Krispy Kreme Stock Soars on Optimism

Krispy Kreme Inc.’s stock experienced a notable surge on Monday, climbing 5.6%, following an upgrade to a “buy” rating from Truist analysts. This optimism from Truist is rooted in what they see as a misunderstood yet promising narrative for the iconic doughnut company, which has seen its share price fluctuate amidst market uncertainties.

First and foremost, the analysts emphasized the underestimated potential of Krispy Kreme’s newly announced partnership with McDonald’s. This strategic deal, which plans to introduce Krispy Kreme doughnuts to 12,000 McDonald’s locations by the end of 2026, could significantly boost Krispy Kreme’s revenue. Initial tests in Kentucky suggest that the rollout could add approximately $320 million in annual revenue, effectively expanding the company’s footprint by 80%.

Truist’s upgrade, led by analyst Bill Chappell, came with a revised 12-month price target of $15, up from $13. Chappell and his team, who recently accompanied Krispy Kreme’s CEO and CFO on a series of meetings with institutional clients, emerged with reinforced confidence about the company’s prospects. They identified several key factors driving their bullish outlook.

Another critical point raised by Truist concerns the market’s reaction to the increasing popularity of GLP-1 drugs like Ozempic, which are used for diabetes and weight loss. While these drugs, produced by companies like Novo Nordisk and Eli Lilly, have seen significant success, Truist believes their impact on Krispy Kreme’s valuation is fully accounted for. They argue that, despite the health trends, the indulgent snack market in the U.S. has continued to grow at a substantial rate, indicating a persistent consumer demand for sweets.

Additionally, the analysts noted that this partnership is likely to accelerate revenue growth in Krispy Kreme’s legacy business even before the full rollout is completed. This anticipation of early financial benefits underscores a robust future outlook for the doughnut maker.

Krispy Kreme’s stock had previously skyrocketed by 40% in a single day back in March when the McDonald’s deal was first announced. However, the stock has since retraced, trading below its pre-announcement levels. Truist attributes this to investor skepticism regarding the forecasted benefits amidst a broader consumer shift toward healthier eating habits.

Moreover, the McDonald’s partnership could help solidify Krispy Kreme’s status as a national brand, moving beyond its current perception as a primarily Southern brand despite its presence in 41 states. This expanded recognition could pave the way for entry into national grocery and mass merchandise stores.

The analysts proposed a more conservative approach to the forecast, suggesting that even if the incremental revenue from the McDonald’s partnership is only 50%-75% of the projected figures, Krispy Kreme would still achieve significant revenue growth. Such growth rates would surpass those expected for most packaged goods and restaurant chains, potentially closing the margin gap between its U.S. and international operations.

Despite the challenges posed by the popularity of weight-loss drugs, Truist maintains a positive outlook on Krispy Kreme’s ability to thrive. Their research indicates that while health-conscious trends persist, the demand for indulgent snacks remains strong, suggesting a resilient market for Krispy Kreme’s offerings.