Krispy Kreme's (DNUT) stock should be devoured by traders headed into the company's earnings on Feb. 22 as it's just too darn cheap, says EvercoreISI restaurant analyst David Palmer.
"Despite a volatile environment, Krispy Kreme continues to execute and move ahead with its growth plans," Palmer said in a new research note.
The veteran analyst listed several key considerations for a bull case on the stock:
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"The company has bold goals for points of distribution based upon detailed analysis. The company is planning 10% annual growth in global points of access to 50k (10k today) with 10K+ planned in the U.S.
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Krispy Kreme sees its sales per U.S. hub increasing by 25% by 2024. Specifically, the company expects sales per hub to go from $3.8M last twelve months in the third quarter with a target to reach $5 million by 2024 (EVRe $4.7M) as hub and spoke markets mature.
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Consumers may not know what price to expect for a dozen Krispy Kreme donuts—and that is a good thing. Krispy Kreme donuts are often purchased for special occasions 2x-3x per year. Low purchase frequency and merchandising is resulting in low elasticities as prices increase on average 10%.
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International markets such as the UK continue to be the pride of the company. Krispy Kreme expects sale per hub to go from $8.7 million to $10 million in 2024 (EVRe $9M).
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The company expects Sweet Treats to be a major source of margin improvement. It expects mid-teens margins from Sweet Treats in addition to significantly higher distribution—with ACV [average value] expanding from 30% to 36% in 2022."
Palmer has a $20.00 basis case price target — nearly 50% above current levels — on Krispy Kreme and an Outperform rating.
At $13.44, shares of the doughnut giant are trading below its July 2021 IPO price of $17. The stock hit a 52-week high of $21.69 not long after its trading debut.
The sell-off is despite pretty solid financial showings from the company, despite inflationary pressures on the business.
Third quarter organic sales growth clocked in at 6.2% from a year ago as the company gained more shelf space at the likes of Walmart in the U.S. and also saw strength at international stores. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rose 9.6% year-over-year.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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