Key Points
A Wall Street analyst downgraded Krispy Kreme stock today.
Krispy Kreme recently unveiled a turnaround plan, but the analyst sees risks going forward.
The plan focuses mainly on cost cuts, which are good, but no substitute for revenue growth.
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Shares of donut maker Krispy Kreme (NASDAQ: DNUT) fell on Wednesday, down as much as 10.2%, before reverting to a 3.6% decline on the day.
Krispy Kreme has had a tough 2025, which has seen the stock plunge 64% on the year. Tepid sales, falling profits, and the cancellation of a high-profile partnership with McDonald’s have all been headwinds for the company.
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Today, a Wall Street analyst piled on, lowering his rating on the stock from neutral to underweight, following the company’s recent unveiling of its turnaround plan.
J.P. Morgan says to sell the turnaround enthusiasm
For reference, Krispy Kreme unveiled its turnaround efforts on Aug. 7, during its second-quarter earnings. The plan has several components, including cutting costs associated with the now-defunct McDonald’s partnership, as well as others. The most notable proposed change has to do with refranchising Krispy Kreme’s international store footprint. Krispy Kreme also seeks to outsource its logistics to a third party.
While each franchise agreement is different, franchising one’s stores means typically means offloading the operations and bulk of profits (or losses) to third parties, while the brand makes revenue on sales of ingredients along with a franchise fee, which is usually a single-digit percent of sales.
But J.P. Morgan analyst Rahul Krotthapalli sees a risk to the plan, as it will take time to execute, while current sales trends remain negative. Last quarter, the company’s organic growth rate declined 0.8%. And while franchising lowers operational risk, it also lowers revenue and profits. Krotthapalli sees that as another risk, given Krispy Kreme’s existing $957 million in debt.
Image source: Getty Images.
Krispy Kreme is a risky turnaround play
Krotthapalli may be a bit harsh in his assessment of the plan, given that it focuses on cost cuts and return on invested capital, which should at least lead to profitability improvements. Nevertheless, Krispy Kreme remains growth-challenged at the moment, so all the focus on streamlining costs won’t amount to much until revenues stabilize and get going back in a positive direction. It’s pretty hard to predict such a turnaround, so investors should probably steer clear of this high-risk story for now.
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Billy Duberstein and/or his clients has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
