McDonald's Partnership Expansion Will Broaden Distribution, But Margins May Decline

Key Takeaways

• Expanded partnerships and distribution networks are poised to boost revenue and brand awareness in both domestic and international markets.
  
• Restructuring and modernization initiatives are focused on improving profit margins, efficiency, and earnings over the next few years.
  
• International challenges and operational inefficiencies may hinder profitability and revenue growth unless addressed effectively, impacting the financial outlook and overall earnings.

Catalysts

Produces doughnuts in the United States, the United Kingdom, Ireland, Australia, New Zealand, Mexico, Canada, Japan, and internationally.

• Krispy Kreme's strategic partnership and expanded network with McDonald's, aiming to deliver fresh doughnuts daily to 2,000 McDonald's restaurants by the end of 2024 and further to 12,000 by 2026, is expected to significantly increase revenue.
  
• The increase in distribution points to 35,000 globally by 2026, up from the current 16,000, aims to enhance revenue and brand awareness, especially in new markets like Europe and Latin America.
  
• The restructuring to focus on a capital-light franchise model internationally while accelerating domestic expansion is likely to improve net margins and operational efficiency.
  
• Modernization of doughnut production facilities and increased distribution density intends to enhance profit margins by increasing hub-and-spoke efficiency and utilization.
  
• Expected savings of $8 million to $12 million in SG&A costs starting in 2025, leading to improved earnings and enhanced capital efficiency.

Krispy Kreme Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Krispy Kreme's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 1.6% today to 1.2% in 3 years time.
• Analysts expect earnings to reach $24.3 million (and earnings per share of $0.08) by about February 2028, down from $28.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 141.1x on those 2028 earnings, up from 51.6x today. This future PE is greater than the current PE for the US Hospitality industry at 25.6x.
• Analysts expect the number of shares outstanding to grow by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.34%, as per the Simply Wall St company report.

Krispy Kreme Future Earnings Per Share Growth

Risks

• The decline in adjusted EBITDA by 20.7%, partly due to the sale of a majority ownership stake in Insomnia Cookies, indicates potential challenges in maintaining profitability and managing high-growth expectations, impacting overall earnings.
  
• Declining adjusted EBITDA margins, notably in the U.K. due to underperformance and regulatory changes, could strain international profitability and complicate the company's financial outlook, affecting net margins.
  
• Increased logistics costs and unexpected vehicle accident claims, if persistent, could continue to exert pressure on margins, reducing short-term profitability and potentially affecting overall earnings.
  
• The challenge of integrating McDonald's expansion with potential start-up costs and the need to optimize route density for efficient distribution may create financial strains, impacting net revenues and limiting margin expansion.
  
• The U.S. market shows signs of choppiness in traditional retail footfall, which could hinder top-line revenue growth unless offset by significant gains in new distribution points, affecting overall revenue generation.

Valuation

• The analysts have a consensus price target of $14.773 for Krispy Kreme based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $12.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $24.3 million, and it would be trading on a PE ratio of 141.1x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of $8.55, the analyst price target of $14.77 is 42.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.