Krispy Kreme's Fundamental Turnaround Amid Market Volatility

Krispy Kreme's recent stock surge is attributed to a short squeeze fueled by high short interest and a small public float. However, the company's management team has been making strategic moves to build a stronger and more profitable business, including ending a planned partnership with McDonald's due to financial concerns and aggressively tackling its cost structure. These actions demonstrate a focus on financial health and sustainable margins over growth at any cost.

Krispy Kreme's (NASDAQ: DNUT) stock recently experienced a dramatic surge, with trading volume skyrocketing from its typical average of around five million shares to a staggering 150 million in a single day. This sudden frenzy, fueled by high short interest and a small public float, resulted in massive price gains, causing a divide among investors. While some view the chaotic volatility as a meme stock driven by social media hype, others see a company in the early stages of a fundamental turnaround.

The stock's price surge was a textbook example of a short squeeze. Krispy Kreme had high short interest, with traders betting against more than 28% of its publicly available shares. Additionally, the company's majority owner, JAB Holding Company, holds a prominent, static position, leaving fewer shares available for trading. When a wave of coordinated buying from retail investors hit the market, the limited supply of shares caused the price to rise quickly, forcing short sellers to buy back shares to avoid catastrophic losses. This buying pressure further propelled the stock higher, resulting in the sudden volatility [1].

However, the real story for investors lies in the strategic changes behind the chart. Krispy Kreme's management team has been methodically re-engineering its business for long-term success, prioritizing financial health and sustainable margins over growth at any cost. This new strategy was demonstrated by the company's decision to end its planned nationwide partnership with McDonald's. After a limited rollout, it became clear that the venture would not be profitable due to higher-than-expected costs and lower-than-needed sales volumes. Rather than chase revenue in a low-margin endeavor, management made the difficult but correct decision to pivot, sending a clear signal to investors that the new Krispy Kreme is focused squarely on the bottom line [1].

To build a more efficient machine, Krispy Kreme is aggressively tackling its cost structure. A key initiative is outsourcing its complex U.S. logistics to third-party experts, a move already resulting in cost savings and more predictable expenses. The company is also planning to strategically close 5-10% of its least profitable distribution locations. These actions directly address operational hurdles and are designed to boost the efficiency of its core hub-and-spoke model [1].

Krispy Kreme is leveraging its iconic brand name overseas through a more intelligent, lower-risk franchise model. The launch in Brazil was a massive success, generating $100,000 in sales in just two days. The company is now exploring refranchising company-owned markets, such as the United Kingdom and Australia. This capital-light strategy allows Krispy Kreme to expand its footprint and grow revenue without putting its cash at risk, with proceeds from potential sales earmarked to strengthen its balance sheet [1].

Wall Street is beginning to notice this strategic shift. BNP Paribas recently upgraded its rating on the stock, indicating an improving risk profile. This follows Morgan Stanley's decision to maintain its Overweight rating, indicating continued institutional confidence in the long-term plan [1].

Krispy Kreme's stock has a 12-month price forecast of $7.58, with a consensus price target above $7.50, indicating a healthy upside potential from recent trading levels. The company's management has taken steps to preserve cash by eliminating the dividend, which can now be used to pay down debt. Additionally, proceeds from international refranchising are earmarked to deleverage the company, lowering its debt-to-equity ratio and strengthening its financial foundation [1].

The next major catalyst for investors will be the company's second-quarter earnings report on August 7, which will provide the first glimpse into the financial impact of this new, disciplined approach.

References:
[1] https://www.marketbeat.com/originals/krispy-kreme-a-meme-stock-sugar-rush-or-a-sustainable-treat/
[2] https://www.theglobeandmail.com/investing/markets/stocks/MS-N/pressreleases/33655245/krispy-kreme-a-meme-stock-sugar-rush-or-a-sustainable-treat/