JPMorgan downgrades Krispy Kreme to underweight, says proposed turnaround plan won’t save it from ‘survivor mode’

JPMorgan downgraded Krispy Kreme (DNUT) to Underweight, citing the company's entry into "survivor mode" after its shares plunged 62% year-to-date and vastly underperformed since its 2021 IPO. The downgrade is attributed to significant profitability challenges, including the costly termination of its McDonald's partnership, high last-mile delivery expenses for its "delivered fresh daily" model, and declining underlying U.S. business trends. Analyst Rahul Krotthapalli highlighted substantial execution risk for Krispy Kreme's proposed turnaround plan amid increasing competition and diminishing product novelty, suggesting a challenging outlook.

Analysis

JPMorgan has downgraded Krispy Kreme (DNUT) to an Underweight rating, characterizing the company as being in "survivor mode" following a 62% plunge in its share price year-to-date and significant underperformance since its July 2021 IPO. The negative outlook is underpinned by the profitability hit from the terminated partnership with McDonald's, which management cited as having unsustainable costs. This setback has forced reactive measures, including the sale of international store assets and a pivot to third-party delivery to mitigate operational complexity. The analyst highlights a fundamental flaw in the company's strategy, noting that the core appeal of its product—freshness—is at odds with the high last-mile costs and logistical difficulties of its "delivered fresh daily" model. Furthermore, the proposed turnaround plan faces high execution risk, particularly concerning the refranchising of international assets, which is exacerbated by declining underlying business trends in the U.S. These trends are pressured by accumulated pricing, growing competition, and the possibility that the company has overestimated consumer demand, mistaking eroding brand novelty for a simple lack of accessibility.

Key Decisions for Investors

• Given the numerous operational headwinds and high execution risk associated with the turnaround plan, investors should consider reducing exposure to DNUT.
• The analysis presents a strong bearish case, indicating potential opportunities for short-sellers who can tolerate the risk, based on deteriorating fundamentals and a challenged business model.
• Monitor key performance indicators such as the progress of international refranchising and U.S. organic revenue growth, as any further decline would validate the analyst's negative thesis.
• Investors should be cautious of assuming a recovery based on brand recognition alone, as the analysis suggests diminishing product novelty and intense competition are fundamental, not temporary, challenges.