Krispy Kreme (DNUT)

Doughnut chain Krispy Kreme (NASDAQ:DNUT) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 15.3% year on year to $375.2 million. Next quarter’s revenue guidance of $377.5 million underwhelmed, coming in 3.6% below analysts’ estimates. Its non-GAAP loss of $0.05 per share was in line with analysts’ consensus estimates.

Company Overview

Famous for its Original Glazed doughnuts and parent company of Insomnia Cookies, Krispy Kreme (NASDAQ:DNUT) is one of the most beloved and well-known fast-food chains in the world.

Traditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Some competitors that sell sweet treats include private company Dunkin’ as well as public companies Dutch Bros (NYSE:BROS), McDonald’s (NYSE:MCD), Starbucks (NYSE:SBUX), and Tim Hortons (owned by Restaurant Brands, NYSE:QSR).

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $1.60 billion in revenue over the past 12 months, Krispy Kreme is a mid-sized restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the bright side, it can still flex high growth rates because it’s working from a smaller revenue base.

As you can see below, Krispy Kreme’s sales grew at a decent 10% compounded annual growth rate over the last five years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new restaurants and expanded its reach.

This quarter, Krispy Kreme missed Wall Street’s estimates and reported a rather uninspiring 15.3% year-on-year revenue decline, generating $375.2 million of revenue. Company management is currently guiding for a 14% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 3.3% over the next 12 months, a deceleration versus the last five years. This projection is underwhelming and implies its menu offerings will face some demand challenges.

A restaurant chain’s total number of dining locations often determines how much revenue it can generate.

Krispy Kreme sported 17,982 locations in the latest quarter. Over the last two years, it has opened new restaurants at a rapid clip by averaging 19.1% annual growth, among the fastest in the restaurant sector. This gives it a chance to become a large, scaled business over time.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Krispy Kreme’s unit economics are higher than the typical restaurant company, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it averaged a decent 26.9% gross margin over the last two years. Said differently, Krispy Kreme paid its suppliers $73.07 for every $100 in revenue.

This quarter, Krispy Kreme’s gross profit margin was 22.8%, marking a 6.7 percentage point decrease from 29.5% in the same quarter last year. Krispy Kreme’s full-year margin has also been trending down over the past 12 months, decreasing by 3.5 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as ingredients and transportation expenses).

Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the business in motion, including food costs, wages, rent, advertising, and other administrative costs.

Krispy Kreme was roughly breakeven when averaging the last two years of quarterly operating profits, one of the worst outcomes in the restaurant sector.

Looking at the trend in its profitability, Krispy Kreme’s operating margin decreased by 3.2 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Krispy Kreme’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q1, Krispy Kreme generated a negative 5.4% operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Krispy Kreme’s full-year EPS flipped from negative to breakeven over the last five years. This is encouraging and shows it’s at a critical moment in its life.

In Q1, Krispy Kreme reported EPS at negative $0.05, down from $0.07 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Krispy Kreme’s full-year EPS of negative $0 will reach break even.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the last two years, Krispy Kreme’s capital-intensive business model and large investments in new physical locations have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.5%, meaning it lit $5.48 of cash on fire for every $100 in revenue.

Taking a step back, an encouraging sign is that Krispy Kreme’s margin expanded by 1.5 percentage points over the last year. We have no doubt shareholders would like to continue seeing its cash conversion rise.

Krispy Kreme burned through $46.73 million of cash in Q1, equivalent to a negative 12.5% margin. The company’s cash burn was in line with the same quarter last year, and it’s unlikely that Krispy Kreme will have an attractive free cash flow profile anytime soon.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Krispy Kreme’s five-year average ROIC was negative 0.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the restaurant sector.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Krispy Kreme burned through $74.92 million of cash over the last year, and its $2.27 billion of debt exceeds the $19.17 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Krispy Kreme’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Krispy Kreme until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We struggled to find many positives in these results. Its revenue guidance for next quarter missed significantly and its EBITDA fell short of Wall Street’s estimates. Overall, this was a bad quarter. The stock traded down 24.5% to $3.25 immediately following the results.

Updated: May 15, 2025 at 10:32 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Krispy Kreme’s business quality ultimately falls short of our standards. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its relatively low ROIC suggests management has struggled to find compelling investment opportunities. And while the company’s new restaurant openings have increased its brand equity, the downside is its cash burn raises the question of whether it can sustainably maintain growth.

Krispy Kreme’s P/E ratio based on the next 12 months is 31.8x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $7.82 on the company (compared to the current share price of $3.19).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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