Is Krispy Kreme a Tasty Buy After Q1 Results?

Krispy Kreme Inc. NASDAQ: DNUT shares have posted a stunning rebound since hitting historic lows at the end of last year. Organic growth and outperformance bolstered by a solid restaurant rebound are reasons why and they may lead the stock even higher. The price action sets up another rally, but a significant hurdle exists.

That hurdle is $16, which proved to be an attractive selling point in the past. While near-term hurdles remain, the company has a bullish long-term trajectory, which should lead the stock higher. The question is if the stock can move higher in 2023 or if the market needs to see more. 

Krispy Kreme Enters a New Age 

Krispy Kreme stock had a great quarter, proving that an old brand can see new life. The company reported $418.95 million in net revenue for a gain of 12.5% compared to last year. The revenue beat the consensus by 420 basis points on strength in all channels led by the U.S. and digital divisions.

Organic sales are up 14%, driven by a 12.5% increase in points of access and an 8% increase in daily fresh delivery, or items delivered fresh to retailers' doors. E-commerce is the standout segment, with 23% growth. This puts digital at 19.6% of sales and well above pre-pandemic levels. Given the success of digital shown by names like McDonald's Co. NYSE: MCD, Chipotle Mexican Grill Inc. (NYSE: CMG) and Starbucks Co. NYSE: SBUX, we’ll likely see Krispy Kreme continue to lean into this channel. 

“We also achieved our best ever quarter of e-commerce revenue, representing a higher mix of revenue than during the pandemic and we see a long runway for further growth in this channel,” said CEO Mike Tattersfield. 

The GAAP margins contracted on a year-over-year (YOY) basis, but this is not concerning due to growth and non-cash impairments. The adjusted margin came in flat compared to last year, with strength in the U.S. offsetting impairments from international sales. The takeaway is that first quarter (Q1) adjusted EPS came in at nine cents to beat the consensus by two cents and grow 12.5% YOY. 

Guidance is also favorable but may not spark a sustainable rally. The company reaffirmed its full-year guidance for revenue growth near 10% and EPS of $0.31 to $0.34, which aligns with the consensus figures. Because the valuation is so high, about 44 times the 2023 consensus, this may cap gains in the stock until earnings catch up with value. That said, the valuation falls to only 33 times in 2024, which is still elevated but far more palatable.  

The Sell-Side Buys into Krispy Kreme 

The analyst's activity in Krispy Kreme was negative at the start of the year but changed in March. Since then, the stock has seen an upgrade and two boosted price targets that have it trading above the consensus, $15. The consensus target assumes fair value at current price points but is trending higher despite the mixed activity. Assuming this continues, shares of Krispy Kreme could move back into the upper portion of its trading range. Institutional activity is also supportive; the institutions have been buying on balance each quarter since the IPO. Their activity is picking up and they own about 75% of the company. 

The chart looks promising and shows a market gearing up for a rally. The caveat is that the $16 level resistance could be significant and may cap gains. A move above $16 would be bullish and may lead the stock to $19.