Krispy Kreme’s initial public offering is far from dollars to doughnuts. Five years after being bought by JAB, the maker of sugary pastries is going public again. Buying up franchises has boosted sales, but patchy performance and the trend towards healthier eating make a mooted $4 billion valuation look over-jammed.
The investor backed by Germany’s Reimann family has been busy since acquiring Krispy Kreme for $1.4 billion in 2016. Managers such as former Mars executive Josh Charlesworth have introduced new flavours, treat designs, and ways of selling online. The 83-year-old company has also spent some $465 million buying back stores from franchisees, a move that gives it greater control over its products, and also helped grow the top line by an average of 19% from 2016 to 2020 to $1.1 billion.
Yet the sweet treat maker’s transformation is hardly complete. Revenue growth after stripping out acquisitions has been patchy: it was 8% in the first quarter of this year but ranged from 1% to 5% a year since 2018. Its EBITDA margin, after adjusting for costs such as stock-based compensation and M&A-related expenses, has hovered between 14% and 16% over that same period. Conversely, sugary pastry rival Dunkin’ Brands, which operates a franchise model and was taken private last year, enjoyed margins close to 40%.
A mooted valuation of $4 billion, reported by Bloomberg, looks rich. Assuming that figure includes debt, it would imply an enterprise value multiple of 26 times 2020 EBITDA, in line with more profitable coffee retailer Starbucks’ trailing multiple. Confectionery group Hershey trades at a less fruity 18 times, according to Refinitiv. Arguably the closest peer, Dunkin’ Brands was bought for around 23 times the previous year’s EBITDA.
Companies that flog so-called indulgences, a euphemism for sugary foods, are going out of fashion. Mondelez and Nestlé are trying to increase the proportion of healthier products they offer. Krispy Kreme seems to be bucking the trend: its glazed doughnut contains 200 calories and more than 40% of an individual’s advised maximum daily sugar intake. Sweet-toothed investors may be tempted to take the doughnut and leave the stock.