Krispy Kreme's Cheap Valuation Belies Persistent Profitability and Leverage Woes

What happened

Krispy Kreme is refocusing on its core doughnut business through refranchising and margin improvements, as highlighted in recent strategic shifts. The termination of the McDonald's USA partnership has forced a pivot to densifying high-volume retail doors, increasing execution risk amid volatile financial results. Recent quarters saw a net loss of $435.3 million driven by significant non-cash impairments and cybersecurity costs, obscuring underlying performance. High leverage with a net debt to EBITDA ratio of 6.2x and negative free cash flow further strain the balance sheet, limiting financial flexibility. While easing sugar and wheat costs offer some margin relief, persistent cocoa volatility and competitive pressures cloud the path to sustained profitability.

Implication

The stock's low EV/EBITDA multiple fails to fully price in the elevated risks from the McDonald's partnership exit, which has shifted growth to less certain retail expansion and requires flawless execution. High debt levels and negative interest coverage constrain the company's ability to invest in growth or withstand economic shocks, increasing vulnerability to further impairments or cost overruns. Input cost volatility, especially in cocoa, adds unpredictability to margin projections, while recent cybersecurity incidents and internal control weaknesses highlight operational fragilities. Refranchising and cost controls may gradually improve margins, but they are unlikely to offset the core issues of weak free cash flow and leverage in the near term. Overall, the investment case remains highly dependent on successful densification of retail doors and deleveraging, with little room for error.

Thesis delta

The recent article aligns with the DeepValue report's cautious hold thesis, underscoring that refranchising and margin gains are insufficient to overcome profitability and balance sheet concerns. No material shift is warranted, but heightened scrutiny on execution risks and input cost management is essential.