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Krispy Kreme Inc. stands to reap the benefits of its deals to sell doughnuts via retail giants Walmart Inc., Target Corp. and fast-food chain McDonald’s Corp., say analysts.
The doughnut maker beat analysts’ top line and bottom line estimates in its first-quarter results Thursday. Krispy Kreme’s stock
DNUT,
ended Thursday’s session up 1%, outpacing the S&P 500 index’s
SPX,
decline of 0.2%. The company’s shares are up 3.3% Friday.
In a conference call to discuss the results Thursday, Krispy Kreme’s Chief Operating Officer John Charlesworth explained that the company is strengthening its links with Walmart and Target. Krispy Kreme is also about six weeks into a test to sell doughnuts via McDonald’s, according to CEO Mike Tattersfield.
The McDonald’s test is taking place at over 160 of the fast food chain’s restaurants in Kentucky.
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“For a ‘MCD door’ we see potential up to ~40% margin to DNUT from each store although the probability of a national rollout is still ambitious,” wrote J.P. Morgan analyst John Ivankoe, in a note released Friday. “McDonalds is currently engaging in its own ‘demand planning’ in the 160 store KY market test, meaning the stores order/own the product at the back door, meaning no returns are accepted.”
McDonald’s is a 13,446 store business in the U.S., and if Krispy Kreme was even 2% of the brand’s U.S. sales, this would translate to around $500 million of wholesale sales at Krispy Kreme, assuming a 50% margin, according to Ivankoe. A 30% margin would be equivalent to around $150 million of wholesale sales, he added.
J.P. Morgan raised its Krispy Kreme price target to $17 from $13. “The Company seems to be honing in on a ‘doughnut logistics’ strategy, which involves revolving growth around existing ‘hubs with spokes’ assets to drive both revenue growth and incremental margin on top,” wrote Ivankoe.
Truist Securities also feels that partner deals bode well for sales of Krispy Kreme’s dozen packs. “We continue to believe the more trials/partnerships DNUT can create will accelerate the trial of the fresh doughnut offering, improve the perception of the products, and help drive future sales of dozens,” wrote Truist Securities analyst Bill Chappell, in a note released Thursday. Citing good momentum in the partnership with McDonald’s and the recently announced deal with Target, Chappell explained that the tests provide “halo impacts” more than “a cannibalization effect.”
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A “halo effect” occurs when sales of one product boost sales of another.
“All in, we continue to believe the company is one of the few consumer staples companies that can continue to drive consistent strong topline growth through the year,” wrote Chappell. The analyst firm maintained its buy rating and $20 price target for Krispy Kreme.
Shares of Krispy Kreme have risen 52% in 2023, outpacing the S&P 500 index’s gain of 7.6%.
