Krispy Kreme, McDonald’s Partnership: sweet strategy for growth

Krispy Kreme stock NASDAQ:DNUT rose as much as 40% on Tuesday following the announcement of a partnership with McDonald’s NYSE: MCD. The companies have revealed plans to make Krispy Kreme donuts available in all McDonald’s restaurants in the United States.

This strategic move is set to be rolled out gradually throughout the year, with nationwide availability expected by the end of 2026. Tariq Hassan, head of marketing and consumer experience for McDonald’s USA, expressed excitement about the partnership, citing it as a It’s an exciting opportunity to expand your breakfast offerings. Likewise, Krispy Kreme President and CEO Josh Charlesworth emphasized the importance of the collaboration, highlighting the joy it will bring to donut lovers nationwide.

While the announcement offered some relief for Krispy Kreme shares, on a longer time frame, the stock remains below resistance and in a downtrend. Could this news change dramatically and lead to a shift in momentum for the stock?

DNUT increases partnership with MCD

Although the stock fell more than 11% on Wednesday, it remained up nearly 30% for the week, thanks to Tuesday’s impressive rally. Notably, the stock closed above $15 for the first time since the start of the year, clearing its first significant hurdle as it looks to break the downtrend and establish higher support.

Despite initial difficulties following its IPO in 2021, the company’s shares are starting to look more attractive to investors. This is due to lower inflation, increased consumer spending and the expansion of the strategic partnership with McDonald’s.

The strategic partnership with MCD will significantly increase DNUT’s accessibility from 350 to over 13,000 locations, with potential international growth ahead. Leveraging its collaborative experience, DNUT is poised for future growth and offers a competitive advantage in the fast food market. This partnership could certainly mark a crucial turning point for Krispy Kreme’s stock, addressing affordability challenges and paving the way for sustainable growth amid inflationary pressures.

Will the partnership sweeten DNUT’s earnings?

Investors are no doubt hoping that the recently announced partnership will break the company’s recent record of missing earnings. Over the last four quarters, the company has surpassed EPS estimates only once.

Most recently, DNUT released its quarterly earnings data on February 13, 2024. The company reported $0.09 EPS for the quarter, missing the consensus estimate of $0.13 by $0.04. The company earned $450.90 million during the quarter, compared to analysts’ expectations of $438.95 million. Its quarterly revenue increased 11.4% from the year-ago quarter.

While the stock has underperformed year-to-date and over a longer time frame than the overall market, investors are hoping that the recent announcement will change the company’s fundamentals and revenue in the quarters to follow as the rollout begins.

Sentiment remains bearish

While the news is undoubtedly very positive for the company, sentiment remains bearish. DNUT has significant short interest, an in-line consensus rating, and recent insider selling.

Based on nine analyst ratings, DNUT has a Hold rating, which is in line with the S&P 500 and other consumer staples companies. The stock’s consensus price target is $16.06, which projects an upside of just 4.6%. Notably, however, following Tuesday’s announcement, Citigroup analysts increased their target on DNUT from $14 to $19, predicting an impressive 24% upside at the time of the report.

One factor that could lead to increased volatility and a greater potential squeeze is abnormal short-term interest in DNUT. As of March 15, 15.67% of the float was short, for a total of 12.6 million shares. This significant short interest equates to dollar volume selling for less than $149.68 million. Considering the stock trades only 1.92 million shares per day, the 12.6 million share short position is significant and could result in substantial volatility if the stock continues to rise.

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