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Krispy Kreme Stock Dunked on HSBC Downgrade to Hold

Krispy Kreme is downgraded to hold as HSBC raises concerns about the donut company's low operating margin profile.

Krispy Kreme  (DNUT) - Get Krispy Kreme Report stock took a dunking Thursday after HSBC analysts downgraded the popular doughnut chain to hold from buy and cut their target price to $14 from $25.

Shares of the Charlotte company at last check were down 3.5% to $13.44.

Analysts Sorabh Daga and Carlos Laboy said in a research note that "the low operating margin profile for a capital-intensive business worries us as geographic expansion into an inflationary environment could lift [capital spending]."

Krispy Kreme went public in July and closed at $21 a share on its first day of trading, 24% above its initial public offering price of $17.

The doughnut maker raised $500 million in the offering, below expectations of $640 million.

The analysts said the company's shares are down 18% since the IPO. With the IPO, 38% of the shares in Krispy Kreme were distributed to minority holders, which the analysts noted is larger than the float. Their lockup period expires at year-end.

"As the stock underperforms, ... this might pressure the operators for faster growth," the analyst said.

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While the analysts liked "the deleveraging story and the top-line growth model," they were worried for return on equity to exceed weighted average cost of capital, it will take until 2027.

"This may be too big an ask for minority holders of the control group who are free to sell in January and for public investors," the analysts said.

The doughnut chain is controlled by JAB Holding, the Luxembourg group that also owns Panera Bread and Pret A Manger. 

"Unlike other quick service restaurants which mostly operate on a franchise model," the analysts said, "Krispy Kreme’s strategy of moving from a franchise model to company-owned operations is weighing heavily on its balance sheet and hence on returns to the equity holders."

In August Truist analyst Bill Chappell lowered the investment firm's price target on Krispy Kreme to $21 a share from $25 but affirmed a buy rating. 

The company had a "sweet start" as a publicly traded name, reporting a second-quarter earnings beat and a slight raise while also introducing 2021 guidance that was above consensus estimates, the analyst said. 

In September Krispy Kreme said it was being added to the Russell 2000 Index as part of planned third quarter IPO additions to the Russell US Indexes.

Krispy Kreme initially went public 21 years ago during the bubble and then hit the skids. JAB Holding took Krispy Kreme private in a $1.35 billion deal in 2016.