'Survivor mode': JPMorgan doubts turnaround, downgrades Krispy Kreme to 'underweight'

JPMorgan has issued a "sell" recommendation on Krispy Kreme, expressing doubt in the doughnut maker’s turnaround plan following the collapse of its partnership with McDonald’s. The bank said the failed tie-up has left the company in “survivor mode.”

A JPMorgan team led by Rahul Krotthapalli downgraded Krispy Kreme shares to "underweight" from "neutral" in a research note yesterday, August 27, Barron's notes. A target price has not been set, based on Yahoo Finance data.

The demise of the company’s ill-fated partnership with McDonald’s has left it in “survivor mode,” JPMorgan argues, and its turnaround plan is laden with risks.  

The company announced its recovery plan in August. It includes growing fresh delivery through "profitable, high-volume doors with major customers," refranchising, and outsourcing U.S. logistics.

JPMorgan called it risky. In particular, it argued finding a reliable off-premise sales model is tough due in part to the product itself. “Our team has life-long experience with the Krispy Kreme brand,” wrote Krotthapalli. “The reality is this donut has nearly all of its appeal when eaten freshly fried & glazed within minutes of being made.”

JPMorgan is skeptical on international refranchising as well. It will cause the company to take on more debt when it is already highly leveraged: its $939 million in net debt exceeds its $616 million market capitalization.

As for daily distribution, any logistics model Krispy Kreme chooses comes with significant last-mile delivery costs, JPMorgan argues. Even with third-party logistics partners, “managing profitability per drop is not easy to scale,” Krotthapalli said.

Analysts had high expectations for Krispy Kreme’s partnership with McDonald’s, announced in spring 2024. Morgan Stanley projected that the tie-up would accelerate sales in the company’s "delivered fresh daily" segment and support stronger earnings growth.

The results proved disappointing. In May, the two companies suspended the partnership after doughnut sales slowed. Krispy Kreme subsequently withdrew its full-year guidance and said it would halt quarterly dividend payments to preserve cash and reduce debt. By July, the partnership was formally terminated.

Financial performance suffered. For the second quarter, Krispy Kreme posted a loss of $0.15 per share, five times bigger than the Wall Street consensus. The quarterly performance reflects the impact of operating costs from the partnership with McDonald's, Krispy Kreme CEO Josh Charlesworth said. He added that "we expect to begin recouping profitability in the third quarter."

Yesterday, the day the JPMorgan research note came out, Krispy Kreme fell almost 3.5% to $3.60 per share. It is off almost 64% year to date.

Most Wall Street analysts remain cautious on the stock's outlook. According to MarketWatch, five rate it a "hold," two a "sell," and only one a "buy." The average target price of $4.24 per share implies upside of nearly 18% from current levels.

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