Krispy Kreme’s stock took a dramatic hit, plummeting by 24% on Thursday following the company’s decision to “reassess” its distribution strategy with McDonald’s and retract its full-year guidance due to what it describes as economic “softness.”
The doughnut chain has decided against expanding its doughnut offerings into new McDonald’s locations for the second quarter, halting a nationwide rollout. Currently, Krispy Kreme’s doughnuts are available in over 2,400 of McDonald’s roughly 13,500 U.S. locations. CEO Josh Charlesworth expressed optimism about the long-term potential of the partnership but emphasized the need to collaborate closely with McDonald’s to boost sales.
Over the past year, Krispy Kreme’s shares have experienced a staggering decline, losing more than 70% of their value, which has decreased its market capitalization to under $600 million. Following this announcement, Truist downgraded the stock from buy to hold, with analyst Bill Chappell voicing concerns regarding the rapid unraveling of the partnership and expressing diminished confidence in management’s strategy.
The partnership between Krispy Kreme and McDonald’s was ambitiously announced over a year ago, aiming for Krispy Kreme doughnuts to be sold in all U.S. locations by the end of 2026. Despite promising beginnings, sales have fallen short of expectations in recent months, reflecting broader economic anxieties impacting consumer spending at restaurants. For instance, McDonald’s previously reported a 3.6% decline in U.S. same-store sales for the first quarter as visits from middle- and low-income customers decreased.
Krispy Kreme is keenly aware of the profitability challenges prompting the slowdown in the rollout. “After the initial marketing launch, demand fell below our expectations which necessitated our intervention for sustainable and profitable growth,” Charlesworth stated during a conference call with analysts.
To supply McDonald’s U.S. locations effectively, the company has invested heavily in expanding its operational capacity, a decision that has adversely affected their profits. Over the past year, Krispy Kreme has recorded net losses for three consecutive quarters, including a $33 million loss for the quarter ending March 30.
In response to these challenges, the company is also reevaluating its deployment schedule alongside McDonald’s while looking to enhance sales through streamlined operations and better demand stimulation. Additionally, Krispy Kreme is considering cutting back on unprofitable locations in its network, which could impact as much as 10% of its U.S. stores.
Despite the current difficulties, Krispy Kreme’s management is committed to working collaboratively with McDonald’s to foster a profitable business model. The unfolding of this partnership holds both challenges and opportunities for growth, provided they can successfully address the current economic pressures.