Krispy Kreme (DNUT -1.46%) is making it easier for customers to get their donut fix. As the company implements its revamped distribution model across its markets, revenue and profits of the iconic donut seller could blossom over the next few years. Here's how that might happen.
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Delivered fresh daily
Historically, Krispy Kreme sold its donuts through its wholesale channel and Hot Light Theater donut shops. The company did well with its distribution model, but found that a lack of access to its treats was the No. 1 reason why customers didn't buy Krispy Kreme donuts.
To solve the problem and write the next chapter in the company's growth story, Krispy Kreme came up with its hub-and-spoke distribution model. The hubs are the existing donut shops; the spokes, also known as "points of access," are smaller cabinets and counters in every grocery store, convenience store, high traffic location, and delivery platform around each hub.
By expanding the number of points of access for each hub, Krispy Kreme brings its famous donuts closer to its customers. More points of access have increased sales in the few hub-and-spoke markets that Krispy Kreme has tested. When the company adds new points of access, it stocks them with fresh donuts made at its nearest hub. Since each additional sale comes with with little associated cost, this strategy helps Krispy Kreme's margins expand.
Krispy Kreme has only just begun implementing its new hub-and-spoke strategy throughout its markets. There are about 5,500 points of access in the US and Canada today. Expansion plans include 2,000 new points of access in the US and Canada over the next three years, with an ultimate total U.S. goal of more than 10,000 .
International markets currently have about 4,300 points of access. Krispy Kreme's long-term goal is to increase that number to over 20,000, with an additional 20,000 in previously untapped markets . The company has already inked contracts to open in four new countries during 2022.
On top of that, the increased number of access points will allow online delivery to expand its reach to more customers with donuts delivered fresh daily. Krispy Kreme has an app for home delivery and pickup, and third-party delivery platforms are also available to customers.
Krispy Kreme believes the ease and simplicity of e-commerce and delivery will be champions for customers. It estimates channel sales can jump from their current level of 17% of revenue to more than 25% in the long run.
Is the stock a sweet treat?
Even though the implementation process is in its early stages, Krispy Kreme has already issued attention-grabbing guidance for 2022. The company expects organic revenue growth of 11%, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) growth of 14%, and adjusted, diluted net income (after accounting for its 2021 IPO) growth of 20%.
You can see the margin expansion opportunity in Krispy Kreme's hub-and-spoke model in how its EBITDA and adjusted net income are growing even faster than its sales. As Krispy Kreme continues its rollout and expansion in the years to come, earnings could compound accordingly.
The company might face stiff competition for shelf space at new points of access, but Krispy Kreme's iconic status could help its case there. For instance, a convenience store might like to have a Krispy Kreme cabinet because customers coming in specifically for donuts will likely walk out with coffee or other items.
The stock is down 31% from its post-IPO highs in July of 2021 to about $15. Krispy Kreme's adjusted EPS guidance for 2022 is about $0.40, pricing at a forward P/E of 37x -- well below its high of over 52x last July. That might still seem a bit expensive, but Krispy Kreme expects earnings to proliferate at a healthy 20% annual clip in the long run, so the company may well deserve that sweeter valuation.
At current levels, Krispy Kreme's stock might be a good opportunity for investors to get in during the early innings of the growth and margin expansion story. Fast food stock investors should keep an eye on point-of-access and organic revenue growth in the coming quarters. As those metrics grow, profitability could gain steam.
