Krispy Kreme's Sweet Deal: McDonald's Partnership Sparks Growth?

Shares of Krispy Kreme NASDAQ: DNUT soared by as much as 40% on Tuesday following the announcement of a partnership with McDonald's NYSE: MCD. The companies revealed plans to make Krispy Kreme doughnuts available at all McDonald's restaurants across the United States. 

This strategic move is set to roll out gradually throughout the year, with nationwide availability expected by the end of 2026. Tariq Hassan, McDonald's USA's chief marketing and consumer experience officer, expressed enthusiasm about the partnership, citing it as an exciting opportunity to expand their breakfast offerings. Likewise, Krispy Kreme's president and CEO, Josh Charlesworth, highlighted the significance of the collaboration, emphasizing the joy it will bring to doughnut lovers nationwide.

While the announcement offered some relief for shares of Krispy Kreme, on a higher timeframe, the stock remains below resistance and in a downtrend. Could this news be fundamentally changing and result in a momentum shift for the stock? 

DNUT Surges on MCD Partnership

Although the stock was down over 11% on Wednesday, it remained up almost 30% on the week, thanks to its impressive surge on Tuesday. Notably, the stock has closed above $15 for the first time since the beginning of the year, clearing its first significant hurdle as it looks to break the downtrend and establish higher support.  

Despite initial struggles after its IPO in 2021, the company’s stock is beginning to look more attractive to investors. This is driven by lower inflation, increased consumer spending, and the expansion of its strategic partnership with McDonald's. 

The strategic partnership with MCD will significantly increase DNUT's accessibility, transitioning from 350 to over 13,000 locations, with potential international growth in sight. Leveraging its collaboration expertise, DNUT is poised for future growth and offers a competitive edge in the fast food market. This partnership certainly could mark a crucial turnaround for shares of Krispy Kreme, addressing accessibility challenges and paving the way for sustainable growth amid inflationary pressures.

Will the Partnership Sweeten DNUT’s Earnings?

Investors will undoubtedly hope that the recently announced partnership will break the company’s recent record of earnings misses. Over the previous four quarters, the company has only surpassed EPS estimates once. 

Most recently, DNUT posted its quarterly earnings data on February 13th, 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 was up 11.4% compared to last year's quarter.

While the stock has underperformed year-to-date and on a higher timeframe than the overall market, investors will be hopeful that the recent announcement could change the company’s fundamentals and topline in the quarters to follow as the rollout gets underway. 

The Sentiment Remains Bearish

While the news is undoubtedly a major positive for the company, the sentiment remains bearish. DNUT has a significant short interest, 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 forecasts just 4.6% upside. Notably, however, following the announcement on Tuesday, analysts at Citigroup boosted its target on DNUT from $14 to $19, predicting an impressive 24% upside at the time of the report. 

A factor that might result in heightened volatility and a higher potential squeeze is the abnormal short interest in DNUT. As of March 15, 15.67% of the float was short, totaling 12.6 million shares. That significant short interest equals a dollar volume sold short of $149.68 million. Considering the stock only trades 1.92 million shares daily, the 12.6 million share short position is significant and might result in substantial volatility should the stock continue higher.