Donut Giant Krispy Kreme's Stock Fall After the Announcement of Lower Profit
Donut giant Krispy Kreme is positive about the success of its hub-and-spokes model and believes that it will continue to grow. Its stock prices recently saw a major dip.
Krispy Kreme and the recent tumble
Krispy Kreme's stock prices recently saw a 12% dip after the company announced lower-than-expected revenue and profits during the recent quarterly results. The brand, which sells donuts and other such sweet treats through an omnichannel business model, also reported a significant deceleration in commodity costs. The company also reported that its net income declined to $14.6 million after the report. The company also said that the adjusted EBITDA (net earnings with interest, taxes, depreciation, and amortization added back) and net income were going to be substantially lower than initial projections. After the recent dip, the stock has gone down by more than 25% this year.
Key points from Krispy Kreme's earnings report
As per the report released recently, Krispy Kreme has revenues of $375.24 million and a year-over-year (YoY) growth rate of 7.5%. This was 2.77% below the projected $385.94 million.
The expansion of Krispy Kreme's omnichannel model and the company's performance in the Australian and Mexico markets were the key drivers of the growth reported. The sales at locations where doughnuts are produced and processed to be sold also saw strong Business Growth sales in the U.S. and Canada saw a YoY increase of 22.2% to $4.4 million, caused by a 9% increase in weekly sales. Sales of international locations grew by 22.5% over the same period. But revenue from Krispy Kreme's e-commerce segment, as a percentage of net sales, saw a dip of 110 basis points to 17.5%, which may also be responsible for the lower profits.
Krispy Kreme's net revenue is now expected to reach $1.49-1.52 billion, down from the earlier projections of $1.53-1.56 billion. Net income was also revised down to $49-54 million from earlier projections of $65-69 million.
Investors' response to Krispy Kreme's earnings report
It was reported that investors were disappointed with the donut company's latest results, which led to the share price drop. Investors seem to be upset over the company's consistent underperformance and are said to be losing faith in its ability to have reliable growth. The investors' disappointment and lower than expected performance has led to the company's shares seeing a drop of 33% compared to the IPO price of $19.12 in July last year.
Even before the current report came out, the market sentiments in the Restaurant Industry about the company's IPO last year were not very positive. Even though the company had seen robust revenue growth in its last reported quarter before the IPO, it did not meet the analysts' earnings estimates, which led to a significant price decline.
Many investors and experts say that it is best to avoid investing in the stock of a company already struggling with inflation costs and labor shortages. They also took into account the company's inability to meet consensus earnings estimates and stated that the higher valuation was not justified.
Krispy Kreme response to the price dip
Krispy Kreme was on the defensive after the latest dip in stock prices. CEO Mike Tattersfield explained that there has been no fundamental change in the model and said that in spite of the challenges in the macro environment and consumers' cutting down on consumption of sweets, the donut brand has been pretty resilient, as it has seen growth in every country it operates in.
Many in upper management blamed inflation for eating into the bottom line as higher wages and commodity costs led to a decrease in operating results. The company also blamed the heat waves, consumer environment, and a faltering economy in the United Kingdom, unfavorable exchange rates, and higher input costs due to the strong dollar for the dip in the EBITDA outlook.
Krispy Kreme's growth projection
As discussed, the donut company has now lowered its projection for revenue to $1.49-1.52 billion, down from the earlier projections of $1.53-1.56 billion. This also means that the growth projection is now down to 8.7% from its previous forecast of 11.6%, just three months ago. The company also adjusted earnings per share (EPS) to $0.29-0.32, a dip from the earlier range of $0.38-0.41.
Krispy Kreme's changing business model
Even before the drop in the stock prices, Krispy Kreme has been working to shift its business model in the United States from a "traditional doughnut shop" to a hub-and-spoke model where the larger shops (hubs) produce and process doughnuts daily for various spokes such as smaller shops, gas stations, and kiosks in grocery stores.
The company has plans to close down 10 underperforming hubs that don't have any spokes. CFO Joshua Charlesworth said that there are 118 such hubs without spokes and the majority have shown good performance.
Many in the management believe that the hub-and-spoke model will generate better profit margins over time as it makes the hubs more productive and efficient. The company has already implemented the model in the United Kingdom, and the profit margins are said to be around 20%, even in a market facing challenges due to a weak economy.
The Donut company decided to opt for the model to gain more access points to drive the Business Growth. In order to gain more hubs, the company has been buying out franchisees to better control the market. The company is in the process of acquiring a 6-unit franchisee in the Midwest for $18.5 million. The brand has acquired well over 100 units from franchisees, bringing down franchisee locations from 205 in 2019 to 66 last year.
Krispy Kreme's plans for the future
CEO Tattersfield said that the company's growth is due to the expansion of delivered fresh daily (DFD) doors, which is part of the hub-and-spokes model being implemented by the company. "The company plans to expand its access points by 10%, banking on the growth of its DFD doors. The brand also has plans to add 10 to 15 new equity hubs per year," added Tattersfield. The management is also planning on spending around 8% of revenue on capital expenditures and plans to reduce it to 6% over time.
Krispy Kreme is positive about the success of its hub-and-spoke model and believes that it will continue to grow based on Sales Forecasts and expansion in countries like Australia and Mexico and moves to promote sales.
