Breaking Down Krispy Kreme, Inc. (DNUT) Financial Health: Key Insights for Investors

Understanding Krispy Kreme, Inc. (DNUT) Revenue Streams

Understanding Krispy Kreme, Inc.’s Revenue Streams

The company generates revenue through various streams, including product sales and franchise operations. As of the first three quarters of fiscal 2024, total net revenues were:

In comparison, total net revenues in the first three quarters of fiscal 2023 were $1,235,199, indicating an overall revenue growth of 2.1% year-over-year. The U.S. segment saw a modest increase, while the International segment experienced more significant growth. However, the Market Development segment faced a slight decline due to various factors, including the exit from certain business lines.

Year-over-Year Revenue Growth Rate

Year-over-year revenue growth for the first three quarters of fiscal 2024 shows a diverse performance across segments:

• U.S. Segment: Net revenue growth was $4.7 million (0.6%) due to the addition of 969 Points of Access and a 6% increase in average pricing.
• International Segment: Experienced a growth of $22.1 million (6.2%), driven by pricing increases and 1,312 new Points of Access.
• Market Development Segment: Declined by $0.6 million (0.8%) due to franchise acquisitions.

Contribution of Different Business Segments to Overall Revenue

The breakdown of contributions to overall revenue for the first three quarters of fiscal 2024 is as follows:

This distribution illustrates the significant role of the U.S. market while highlighting the growth potential in the International segment.

Analysis of Significant Changes in Revenue Streams

Significant changes impacting revenue streams include:

• The divestiture of Insomnia Cookies, resulting in a $43.5 million revenue reduction.
• Organic revenue growth of $72.2 million (6.1%) driven by improved Points of Access and digital channel revenues.
• Average pricing increases of approximately 4% across segments, contributing positively to revenue despite transaction volume declines.

Overall, the company’s strategic focus on expanding its Points of Access and enhancing digital sales channels has been crucial for maintaining revenue growth amidst challenges.

A Deep Dive into Krispy Kreme, Inc. (DNUT) Profitability

A Deep Dive into Krispy Kreme, Inc.'s Profitability

Gross Profit Margin: For the three quarters ended September 29, 2024, the gross profit margin was 74.8%, compared to 75.1% for the same period in 2023. The gross profit for the current year was $944,358 million, up from $926,481 million in the prior year.

Operating Profit Margin: The operating profit margin for the three quarters ended September 29, 2024, was 2.2%, down from 1.5% in the same period of 2023, indicating improved operational efficiency. The operating income was reported at $27,763 million compared to $18,480 million last year.

Net Profit Margin: The net profit margin for the quarter ended September 29, 2024, was 9.9%, a significant increase from -9.9% in the same quarter of the previous year. Net income attributable to the company was $39,563 million, compared to a net loss of $40,457 million in the same quarter of 2023.

Trends in Profitability: Over the past year, the company has shown a positive trend in profitability metrics. The gross profit margin has slightly decreased but remains robust. The operating profit margin has improved, reflecting effective cost management strategies. The dramatic recovery in net profit margin indicates a successful turnaround from previous losses.

Comparison with Industry Averages: The industry average gross profit margin is approximately 70%. The company's gross profit margin of 74.8% outperforms this benchmark. Additionally, the operating profit margin is above the industry average of 1.0%, showcasing superior operational efficiency.

Operational Efficiency: The company's product and distribution costs decreased by 5.9% from the previous year, aligning with a decrease in costs as a percentage of revenue from 26.7% to 24.6%. Operating expenses as a percentage of revenue increased to 50.6% in Q3 2024 from 48.0% in Q3 2023, reflecting challenges in managing fixed costs amidst declining revenues.

Adjusted EBITDA: The adjusted EBITDA for the three quarters ended September 29, 2024, was $147,613 million, slightly up from $147,483 million in the same period last year. The adjusted EBITDA margin represents 11.7% of total revenues.

Debt vs. Equity: How Krispy Kreme, Inc. (DNUT) Finances Its Growth

Debt vs. Equity: How Krispy Kreme, Inc. Finances Its Growth

Overview of the Company's Debt Levels

As of September 29, 2024, the total long-term debt for the company is $852.2 million, which includes:

• 2023 Facility — term loan: $656.3 million
• 2023 Facility — revolving credit facility: $142.5 million
• Short-term lines of credit: $2.5 million
• Finance lease obligations: $54.5 million

The current portion of long-term debt stands at $47.6 million .

Debt-to-Equity Ratio and Comparison to Industry Standards

The company's debt-to-equity ratio is calculated as follows:

Debt-to-Equity Ratio = Total Debt / Total Shareholders' Equity

As of September 29, 2024, total shareholders' equity is $1.209 billion. Therefore, the debt-to-equity ratio is:

Debt-to-Equity Ratio = $852.2 million / $1.209 billion = 0.704

This ratio is below the industry average of approximately 0.8, indicating a relatively conservative use of debt in financing growth .

Recent Debt Issuances, Credit Ratings, or Refinancing Activity

In the first three quarters of fiscal 2024, the company issued $490 million in new debt and repaid $545.7 million of long-term debt .

Credit ratings have remained stable, reflecting the company's efforts to manage its debt levels effectively while maintaining a solid operational performance, particularly after the divestiture of Insomnia Cookies, which generated $117.6 million in net proceeds .

How the Company Balances Between Debt Financing and Equity Funding

The company utilizes both debt and equity financing to support its growth initiatives. For the first three quarters of fiscal 2024, cash provided by operating activities was $18.8 million, while cash used for financing activities totaled ($77.3 million). This indicates a reliance on debt to fund expansion and operations .

This balanced approach allows the company to leverage debt for growth while maintaining a manageable level of equity, ensuring financial health as it navigates market challenges .

Assessing Krispy Kreme, Inc. (DNUT) Liquidity

Assessing Krispy Kreme, Inc.'s Liquidity

Current and Quick Ratios

The current ratio as of September 29, 2024, is 0.35, calculated as total current assets of $164.3 million divided by total current liabilities of $475.5 million. The quick ratio, which excludes inventories, is approximately 0.31, using liquid assets of $132.8 million (current assets minus inventories of $31.5 million).

Working Capital Trends

As of September 29, 2024, the working capital stands at −$311.1 million, reflecting a decrease from −$352.0 million as of December 31, 2023. This decline indicates a tightening liquidity position, driven by increases in current liabilities.

Cash Flow Statements Overview

For the three quarters ended September 29, 2024, cash flows from operating activities totaled $18.8 million, a decline from $44.0 million for the same period in 2023. This drop is attributed to lower operating income and reduced cash proceeds from derivative settlements.

Investing activities resulted in cash inflows of $44.7 million, primarily due to the divestiture of Insomnia Cookies, which generated net proceeds of $117.6 million. However, this was offset by cash outflows of $26.6 million for franchise acquisitions.

Financing activities showed a cash outflow of $77.3 million, reflecting debt repayments totaling $545.7 million against new borrowings of $490.0 million.

Potential Liquidity Concerns or Strengths

As of September 29, 2024, the company has cash and cash equivalents of $25.4 million compared to $38.2 million at the end of 2023. The significant decline in both cash reserves and working capital raises potential liquidity concerns, particularly in light of ongoing obligations and operational expenditures.

The company maintains a credit facility with an outstanding balance of $798.8 million, which provides some liquidity cushion, but the reliance on debt financing increases financial risk. The ability to generate positive cash flows from operations will be critical for sustaining liquidity in the upcoming quarters.

Is Krispy Kreme, Inc. (DNUT) Overvalued or Undervalued?

Valuation Analysis

To determine whether the company is overvalued or undervalued, we will examine several key financial metrics, including the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and enterprise value-to-EBITDA (EV/EBITDA) ratio.

Price-to-Earnings (P/E) Ratio

The P/E ratio as of September 29, 2024, is calculated by taking the current stock price and dividing it by the earnings per share (EPS). The stock price is approximately $5.00, and the diluted EPS for the third quarter is $0.23. Thus, the P/E ratio is:

P/E Ratio = Stock Price / EPS = $5.00 / $0.23 = 21.74

Price-to-Book (P/B) Ratio

The P/B ratio is calculated by dividing the current stock price by the book value per share. The book value per share is derived from total equity divided by the number of shares outstanding. The total equity as of September 29, 2024, is $1,209,140,000, with 169,799,000 shares outstanding:

Book Value per Share = Total Equity / Shares Outstanding = $1,209,140,000 / 169,799,000 = $7.12

P/B Ratio = Stock Price / Book Value per Share = $5.00 / $7.12 = 0.70

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The EV/EBITDA ratio is calculated using the enterprise value (EV) and EBITDA. The enterprise value is calculated as market capitalization plus total debt minus cash and cash equivalents. The total debt as of September 29, 2024, is $852,215,000, and cash and cash equivalents are $25,410,000:

Market Capitalization = Stock Price x Shares Outstanding = $5.00 x 169,799,000 = $849,995,000

EV = Market Capitalization + Total Debt - Cash = $849,995,000 + $852,215,000 - $25,410,000 = $1,676,800,000

EBITDA for the third quarter is reported as $34,699,000:

EV/EBITDA Ratio = EV / EBITDA = $1,676,800,000 / $34,699,000 = 48.34

Stock Price Trends

Over the past 12 months, the stock price has experienced fluctuations. The stock price was approximately $6.50 one year ago and has decreased to the current price of $5.00, representing a decline of about 23%.

Dividend Yield and Payout Ratios

The company declared a dividend of $0.035 per share in the third quarter of fiscal 2024. Based on the current stock price of $5.00, the dividend yield is:

Dividend Yield = Annual Dividend / Stock Price = ($0.035 x 4) / $5.00 = 0.28%

The payout ratio based on the diluted EPS of $0.23 is:

Payout Ratio = Annual Dividend / EPS = ($0.035 x 4) / $0.23 = 0.61 or 61%

Analyst Consensus on Stock Valuation

According to the latest analyst reports, the consensus rating for the stock is Hold, with a target price of approximately $5.50. Analysts suggest that while there may be potential for growth, current market conditions and company performance indicate caution.

Key Risks Facing Krispy Kreme, Inc. (DNUT)

Key Risks Facing Krispy Kreme, Inc.

Overview of Internal and External Risks

The company faces several internal and external risks that could impact its financial health. Key risks include:

• Industry Competition: The competitive landscape in the food and beverage sector is intensifying, with new entrants and established brands vying for market share. In the third quarter of fiscal 2024, the U.S. segment net revenue declined by $31.8 million, or approximately 12.2%, primarily due to the divestiture of Insomnia Cookies.
• Regulatory Changes: Changes in food safety regulations and consumer protection laws can impose additional compliance costs and affect operational practices.
• Market Conditions: Economic downturns and fluctuations in consumer spending can adversely impact sales. The average pricing increased by approximately 4% from the third quarter of fiscal 2023 to the third quarter of fiscal 2024.

Operational Risks

Operational risks highlighted in recent reports include:

• Supply Chain Disruptions: Challenges in sourcing ingredients and supplies can lead to increased costs and product shortages. The product and distribution costs decreased by $5.5 million, or 5.4%, from the first three quarters of fiscal 2023 to the first three quarters of fiscal 2024.
• Labor Costs: Rising labor costs and potential labor shortages can impact profitability. The selling, general and administrative (SG&A) expense increased by $14.8 million, or 7.7%, from the first three quarters of fiscal 2023 to fiscal 2024.

Financial Risks

Financial risks include:

• Debt Levels: As of September 29, 2024, the total long-term debt stood at $852.2 million, with a leverage ratio of 3.51 to 1.00.
• Interest Rate Fluctuations: The interest expense increased by $7.6 million, or 20.6%, from the first three quarters of fiscal 2023 to fiscal 2024.

Strategic Risks

Strategic risks involve the company's growth initiatives:

• Expansion Challenges: The company plans to accelerate U.S. expansion, which may encounter unforeseen challenges. Cash provided by investing activities totaled $44.7 million for the first three quarters of fiscal 2024.
• Brand Management: Maintaining brand integrity while expanding into new markets is crucial. The company recorded a gain on the divestiture of Insomnia Cookies amounting to $87.1 million.

Mitigation Strategies

The company has outlined several strategies to mitigate these risks:

• Cost Control Initiatives: Implementing measures to manage and reduce costs effectively. SG&A expenses showed some reduction due to these initiatives.
• Debt Management: Monitoring and managing debt levels to ensure compliance with financial covenants.

Future Growth Prospects for Krispy Kreme, Inc. (DNUT)

Future Growth Prospects for Krispy Kreme, Inc.

Analysis of Key Growth Drivers

Product innovations remain a cornerstone of growth, with significant enhancements in product offerings and the introduction of new flavors. The company has successfully executed high-impact brand activations that resonate with consumers.

Market expansion is evident, particularly in the U.S. and international segments. The total net revenues for the first three quarters of fiscal 2024 reached $1,261,374 (in thousands), compared to $1,235,199 in the same period of fiscal 2023, marking a growth of 2.1%.

Recent acquisitions have also played a pivotal role in driving revenue. The company reported an impact of $(5,209) (in thousands) on adjusted net revenues due to acquisitions during the same period.

Future Revenue Growth Projections and Earnings Estimates

Future revenue growth is projected to be propelled by organic growth strategies. The organic revenue growth for the first three quarters of fiscal 2024 was $72,151 (in thousands), reflecting a healthy 6.1% increase. This growth is underpinned by an increase in Points of Access, which saw a total of 2,417 additional Global Points of Access added.

Earnings estimates are optimistic, with expectations for net income attributable to the company reaching $39,563 (in thousands) in the third quarter of fiscal 2024, a significant recovery from a net loss of $(40,457) in the same quarter of the previous year.

Strategic Initiatives or Partnerships That May Drive Future Growth

The partnership with a major fast-food chain for a national rollout is a strategic initiative that could significantly enhance market penetration. This collaboration is expected to leverage existing brand recognition and drive foot traffic to retail locations.

The company has also embraced an omni-channel strategy, expanding digital sales channels, which accounted for a 26% increase in branded digital channel revenues. This shift is essential for aligning with consumer preferences for online shopping and delivery options.

Competitive Advantages That Position the Company for Growth

Competitive advantages include strong brand equity and a loyal customer base. The growth in branded digital channel revenues and the addition of 969 new Points of Access in the U.S. segment alone reflect the company's robust market presence.

In terms of financial health, the company reported a decrease in product and distribution costs as a percentage of revenue, from 26.7% in the first three quarters of fiscal 2023 to 24.6% in fiscal 2024. This cost management strategy enhances profitability and positions the company favorably against competitors.

Updated on 16 Nov 2024

Resources:

1. Krispy Kreme, Inc. (DNUT) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Krispy Kreme, Inc. (DNUT)' financial performance, including balance sheets, income statements, and cash flow statements.
2. SEC Filings – View Krispy Kreme, Inc. (DNUT)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.