Is Krispy Kreme’s Stock Delicious or a Dud?
Have you been thinking about taking a bite of Krispy Kreme (Nasdaq: DNUT) shares?
There are definitely things to like about this company.
Krispy Kreme has 99% brand recognition. That’s some serious brand strength. And it has staying power.
The first Krispy Kreme was opened by Vernon Rudolph more than 85 years ago in 1937. Rudolph rented a building in Winston-Salem, North Carolina, and started selling his Krispy Kreme doughnuts to local grocery stores.
When the delicious smells emanating from his shop started attracting foot traffic, Rudolph cut a hole in the outside wall and started selling directly to sidewalk customers.
From there, tremendous growth ensued.
Today, Krispy Kreme sells 1.6 billion doughnuts per year from 11,700 different locations globally. Management expects that growth to continue through expansion.
The company’s most recent investor presentation shows plans for revenue to increase 42%, from $1.52 billion in 2022 to $2.15 billion in 2026.
Management also expects revenue growth to translate into an even faster increase in EBITDA (earnings before interest, taxes, depreciation and amortization).
That same presentation shows expectations for EBITDA to jump 65%, from $190 million in 2022 to $315 million in 2026.
EBITDA is a good proxy for how much cash flow operations can generate. It’s good to see that management expects cash flow to grow at a good clip over the next few years.
But here’s the problem…
EBITDA doesn’t factor in interest expense. For anyone looking at Krispy Kreme shares today, interest expense on the company’s debt is a big thing to consider.
The reason I say this is all of Krispy Kreme’s $738 million in long-term debt expires in June 2024.
That alone isn’t the problem. The problem is that the interest rate that the company pays on its debt once the refinancing occurs will almost certainly go up by a lot.
Currently, the blended interest rate that Krispy Kreme pays on its long-term debt is 4%. The company locked into its current debt position when interest rates were much lower than they are today.
To be clear, this company carries a lot of debt relative to the cash flow it generates.
Currently, Krispy Kreme’s debt-to-EBITDA ratio sits at almost 4 ($738 million in debt to $190 million in EBITDA). That is not a light debt load.
In the current rate environment, Krispy Kreme’s interest cost could at least double when the company refinances its debt in the coming months.
That would mean at least another $30 million in interest expense for a company that hasn’t actually posted a profit in any of the last three years. It would also take a good bite out of the EBITDA growth that management is expecting.
So while I’m very sweet on the product that Krispy Kreme sells, I’m sour on Krispy Kreme shares.
The Value Meter rates Krispy Kreme as “Slightly Overvalued.”
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