Krispy Kreme’s Hangover from McDonald’s Deal Bestows Pullback Opp

Krispy Kreme Inc. NASDAQ: DNUT is world famous for its glazed donuts which can be purchased fresh through its store locations or grocery stores and kiosks. Shares of the retail/wholesale sector company skyrocketed 39% higher on news of its sweet partnership with fast food giant McDonald's Co. NYSE: MCD. Shares have since pulled back from their frenzied spike to $17.84, bestowing a potential entry opportunity for patient investors looking to get in.

How's the Rest of the Business Doing?

Krispy Kreme has been treading water up until the deal announcement. Despite the GLP-1 weight loss trend and popularity of low-carb, low-sugar, high protein and high-fat diets like carnivore and keto, Krispy Kreme is still able to secure double-digit YoY revenue growth. It reported Q4 2023 EPS of 9 cents, missing consensus estimates by 4 cents. Revenues rose 11.4% YoY to $450.9 million, beating $438.95 million. The growth driver is the growth of more access points to sell their fresh donuts outside of company and franchise stores. The company competes with Dunkin and Starbucks Co. NASDAQ: SBUX. 

Mixed Guidance

Krispy Kreme offered mixed guidance for full-year 2024 EPS between 27 cents to 31 cents, falling short of 38 cents consensus estimates. Revenues are expected to grow 5% to 7% YoY for $1.770 billion to $1.804 billion versus $1.79 billion consensus estimates. Shares proceeded to sell off 17% YTD after earnings.

Krispy Kreme CEO Josh Charlesworth commented, "Our ongoing strategy is to scale the business efficiently by adding more fresh points of access. There are now more than 14,100 places where you can buy our melt-in-your-mouth fresh doughnuts in 39 countries. And our focus on operating excellence means that we're building both a bigger and better Krispy Kreme business. And finally, we are introducing our 2024 outlook with organic growth expected to translate into adjusted EBITDA expansion, reflecting our intent to drive increasingly profitable growth."

Daily Descending Triangle Breakout

The daily candlestick chart on DNUT illustrates a descending triangle breakout pattern. DNUT shares were languishing before the MCD partnership announcement. DNUT peaked at the $15.33 swing on December 27, 2023. Shares continued to cascade lower as the descending trendline capped each bounce attempt, resulting in lower highs toward the flat-bottom lower trendline support at $11.53.

Shares tested the ascending trendline at $12.59 on the preceding announcement, triggering a gap to $14.34 as shares surged to a new swing high of $17.84. The daily relative strength index (RSI) surged to the 83-band but has since fallen back down to coil at the 61-band as DNUT shares bounced off the $14.34 gap-fill area. Pullback support levels are at $14.34, $13.47, $12.59 and $11.53.

The Sweet McDonald's Deal

The expanded partnership deal with McDonalds was announced on March 26, 2024. The partnership will commence with a phased-in rollout starting in the third quarter of 2024. Under the agreement, three of Krispy Kreme's most popular doughnut flavors will be made fresh and delivered to McDonald's locations daily. Customers can purchase them individually or in set boxes containing 6 donuts. They can be purchased during breakfast times throughout the day while supplies last. The rollout will continue in phases throughout the country until they are available nationally by the end of 2026. This has the potential for daily deliveries up to 13,000 McDonald's locations. It also has the potential to expand internationally if successful. Check out the sector heatmap on MarketBeat.

How the Partnership Began

McDonald's began testing Krispy Kreme doughnuts at 160 locations in Louisville and Lexington, Kentucky. The test runs were very well received, generating exceptional demand that far exceeded expectations. Krispy Kreme has been expanding its supply chain in anticipation of the big rollout, scaling its operations, adding new equipment and technology, and beefing up field training to underdo the daily deliveries. More details about the partnership are expected to come out in the weeks leading up to the rollout.

Piper Sandler Says the Deal is a Game Changer

Shares of Krispy Kreme were upgraded to Overweight from Neutral with a $20 price target by Piper Sandler. Analyst Brian Mullen anticipates the McDonald's deal will bolster McDonald's specific access points by 1,000, 3,500 and 5,000 in the years 2024, 2025 and 2026, respectively. Mullen also expects Krispy Kreme will add an extra 800 delivered fresh doors (DFD) organically annually. Mullen estimates adding nearly 175% cumulative DFD growth in the following 3 years.

Mullen commented, "McDonald's is obviously the catalyst, but over a longer period of time, this should benefit Krispy Kreme with other new and incremental DFD locations as well."

Krispy Kreme analyst ratings and price targets are at MarketBeat. Krispy Kreme's peers and competitor stocks can be found with the MarketBeat stock screener.