Krispy Kreme (DNUT +4.08%) is once again trying to prove that its beloved brand can translate into a great business. After years of uneven growth, thin margins, and a failed partnership with McDonald's, management is now focused on profitability -- closing weaker stores, refranchising operations, and improving cash flow.
The early signs are encouraging. The adjusted EBITDA margin has improved, and free cash flow turned positive last quarter. But turnarounds are rarely smooth, and Krispy Kreme's comes with its own set of challenges.
Here are three key risks that could derail its efforts and keep the company from becoming the scalable, high-return brand that investors hope it can be.
Image source: Getty Images.
Structural weakness in the business model
The biggest obstacle Krispy Kreme faces is its own business model. Unlike most successful quick-service chains, Krispy Kreme still owns and operates a large share of its stores, production hubs, and delivery networks. That makes the business capital-intensive, requiring constant reinvestment to sustain growth.
Even with its global brand recognition, Krispy Kreme has struggled to deliver sustainable operating profits, unlike its larger peers, such as McDonald's. That's a problem because those competitors benefit from franchise-heavy, asset-light models that produce strong returns on invested capital (ROIC).
Krispy Kreme is attempting to address this issue through refranchising and outsourcing logistics, but these changes take time and come with execution risk. If costs don't come down meaningfully, or if refranchising fails to scale, the company could remain stuck in what investors call a "low-ROIC trap."
In other words, even if Krispy Kreme returns to sustainable revenue growth (which is currently not the case), it may still struggle to convert growth into tangible shareholder value unless it gets its margin problem solved over time.
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Key Data Points
There are execution risks
Turnarounds require careful balance, and that's precisely what Krispy Kreme must manage now. The company recently closed 960 underperforming "points of access" in a single quarter. While that's positive for profitability, it also shrinks the company's reach and could reduce visibility with consumers.
There's also the risk of overcorrection. If Krispy Kreme cuts too deeply or grows too cautiously, it could lose the very momentum it needs to reinvigorate its brand.
The same tension applies to its hub-and-spoke logistics model, where doughnuts are produced centrally and distributed to stores and retailers. It's a clever setup, until fuel, labor, or distribution costs spike. Then, what was meant to be a scalable model becomes a margin headwind. While the company works to outsource its logistics to become lean, it must do so cautiously to avoid affecting product quality.
In short, for the turnaround to be successful, management must cut costs without reducing capacity, streamline operations without compromising brand presence, and expand profitably without overextending capital. That's a tightrope that few consumer brands walk successfully.
Health trends and competitive pressure
Krispy Kreme's identity has always centered around indulgence. Its signature product, the Original Glazed doughnut, remains a cultural icon. But in today's environment, indulgence comes with limits.
People are increasingly health-conscious, particularly younger demographics who seek "better-for-you" snacks and plant-based options. While there's still a place for occasional treats, the long-term growth of high-sugar products could slow, especially in mature markets.
Meanwhile, competition in the "affordable indulgence" sector is intensifying. Peers like Tim Hortons and Starbucks have expanded their offerings to include bakery and dessert items. Local doughnut shops add another layer of competition, often with creative products and strong social media appeal.
Krispy Kreme's recent menu expansion to 16 flavors indicates that it's trying to evolve, but flavor innovation alone may not be enough to offset these broader shifts. If consumer preferences continue trending toward healthier options, the company could face stagnant demand in key markets.
What does it mean for investors?
Krispy Kreme's brand remains one of the most recognizable in the world. That's its edge, and its cushion. But turning that brand into a consistently profitable business requires navigating high capital costs, operational complexity, and shifting consumer tastes.
If management executes well, this turnaround could mark a genuine inflection point. If not, Krispy Kreme risks staying what it has long been -- a sweet story that never quite compounds.
