With share prices falling flat, Krispy Kreme (DNUT -0.23%) is a smart buy for investors eager to capitalize on a reopening economy. As people go back to work, Krispy Kreme is well-positioned to thrive thanks to its strong revenue growth, strong brand, and omnichannel strategy.
Taking a bite out of the pandemic
While lifted COVID mandates have drawn crowds back into the stores, Krispy Kreme has successfully garnered customers through several newly implemented strategies.
The company got lots of publicity by offering free doughnuts to customers who became vaccinated. Behind the scenes, Krispy Kreme has begun using high-quality ingredients that require less sugar and artificial sweeteners than competitors. It also recently revamped its operational model to prepare doughnuts in-store in an effort to keep the doughnuts fresh -- unlike rivals Dunkin' and Starbucks, which source their sweet treats from other locations. Even Krispy Kreme sites that don't make doughnuts in-house receive daily shipments of freshly made treats from other nearby locations.
To further boost its customer experience, Krispy Kreme has added "Hot Light Theater Shops" that attract customers to witness the process of doughnut creation with special visual effects. In its Times Square location, the company added a 24-hour street-side pickup window and a glaze waterfall to engage customers.
While this may seem very theatrical, it has certainly caught customers' attention, fueling sizable sales gains. Krispy Kreme grew its Q2 2021 revenue by 42.6% year over year, to $349.2 million, including 22.5% organic revenue growth -- sales gains from the company's existing businesses, rather than from newly purchased ones -- in the same period. That success isn't anything new or novel, either; the company grew net revenue by 19.1% per year from 2016 through 2020.
No holes in these operations
Doughnuts continue to remain popular with consumers; 201 million Americans ate them in 2020. And Krispy Kreme's one of the biggest, most beloved of all doughnut dealers. Founded in 1937, Krispy Kreme is well-known across all demographics in the country. The company's S-1 filing reports that it has 94% brand awareness in their target markets.
By the same merit, Krispy Kreme has done a fantastic job of differentiating its doughnut appeal to become an industry leader. Through its unique flavors and In a consumer survey, 73% of respondents reported that if they could eat only one doughnut brand for the rest of their life, they would choose Krispy Kreme.
What investors should consider
While there is certainly a lot to be optimistic for Krispy Kreme's future, this doesn't necessarily mean it will work out. This isn't the company's first time reaching the public markets. In 2000, the company IPO'd, performed poorly on the stock market, and eventually went private again, acquired by JAB Holdings in 2016.
Additionally, the company carries massive long-term debt of $626.4 million, against just $37.4 million in cash on hand, and hasn't turned a profit in the past few years. The company took on $466 million of this debt to acquire 24 franchisees and 469 locations globally during its exit from JAB Holdings. Consistently negative free cash flow suggests the company won't be able to pay down this debt anytime soon.
It's also important to consider that Krispy Kreme's business is seasonal and doesn't attract many repeat customers. Its doughnuts are used for special occasions, and the company typically sells more boxes of dozens than individual treats. Krispy Kreme's operational improvements and attention-getting efforts have certainly worked well in the short run, but maintaining revenue growth will be tricky given millennials' preference for healthier eating.
Despite these reasons, the sugary titan still packs a lot of potential. According to IBIS World, the doughnut industry is projected to grow revenue at 2.9% annually from 2020-2025. Likewise, doughnut creation may be labor-intensive, but the sweet treats require few imports to produce. If Krispy Kreme is able to continue its international expansion and bolster its e-commerce presence, it seems likely to grow beyond its current 5.4% market share and overtake competitors in a highly fragmented market.
The final crumbs
As of Nov. 5, Krispy Kreme shares have dropped 17% from their initial IPO price, but this could be an opportune time to invest in one of America's oldest companies. From its beginnings in the depths of the Great Depression, Krispy Kreme has endured hard times, yet it still stands as the preeminent doughnut brand in the United States. Krispy Kreme's path to success is a difficult one, but I think if the company is able to achieve profitability and reduce its debt substantially, this could be a hole in one for investors.