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Krispy Kreme’s IPO Has A Lot To Offer

By Alex NewmanStock MarketsJun 29, 2021 12:59AM ET
www.investing.com/analysis/krispy-kremes-ipo-has-a-lot-to-offer-200588769
Krispy Kreme’s IPO Has A Lot To Offer
By Alex Newman   |  Jun 29, 2021 12:59AM ET
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Donut maker Krispy Kreme (NASDAQ:DNUT) has released pricing details about its planned IPO set to debut next week. According to Barron’s, Krispy Kreme is aiming for a $4 billion valuation and will try to raise up to $640 million in this IPO. It will be the first restaurant company to go public since 2019, as the industry was hard-hit by the pandemic.

This is not Krispy Kreme’s first attempt to go public. The company initially went public in 2000, before being purchased and taken private by JAB Holding in 2016. These sorts of IPOs should concern investors who may worry that they are simply bailing out JAB while investing in a company at the peak of its success. But while there are some concerning financial numbers, there is a lot to like about Krispy Kreme’s potential and the IPO is reasonably valued.

Growth Prospects Going Forward

The struggles of the restaurant industry and food outlets like vending machines over the past 12 months thanks to COVID have been well documented, but Krispy Kreme has been in a better position compared to most for a few reasons.

First, Krispy Kreme is somewhat unusual in that it is not dependent on regular repeat customers. According to its S-1/A, Krispy Kreme states that only 3% of its customers go to Krispy Kreme on a regular basis, with the remaining 97% only going 3 times per year or less. This creates a sort of diversification of the customer base and meant a lesser impact if certain customers were not able to visit stores thanks to COVID.

Second, Krispy Kreme argues that it is in the “indulgence sector,” which it claims is highly recession-resistant as people want their cheap treats and has a future CAGR of 4.0%. If we look at similar companies like Starbucks (NASDAQ:SBUX) or Dunkin Donuts before it was taken private late last year, we can see that those companies also performed well despite pandemic difficulties. Starbucks is up more than 50% compared to 12 months ago.

Such growth in the middle of a bull market may cause some investor to try to zag and worry about whether Krispy Kreme can sustain its success. But when compared to other restaurants who have struggled much more, there is reason to think a store which sells doughnuts and treats is in a better position which sells meals and is more likely to be affected by any return of COVID.

Financial and Valuation Thoughts

Krispy Kreme’s financial numbers are a bit unusual for this sort of company. Its S-1/A report states a CAGR of 19.1% going back to 2016, as well as 23% growth from the first quarter of 2020 to the same period in 2021. Krispy Kreme attributes this growth stream to multiple factors, such as an increased focus on delivery as well as pairing up with Walmart (NYSE:WMT) to sell doughnuts at its stores. On the other hand, Krispy Kreme’s net losses have been steadily rising from $12 million in 2018 to $64 million in 2020, and its operating income was a mere $4.2 million in 2020.

Krispy Kreme’s financial profile thus looks more like some new tech company instead of a well-established restaurant chain. While the company’s growth is impressive, there are questions about how much further a well-known doughnut chain can continue to grow. Furthermore, Krispy Kreme suffers from heavy indebtedness of $1.2 billion, and ended up paying $34 million just in inerest expenses for the 2020 fiscal year. Krispy Kreme will be using IPO proceeds to pay off this debt, but this should leave investors concerned that they will find themselves shouldering JAB’s debt holding at the top of this bull market.

The good news is that Krispy Kreme is not trying to achieve the valuation of a tech company. With such a heavy debt load and only $50 million cash on hand, Krispy Kreme will have an enterprise value of about $5.2 billion. This gives the company a forward EV/revenue ratio of about 4.64, which is lower than other companies like Starbucks (NASDAQ:SBUX) or McDonald’s Corporation (NYSE:MCD).

Final Thoughts

Krispy Kreme is a famous brand which unlike so many other restaurants that have installed custom vending machines over the past year has shown an ability to survive during a period which was disastrous for this industry. It has grown impressively over the past and previous years thanks to technology and partnerships, and other companies like Starbucks show that this growth is not a unique mirage. Furthermore, it appears to be reasonably valued at $4 billion.

This is not to suggest that there are serious concerns. Krispy Kreme’s debt is a major challenge which will limit future growth prospects, and investors may hesitate at the idea of paying off such debt which was likely hoisted onto it by JAB. And given how well-known and established Krispy Kreme is, the idea that it can continue to grow rapidly going forward may seem somewhat fantastic.

But Krispy Kreme has done so over the past few years, and trends indicate that it can continue. This is an IPO which investors should seriously consider next week.

Krispy Kreme’s IPO Has A Lot To Offer
 

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Krispy Kreme’s IPO Has A Lot To Offer

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