On Tuesday, Krispy Kreme (NASDAQ:DNUT) received a reinstated In Line rating from Evercore ISI, accompanied by a $13.00 price target. The firm based its target on a discounted cash flow (DCF) analysis, which suggests the stock is valued at approximately 11 times its estimated 2026 enterprise value to EBITDA (EV/EBITDA). This valuation represents a slight discount compared to the average within the casual dining sector.
Krispy Kreme has recently streamlined its operations, having closed its consumer packaged goods (CPG) division and sold a majority stake in Insomnia Cookies, while retaining a 34% minority interest. The company's focus is now squarely on its core product, fresh daily donuts.
The potential success of Krispy Kreme's rollout in McDonald's (NYSE:MCD) restaurants is a key factor in Evercore ISI's valuation, with two scenarios presented: a base case with a $13 per share valuation and an upside scenario targeting $18 per share.
The base case scenario projects a compound annual growth rate (CAGR) of 13% in sales and 17% in EBITDA for 2025/2026, with Krispy Kreme donuts achieving a 0.7% sales mix at an average of 9,000 McDonald's locations.
This scenario assumes a weekly sales figure of $500 per restaurant with a 20% incremental sales margin. In contrast, the upside scenario anticipates a higher CAGR of 18% in sales and 25% in EBITDA, with donut sales reaching a 1.5% mix and $1,000 in weekly sales per McDonald's restaurant, along with a 22% incremental sales margin.
For the fiscal year 2024, Evercore ISI's estimates align closely with the consensus, projecting $1.66 billion in sales (consensus at $1.67 billion) and $216 million in EBITDA (consensus at $217 million). The firm expects U.S. sales to reach $1.04 billion, slightly above the consensus forecast of $1.03 billion, with U.S. EBITDA at $130 million, surpassing the consensus of $125 million. The projected EBITDA margin is 12.5%, improving by 60 basis points year-over-year.
The report also outlines potential headwinds for Krispy Kreme, including higher freight costs, increased labor hours, commodity inflation, and the initial costs associated with supporting the McDonald's rollout, which is not expected to contribute to EBITDA.
Despite these challenges, the company is predicted to see growth in U.S. points-of-access, including 1,000 McDonald's locations, and revenue per hub. However, international revenue growth is expected to be modest at 5% year-over-year, with a decrease in EBITDA margin due to weakness in the high-margin UK segment. Free cash flow for 2024 is anticipated to remain negative.
In other recent news, Krispy Kreme has reported noteworthy second-quarter earnings and unveiled ambitious expansion plans. The company experienced a 7.8% increase in organic revenue and a 23% year-over-year rise in global points of access. Krispy Kreme plans to venture into new international markets such as Spain, Germany, and Brazil, aiming to reach 33,000 points of access by 2026. In the U.S., collaborations with Target (NYSE:TGT) and McDonald's are set to boost expansion, with Krispy Kreme products expected to be available in over 1,000 McDonald's restaurants by the end of the year.
The sale of Insomnia Cookies has allowed Krispy Kreme to concentrate on its primary business of fresh doughnuts. Financially, the company reported a 12.1% increase in adjusted EBITDA and a margin expansion. The company's net revenue projections are set at $1.65 billion to $1.685 billion, with adjusted EBITDA between $215 million and $220 million for 2024.
These recent developments indicate Krispy Kreme's strategic focus on growth and expansion, both domestically and internationally. However, the company faces challenges in the UK market, prompting strategies for improvement. Despite these hurdles, the overall outlook remains positive, underpinned by strong financial performance and strategic partnerships.
InvestingPro Insights
Krispy Kreme's recent operational changes and strategic partnerships have drawn attention from analysts, and real-time data from InvestingPro provides additional context to the company's financial health and market valuation. The company's market capitalization stands at approximately $1.88 billion, indicating its size within the industry. Despite facing challenges such as a significant debt burden and short-term obligations exceeding liquid assets, Krispy Kreme's net income is expected to grow this year. Analysts predict the company will be profitable within the year, which could be a turning point for the doughnut giant.
InvestingPro data highlights a P/E ratio of -36.01, reflecting investor sentiment about the company's earnings potential. The revenue for the last twelve months as of Q2 2024 is reported at $1.74 billion, with a growth of 8.06%, suggesting an upward trajectory in sales. Additionally, the company's gross profit margin is 28.54%, which is a critical figure for understanding its profitability at the fundamental level. These metrics, combined with an InvestingPro fair value estimate of $9.11, may influence investors' decisions as they weigh the company's future prospects.
For those interested in a deeper analysis, InvestingPro offers additional tips on Krispy Kreme, including insights into its trading multiples and profitability metrics. With 6 more InvestingPro Tips available, investors can access a comprehensive view of the company's financial standing and make more informed investment decisions.
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