Why Doughnut Maker Krispy Kreme's Shares Are Shooting Higher Today?

Krispy Kreme Inc DNUT shares are trading higher after Pipler Sandler analyst Brian Mullan upgraded the shares from Neutral to Overweight and raised the price target from $14 to $20.

As a result of the national partnership with McDonald's Corp MCD, the stage is set for a material expansion of DNUT's Points of Access (POA) in the U.S. over the next ~three years.

From a U.S. Delivered Fresh Daily (DFD) door perspective, the analyst assumes that DNUT will add 1,000, 3,500, and 5,000 MCD specific incremental POA across the 2024e, 2025e, and 2026e time periods, respectively.

Very importantly, what the MCD partnership does for DNUT is that it gives management the confidence and the ability to significantly increase its donut production capacity investments across the U.S., said the analyst.

In terms of liquidity, DNUT currently has ~$177 million available between its 2023 facility and short term lines of credit, noted the analyst.

According to Mullan, the last three years have not been the best historical time period from a free cash flow generation perspective for DNUT.

The analyst mentioned that DNUT could reduce its balance sheet leverage by approximately 1.6 times by the end of 2026, compared to the end of 2023, even as it finances an expansion of its capacity.

By the end of 2023, there were 13,457 McDonald’s locations in the U.S., and the analyst projects that DNUT could target 85% of these locations by the end of 2026.

The analyst thinks the McDonald’s partnership is a game changer for the business, and expects to see the narrative around DNUT start to improve from here.

Price Action: DNUT shares are trading higher by 4.8% at $14.98 at last check Friday.

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