiency. The latest trends underscore deeply rooted structural challenges.
In the first quarter, net revenue of $375.2 million fell by 15.3% year over year, alongside an adjusted net loss of $0.05 per share, reversing the profit of $0.07 in the same quarter last year. While some of that decline was due to the company's divestiture of its Insomnia Cookies group last year, more concerning was the 2.6% decline in organic revenue from U.S. operations. Sales per hub internationally are down 1% over the past year.
All this occurs even as global points of access increased by 21.2%, reflecting a distribution deal with McDonald's announced last year that now features Krispy Kreme doughnuts at 2,400 U.S. locations. Unfortunately, demand has been below expectations, with the added costs pressuring the companywide financial performance.
Management has acknowledged consumer spending softness and a shifting sales channel mix, emphasizing a need to refocus on core strengths. However, Krispy Kreme's strained balance sheet, with $993 million in debt and a net leverage ratio of 6.1, severely constrains its ability to tackle these issues quickly. The suspension of its regular dividend to prioritize debt reduction further undermines investor confidence.
Those skeptical of Krispy Kreme's near-term recovery prospects have ample reasons to sell or steer clear of the stock for now.
The case to buy or hold Krispy Kreme stock
When looking at Krispy Kreme as an investment, one silver lining to consider is that following the deep stock price sell-off, the bulk of its near-term challenges may have already been priced into the stock by the market. The stock is trading at a price-to-sales (P/S) ratio of just 0.3, which reflects a deeply discounted business that may still have some underlying value.
The company still needs to rectify its falling sales, but its outlook is backed by a storied brand and distinct market positioning. Amid a reset of expectations, signs of operating and financial progress over the next few quarters could be the catalyst needed for the stock to get back on track. Krispy Kreme's plan to improve its financial positioning by fixing its balance sheet and correcting its cost structure could ultimately pay off in creating value for shareholders.
Investors convinced that the company's weakness is only temporary might consider the latest sell-off as a buy-the-dip opportunity to hold for the long run.
Decision time: I'm avoiding this doughnut
Given the uncertainties surrounding Krispy Kreme's timetable for a sustained earnings recovery, caution is warranted. For existing shareholders, it seems too late to sell the stock, considering the possibility of a rebound, while the prudent move for new investors is to simply avoid it. There doesn't appear to be a quick turnaround in sight, and I predict the stock will remain volatile.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
