The recent series of financial, supply chain and management setbacks at Krispy Kreme Inc. has a prominent food-industry analyst pondering whether its private-equity parent company should divest it.
JPMorgan Chase & Co. analyst Rahul Krotthapalli issued an investor report on Aug. 27 in which he downgraded his rating on Krispy Kreme’s shares to “underweight†from “neutral.â€
Perhaps most notably is Krotthapalli continuation of not providing a share-price target for a stock that opened trading Tuesday at $3.55. The 52-week share-price range is $2.50 to $12.68.
“Shares have vastly underperformed since the July 2021 initial public offering at $17,†Krotthapalli wrote.
“Recent profitability hit was notable from major costs associated with launch of (now canceled rollout) delivered-fresh-daily coverage to support the McDonald’s system, and eventually other national accounts,†Krotthapalli wrote.
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“This disruption led to the company being in survivor mode, including the sale of various store assets around the world and an attempted shift to third-party delivery to reduce costs and operational complexity.â€
By comparison, Krispy Kreme was projected by stock analysts at a $18 to $20 share price even though it jumped as high as $37 amid the high-profile buzz initial public offering that launched April 5, 2000,
Parent company JAB Holdings Co. is its largest shareholder at 44.1%. In 2016, Krispy Kreme shareholders voted to sell the company for $1.35 billion, or $21 a share, to an affiliate of JAB.
“The reality is this donut has nearly all of its appeal when eaten freshly fried and glazed within minutes of being made,†Krotthapalli wrote.
“We continue to believe the company could potentially benefit from a strategic owner to unlock the value faster with more balance sheet flexibility.
“In our view, (gaining) a global consumer packaged goods platform backing would be possible only if the story pivots to delivery of longer shelf-stable products (24 to 72 hours) — something that was done in the previous era of Krispy Kreme.
“This could be a more viable path forward and enable the company to fully transition to a capital-light licensing strategy, even in the U.S. market, while remaining focused on the core product.â€
However, that strategy relies on products that “will not be the same as sub-24 hour fresh product, let alone fresh off the conveyor belt product in a Hot Light Theater.â€
Restructuring initiative
Krispy Kreme has said its long-term goal is to have at least 100,000 global points of access — 15,000 of which would be in the U.S. The short-term goal is 33,000 by the end of 2026.
Krispy Kreme had 18,113 such global points of access as of June 30, including 10,176 U.S. outlets.
The latest restructuring initiative development, disclosed Aug. 6, includes plans to reduce its ownership stake in a joint venture with franchisee WKS Restaurant Group in the western United States.
It also plans to “refranchise certain markets†in Australia, Ireland, Japan, Mexico, New Zealand and the U.K. as part of the effort to create “greater financial flexibility.â€
Krispy Kreme also said it would outsource the majority of U.S. logistical operations.
“Looking ahead, we have implemented a comprehensive turnaround plan aimed at unlocking our two biggest opportunities: profitable U.S. expansion and capital-light international franchise growth,†chief executive Josh Charlesworth said on Aug. 6.
“This plan is designed to reduce leverage and deliver sustainable, profitable growth through refranchising, improving returns on capital, expanding margins and driving sustainable, profitable U.S. growth.â€
On July 7, Krispy Kreme announced of chief financial officer Jeremiah Ashukian and chief growth officer David Skena.
In April, Krispy Kreme announced plans for a sweeping overhaul of its board of directors that it is describing as “refreshing†as the company pursues its latest ambitious U.S. and global growth plans.
Shareholders approved shrinking its board from 11 to nine members, with six current members not being nominated for re-election and a shuffling of the JAB representatives.
Krispy Kreme said the “refreshed board will provide valuable partnership for the management team as it continues to execute the company’s transformation into a better and bigger Krispy Kreme.â€
The refreshing featured an intriguing shift of board representation for JAB. JAB senior partner David Bell and senior investment adviser Olivier Goudet departed, partner Patricia Capel stayed and senior partner Gordon von Bretten joined.
Krotthapalli indicated he was not impressed by the changes.
“After reviewing the proposed turnaround plan, we believe the execution risk — specifically the duration risk to refranchise multiple international assets — remains high as underlying business trends continue to decline,†Krotthapalli wrote.
“We continue to believe the company has overestimated the product demand, assuming accessibility as a barrier — but in reality declining organic sales trends indicate diminishing product/brand novelty in light of current macro/competition.â€
