Krispy Kreme Deal with McDonalds Could Be a Gamechanger

Krispy Kreme NASDAQ: DNUT is an iconic brand that’s been around since 1937 selling more than 1.3 billion donuts yearly throughout 30 countries worldwide. Older traders may remember the meme stock like a short squeeze propelling its shares into the triple digits under its old symbol KKD. The Company had since been acquired by private equity firm JAB holdings in 2016 for $1.35 billion. They spun it off again in 2021 under its current symbol in a $500 million IPO. The Company has expanded its line of products from donuts to ice cream, coffee, cookies, shakes,  snacks, and various fresh baked goods. The Company competes with privately acquired Dunkin and loosely with Starbucks NASDAQ: SBUX. A potential deal with McDonalds NYSE: MCD could be a game-changer if the test program pans out well. The Company has been evolving its operating model and refining its growth strategy since its new CEO took over in 2016 and it’s finally hitting the tipping point.

The Transformation of Krispy Kreme

The “new” Krispy Kreme transformation has been spearheaded by CEO Michael Tattersfield, former CEO of Einstein Bagels and Caribou Coffee. He has evolved the strategy from the legacy retail and wholesale distribution model focus to bolstering its direct-to-consumer (DTC), e-commerce and omnichannel sales funnels. The legacy strategy favored more franchised donut shops, long-shelf life doughnuts in grocery stores, and capital-heavy Hot Light Theatre Shops. The new Krispy Kreme has grown its omnichannel sales pipeline growing its asset-light fresh access points (FAB), focus on freshly made daily premium quality doughnuts, asset-light hub and spoke model and focusing on growing its Company owned shops.

Daily Cup-and-Handle Breakout Chart Formation

Krispy Kreme stock collapsed on Aug. 17 on its prior Q2 2022 earnings report as they not only missed EPS estimates but also lowered forward guidance for the rest of 2022. This formed a gap level between $13.86 to $13.51. The stock proceeded to fall further to a swing low of $11.25 before staging a rally ahead of Q2 earnings. The daily Bollinger Bands (BBs) formed tight compressions in the month of September as a rounding bottom was forming. By October, the selling pressure had subsided as the daily MSL finally triggered on the breakout through $12.52, where it had failed twice before The heavy volume helped to sustain the momentum and proceed higher towards the $15.59 multiple resistance and “lip” of the cup. If the stock rejects the “lip” and falls back down to hold the gap levels between $13.50 to $13.81, then it can proceed to attempt a cup and handle breakout upon bouncing back up through the $14.82 “lip” level with a heavy volume equivalent to the volume of the $12.52 breakout. If the pullback doesn’t hold the gap levels, then the remaining support levels sit at the $13.11, $12.52 MSL trigger, $11.25 swing low, and the $10.50 stinky 5s price level.

Access is the Growth Driver  

One of the biggest shortfalls for Krispy Kreme is the lack of nearby locations or access. It has just over 1,800 Krispy Kreme and Insomnia Cookies locations spread throughout 30 countries worldwide. Krispy Kreme has over 11,000 points of access (POA), which are locations you can purchase Krispy Kreme doughnuts from its more than 1,200 owned and franchised shops to 385 Hot Light theatres, 42 doughnut factories, and  9,000 delivered fresh daily (DFD) locations. DFDs are strategically placed cabinets, carts, food trucks, and placements in high traffic retail store locations. DFDs are the growth driver of FABs. Krispy Kreme’s goal is to grow to over 50,000 POA long-term in a universe of 1.3 million.

McDonald’s Test-Selling Program

Krispy Kreme doughnuts began a McDonald's restaurant test-selling program with its Original Glazed, chocolate iced with sprinkles, and raspberry-filled donuts in nine McDonald's locations in Louisville, KY. The outcome of the testing will determine if McDonalds will be another FAB with its over 40,000 locations. A joint statement was issued “McDonald’s is always looking for ways to give our fans more of what they crave, and we often conduct tests to inform future menu decisions. This small-scale test will help us understand how offering new bakery items like Krispy Kreme could impact operations in our restaurants.” Shares have climbed in anticipation of the test results. Investors recall how a McDonald’s approval can be a game-changer for its shares like Beyond Meat NASDAQ: BYND did when they approved a  McPlant co-branded burger rollout. More color on this is expected when Krispy Kreme reports its Q3 2022 earnings premarket on Nov. 15, 2022. Analysts expect $366.3 million in revenues and $0.05 EPS.