Krispy Kreme posts 2Q loss five times bigger than forecast as McDonald's tie-up ends

Shares of doughnut chain Krispy Kreme fell 7% yesterday, August 7, after the company released its second-quarter financials, marking an end to the stock's "meme moment." It reported widening losses due to the termination of its partnership with McDonald's, which investors and analysts had had high hopes for. Krispy Kreme promises to start returning to profitability in the current quarter, but analysts remain cautious.

Krispy Kreme dropped 7% to close at $3.18 per share yesterday. At one point, the share price was down as much as 15% at $2.90, its lowest mark in more than a month.

The company's stock, which looked to have meme potential after surging in July, plunged yesterday after the company disclosed its second-quarter financials. Revenue dropped 13.5% year over year to $379.8 million. Meanwhile, the net loss widened sharply to $435.3 million, compared to just $5.5 million a year before.

Krispy Kreme posted an adjusted loss of $0.15 per share. That's five times the consensus forecast of analysts surveyed by FactSet, who had expected the company to post a loss of $0.03 per share. The doughnut maker had reported adjusted earnings of $0.05 cents per share in the second quarter of 2024.

The quarterly performance reflects the impact of operating costs from its partnership with McDonald's, which the companies discontinued effective July 2, Krispy Kreme CEO Josh Charlesworth said. The company recorded $28.9 million in lease impairment and termination costs related to the tie-up, as well as $22.1 million in noncash impairment charges, reports Bloomberg. "We expect to begin recouping profitability in the third quarter," Charlesworth added.

According to the company statement, Krispy Kreme is "quickly removing" costs related to the McDonald’s partnership and growing fresh delivery through "profitable, high-volume doors with major customers."

To reduce debt and start growing again, the company has released a turnaround plan. It includes: 

- Refranchising: Improve financial flexibility through refranchising international markets (e.g., Australia, Japan, and the UK) and restructuring the joint venture in the Western U.S.

- Driving return on invested capital: reduce capital intensity by using existing assets and focusing on franchisee development.

- Expanding margins: including outsourcing U.S. logistics.

Krispy Kreme plans to exit roughly 1,500 underperforming locations by year-end. It will replace them with about 1,100 more profitable points of sale, more than half of which are already operational, CEO Josh Charlesworth said on a separate earnings call, writes Bloomberg. These include retail partnerships with chains like Target Corp., Walmart Inc., and Costco Wholesale Corp. 

In late July, Krispy Kreme joined the latest meme trade, rising more than 30% in just a day. The stock is down since then, and it remains off 68% year to date.

Ahead of this earnings release, the estimate revisions trend for Krispy Kreme was mixed, Zacks noted. They translated into a Zacks Rank #3 ("hold") for the stock.

After the earnings, Truist Securities analysts led by Bill Chappell wrote in a note: "we’re glad to see management lay out a blueprint to get things back on track but will need to see more quantification and results before getting more constructive." Truist has a "hold" recommendation on the stock. 

The doughnut chain has a total of nine ratings, almost all of which are "hold" (seven) versus one "buy" and one "sell," according to MarketWatch.

The AI translation of this story was reviewed by a human editor.