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Krispy Kreme, the famous donut maker that traces its origins back to a Paducah, Kentucky store that opened in 1933, has an initial public offering planned for later this month (no set date for the IPO has been announced — the Securities and Exchange Commission must complete a review process.) The company will list on NASDAQ.
In a filing with the SEC, the company laid out the case that it is a good investment. One has to acknowledge: it has an appetizing glaze.
The Balance Sheet
For lovers of the numbers: the company, now a subsidiary of JAB Holdings Co., had sales of $1.1 billion in its last fiscal year. This is up 17% year-to-year.
Over the period from fiscal 2016 to fiscal 2020, its net revenue compound annual growth rate was 19.1%.
Its balance sheet as of April 4, 2021 indicates that it has more than $50 million in cash and cash equivalents, and a 2019 credit facility that provides it with up to $300.0 million of revolving borrowing capacity.
It terms of donut quantity: it sold 1.3 trillion of them across 30 countries in FY 2020. Besides for selling through its own shops, Krispy Kreme also makes money through partnerships with retailers, e-commerce and its delivery business.
It’s Gone Public Before
This is not Krispy Kreme’s first IPO. It went public, on the NYSE, as a free-standing company. in 2000. It then used the sticker name KKD. But the health trends of the turn-of-the-millennium were already working against such an indulgent treat. It is not profitable to continue selling people something they don’t want. Perhaps that is why the CEO of that time, Scott Livengood, found himself fiddling with the company’s numbers in what became a major accounting scandal.
The stock price plummeted in 2004 as the SEC investigated the bookkeeping. As the scandal reverberated, the board fired Livengood in 2005. That helped set the stage for the company’s acquisition by JAB, and for the subsidiary’s disappearance from the NYSE. Now it seems to have come full circle. Perhaps the long months of shut-in have allowed people to become accustomed to ordering food delivered to their porches, and this may play to a DNUT strength. It announced a partnership with DoorDash in February 2020.
Losses and Outstanding Debt
Potential investors should know, then, that not everything is glaze. Despite the healthy-seeming revenue figures mentioned above, Krispy Kreme isn’t making a profit. JAB attributed a net loss to this subsidiary of $37.4 million in 2019, and $64.3 million in 2020.
The balance sheet filed with the SEC show a working deficit of $328.9 million and a debt of $1.2 billion.
In 2018, the net losses to the parent company attributable to this number came to $14.1 million. That loss grew in 2019 to $37.4 million. And in 2020, the same number was $64.3 million.
The filing says that DNUT would use the proceeds from the IPO to repay outstanding debt, “with the remainder to be used for general corporate purposes.”
The Bottom Line
Krispy Kreme’s earnings before interest, taxation, depreciation, and amortization, EBITDA, after adjustments such as stock-based compensation and merger related expenses, have been stuck between 14% and 16% since 2018. Dunkin’ Brands, an obvious comparison, has had margins close to 40%.
Federal Reserve has been working very hard for years now to keep interest rates low, a policy that in effect makes corporate debt burdens affordable. Krispy Kreme may well produce a turnaround and a pay-out for investors, but that’s mostly a bet that the Fed will continue this easy-money policy for the near future, giving managers the necessary running room.
The bottom line for this IPO, as for every one, is: proceed at your own risk.