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Krispy Kreme IPO: What You Need to Know

By Evan Niu, CFA - Jun 2, 2021 at 10:00AM

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The doughnut maker is coming back to the public markets.

After spending five years as a private subsidiary of European conglomerate JAB Holding, Krispy Kreme is preparing to return to the public markets. JAB had scooped up the doughnut maker back in 2016 for $21 per share, valuing Krispy Kreme at $1.35 billion at the time, but it's now looking to spin off the company in an initial public offering (IPO). The move comes about a year after JAB similarly took JDE Peet's public.

Krispy Kreme has filed a new S-1 Registration Statement ahead of its return, providing a glimpse into its books. Here's what investors need to know about the upcoming deal.

People taking donuts out of a box

Image source: Getty Images.

Acquiring franchisees is helping drive revenue growth

Revenue last fiscal year, which ended on Jan. 3, increased by 17% to $1.12 billion, but operating income declined by nearly 90% to $4.3 million due to increased costs related to Krispy Kreme's franchise acquisition strategy, as well as new store openings.

The consumer discretionary company has been aggressively buying up franchised stores over the past three years, spending $466 million to acquire 24 franchisees and nearly 470 locations around the world. Krispy Kreme says that the strategy will accelerate revenue growth going forward. By purchasing franchisee locations, Krispy Kreme argues that it can more efficiently deploy its omnichannel sales model. Corporate-owned stores now represent 84% of branded sales in North America.

"We recognize substantially higher revenue for a company-owned shop compared to a franchise shop, from which we generally earn only royalties and fees based on a percentage of sales and sales of doughnut mix and other supplies," Krispy Kreme writes in the filing.

That all resulted in a net loss of $60.9 million last fiscal year. The company also reported $321.8 million in revenue and a net loss of $3.1 million for the first quarter.

JAB will retain control

The company expects that JAB will retain its controlling interest following the offering, as the conglomerate will still hold a majority of all outstanding shares. Public investors should be aware that they will have no say in how Krispy Kreme is run, and that a majority of the company's directors will not be classified as independent.

JAB has an investors' rights agreement in place, which will effectively let JAB maintain its control of the capital structure following the IPO.

Debt is mounting

Krispy Kreme is also saddled with a meaningful amount of debt. At the end of the first quarter, the company had $1.2 billion in total debt. Approximately $350 million of that is owed to JAB, and paying down debt is one of the primary goals of raising cash through the IPO, according to the filing.

"The principal purpose of this offering is to provide us with additional capital including to allow us to reduce indebtedness, create a public market for our common stock and enable access to the public equity markets for us and our stockholders," the company writes. "We intend to use the net proceeds that we receive from this offering to repay outstanding indebtedness under the revolving credit facility portion of our 2019 Credit Facility and the Related Party Notes, with the remainder to be used for general corporate purposes."

It's unclear how much Krispy Kreme is looking to raise in total. The filing notes that the company may raise up to $100 million, but that figure is likely a placeholder in the first version that will be updated in subsequent amendments.

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