Fast-food donut leader Krispy Kreme (DNUT) slipped after a new downgrade hit the company. The word from Truist suggested that recent developments in the labor market may not be the kind of news Krispy Kreme investors will want to hear.
Though I personally prefer the cake donuts offered by Dunkin Donuts, I’m still bullish on Krispy Kreme regardless of Truist’s assertions. (See Analysts’ Top Stocks on TipRanks)
Looking at Krispy Kreme’s stock chart since its IPO in July shows a stock that’s clearly in decline. The stock had breached the $20 mark shortly after its IPO. However, the company started slipping from that point on until mid-August.
The price saw a small recovery towards the end of August that lasted for a couple of days into September. Unfortunately, the stock started to fall once more, until around October. Then, the stock largely plateaued before slipping a bit more, recovering, and plateauing once more at around the $14 mark. (See Krispy Kreme stock charts on TipRanks)
The latest developments have not been good at Krispy Kreme. Back in late October, HSBC (HSBC) downgraded the company from Buy to Hold, cutting the price target on the company nearly in half from $25 per share to just $14. HSBC analysts Carlos Laboy and Sorabh Daga noted that “…the low operating margin profile for a capital-intensive business worries us as geographic expansion into an inflationary environment could lift [capital spending].”
More recently, Truist stepped in with a downgrade of its own. This time, though, Truist wasn’t quite so concerned about the inflationary environment as much as it was the tight labor market. A difficulty finding workers could hamper Krispy Kreme’s proposed expansion plans.
Still Plenty of Sweet Potential on Hand
First, we have to acknowledge the elephants in the room here. Yes, the inflationary environment could pose a problem for Krispy Kreme going forward. It could pose a problem for a lot of companies out there; Krispy Kreme is not uniquely at risk from such a development.
Additionally, trying to expand Krispy Kreme’s operations physically could be challenging since the labor market is so incredibly tight right now. Companies throughout the spectrum are having a challenging time finding employees. The average American these days is more likely to try and start their own donut shop than they are to seek employment in someone else’s.
Some minor adjustments could be called for; an increasingly entrepreneurial America may be more interested in starting franchises than in becoming staff for franchise operations. If Krispy Kreme focuses on that be-your-own-boss spirit, it may be able to accomplish its goals of expansion. Maybe not how it intended to, but sometimes getting there is half the battle.
It’s not going to go exactly how it has in the past. But it’s still possible to meet expansion goals with the current employment environment we have today. It just may have to be done a little differently.
Furthermore, Krispy Kreme is also positioning itself to address the upcoming holidays. Starting November 8, Krispy Kreme is releasing its Thanksgiving Collection, a set of four donuts offered in “custom gratitude boxes”.
A recent study found people are more eager to celebrate Thanksgiving now than in previous years. That’s likely because 2020 saw so many Thanksgiving celebrations shuttered thanks to lockdown rules and other restrictions. As a result, Krispy Kreme is taking advantage of growing interest and offering donut packs accordingly to keep customers interested.
Wall Street’s Take
Turning to Wall Street, Krispy Kreme has a Moderate Buy consensus rating, based on two Buys and three Holds assigned in the past three months. The average Krispy Kreme price target of $18.00 implies 36% upside potential.
Analyst price targets range from a low of $14.00 per share to a high of $21.00 per share.
Concluding Views
There are several potential limiting factors to Krispy Kreme’s growth. The inflationary environment and tight labor market are certainly high on the list. However, Krispy Kreme is a food vendor. That should put it somewhat ahead of potential cutbacks in spending from customers. Finding people to staff new locations may also be difficult but not insurmountable.
The good news is that every challenge Krispy Kreme may face going forward has a potential answer waiting. Better yet, Krispy Kreme shares are bargain-priced right now. That combination of low price and the significant potential gain is what has me so bullish on Krispy Kreme overall.
Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.
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