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\*All $ values are presented in USD unless otherwise specified.
**\*\*\*Disclosure\*\*\*:** The author currently holds long positions in $DNUT shares and call options. This report reflects the author’s independent analysis and opinions and should not be taken as investment advice.
**TLDR:**
Krispy Kreme ($DNUT) is a struggling business executing a turnaround. It is aiming to expand margins, improve ROIC, pay down debt through refranchising, and pursue growth in its US business through high margin outlets. The plan was announced in early 2025, and since then the company has delivered increasing EBITDA margins, increasing per door revenue, and positive free cash flow (FCF) three quarters in a row. The company currently trades at $3.18 per share, but, if management executes delivers, the share price should move to $7.00 per share (range of $5.70 – $8.49).
The company operates a hub and spoke model where central doughnut making sites (hubs) produce fresh doughnuts, delivering them fresh to various outlets (spokes) such as club stores, grocery stores, or convenience stores. While the international market hubs all operate with spokes, 36% of US hubs have none and management estimates overall US hub utilization is currently only at 25%. Given the low utilization, there is substantial untapped operating leverage in the US assets; should US hubs grow their revenues to just 67% of international revenue-per-hub by 2029, the company’s EBITDA margin is forecast to double and its FCF yield is expected to quadruple.
https://preview.redd.it/k43m7g2dj2hh1.png?width=657&format=png&auto=webp&s=38b2a43ac02767127acc4c0e6f94a8e3dc83484e
**Investment Thesis:**
Krispy Kreme’s turnaround strategy is already in motion. Margins are improving, free cash flow is increasing, and refranchising transactions are occurring on schedule. If the positive momentum continues, the company will be able to make use of its operating leverage to drive large gains in EBITDA and FCFF. At the current share price of $3.18 there is asymmetric risk to the upside making it an attractive investment .
**1. The company has substantial operating leverage and a depressed share price:** The company’s current share price reflects high turnaround risk and a legacy of low margins, the previous three quarters, however, show consistently improving fundamentals. Due to its operating leverage, every incremental dollar of US revenue has a large positive impact on EBITDA and free cash flow. As the market prices in the improving margins and the higher likelihood of a successful turnaround, the stock should be repriced towards the $7.00/share price target.
**2. Per hub revenues have improved since the turnaround began:** The turnaround plan was announced in Q2 of 2025. Shortly after, quarterly revenue per US hub bottomed at $920,000 in Q3 2025 and has increased 9 and 12 percent in Q4 2025 and Q1 2026 respectively. The improved per hub sales have also lifted EBITDA and FCF, with the company delivering positive FCF three quarters in a row since the turnaround began.
**3. Cash from restructuring continues to de-risk the balance sheet:** The company is targeting a net leverage ratio less than 5.5x and intends to raise cash to do so through refranchising certain international markets and restructuring its joint venture in the western US. As of Q1 2026, the company has completed the JV restructuring and refranchised its Japanese operations, with its net leverage ratio falling from 6.1x to 5.5x YoY.
**4. Management is prioritizing profitability over raw revenue growth:** Competent management is critical in a turnaround. Krispy Kreme’s management team made the difficult decision to end their partnership with McDonald’s, which had allowed them to sell doughnuts in select McDonald’s across the US. This reduced revenue but removed unprofitable points of access, improving margins and ultimately benefiting the company. Similar difficult decisions such as refranchising and focusing on growth through expanding the reach of existing hubs over opening new ones demonstrate the management team’s commitment to their strategy and the health of the business.
**Trade Setup**
Krispy Kreme’s shares offer the best exposure for this trade. The depressed price and operating leverage offer a call-like risk/return profile without the risk of expiration.
If you feel compelled to lose money on a winning trade using options, the company reports Q2 2026 earnings on August 6th. You can lose money trading the Aug 7 3.5c, its what I'm doing.
**My Positions**
Don't ask about the other stuff.
https://preview.redd.it/sbivegryo2hh1.png?width=330&format=png&auto=webp&s=c2c3cae18725e0144118c761c99eeeac096e08ac
**Other Figures and Tables**
*Segment results for FY’25 and Q1’26. Corporate overhead of \~$18M per quarter is excluded from segment results.*
|**Segment breakdown**|**Unit**|**Q1 2025**|**Q2 2025**|**Q3 2025**|**Q4 2025**|**Q1 2026**|
|:-|:-|:-|:-|:-|:-|:-|
|**US segment**| | | | | | |
|Net revenue|$K|236,544|230,099|216,187|230,220|221,550|
|Product and distribution costs|$K|57,830|56,756|53,574|54,526|53,348|
|OPEX|$K|135,522|139,224|126,175|123,926|119,824|
|SG&A expense|$K|19,149|17,055|16,622|15,657|15,831|
|Marketing expense|$K|6,834|7,408|7,343|7,231|6,407|
|Other segment expense, net|$K|1,299|\-275|\-8,537|\-3,903|591|
|**US Adjusted EBITDA**\*|$K|**15,910**|**9,931**|**21,010**|**32,783**|**25,549**|
|**US Adj. EBITDA margin**| |**6.7%**|**4.3%**|**9.7%**|**14.2%**|**11.5%**|
|**Intl. segment**| | | | | | |
|Net revenue|$K|119,635|132,755|140,237|142,461|125,258|
|Product and distribution costs|$K|27,102|30,624|32,021|32,254|28,632|
|OPEX|$K|61,998|67,063|67,961|67,591|65,125|
|SG&A expense|$K|12,721|13,056|13,100|13,884|14,293|
|Marketing expense|$K|2,644|3,234|4,284|3,039|2,935|
|Other segment expense, net|$K|273|557|\-286|\-1,103|\-199|
|**Intl. Adjusted EBITDA**\*|$K|**14,897**|**18,221**|**23,157**|**26,796**|**14,472**|
|**Intl. Adj. EBITDA margin**| |**12.5%**|**13.7%**|**16.5%**|**18.8%**|**11.6%**|
|**Market dev segment**| | | | | | |
|Net revenue|$K|19,005|16,913|18,874|19,686|20,226|
|Product and distribution costs|$K|5,548|5,109|5,746|6,197|6,344|
|SG&A expense|$K|1,314|1,122|756|1,335|1,157|
|Other segment expense, net|$K|1,096|1,734|378|51|1,091|
|**Market dev Adjusted EBITDA**\*|$K|**11,047**|**8,948**|**11,994**|**12,103**|**11,634**|
|**Mkt dev Adj. EBITDA margin**| |**58.1%**|**52.9%**|**63.5%**|**61.5%**|**57.5%**|
[Turn around plan](https://preview.redd.it/puhtuh2dj2hh1.png?width=960&format=png&auto=webp&s=4ee774642da15e85efbc3e85e7c75a62844173ed)
https://preview.redd.it/ct2577pnm2hh1.png?width=1115&format=png&auto=webp&s=b7ec4c59ae5aaf9e77f06e2991082aecec7ace3e
*Turnaround progress so far.*
|**Key Performance Indicator**|**Unit**|**Q1 2025A**|**Q2 2025A**|**Q3 2025A**|**Q4 2025A**|**Q1 2026A**|
|:-|:-|:-|:-|:-|:-|:-|
|Franchised hubs| |133|134|135|137|200|
|US average weekly DFD door sales|$K|587|525|617|660|685|
|Leverage ratio| |6.1x|7.5x|7.3x|6.7x|5.5x|
|Free cash flow|$K|\-46,731|\-60,752|14,078|29,400|11,382|
*Forecast of KPI for the base case scenario.*
|**Scenario: Base**|**Unit**|**FY 2025A**|**FY 2026E**|**FY 2027E**|**FY 2028E**|**FY 2029E**|
|:-|:-|:-|:-|:-|:-|:-|
|**Total revenue**|**$K**|**1,522,616**|**1,407,857**|**1,284,721**|**1,339,820**|**1,435,278**|
|Gross margin| |75.5%|79.9%|80.6%|80.7%|80.7%|
|Franchise Adj. EBITDA|$K|44,092|61,709|86,585|92,112|93,829|
|Owned stores Adj. EBITDA\*|$K|96,161|106,249|118,544|167,843|232,784|
|**Total Adj. EBITDA**\*\*|**$K**|**140,253**|**167,958**|**205,129**|**259,955**|**326,613**|
|Total Adj. EBITDA margin| |9.2%|11.9%|16.0%|19.4%|22.8%|
|**FCFF**|**$K**|**-64,005**|**68,049**|**130,410**|**183,168**|**236,017**|
|FCFF margin| |\-4.20%|4.83%|10.15%|13.67%|16.44%|
|US sales per hub|$K/hub|3,987|4,572|5220|5927|6635|
|Intl. sales per hub|$K/hub|9,388|9,730|9908|9908|9908|
|System wide sales|$K|1,960,000|1,962,904|2,021,790|2,082,443|2,144,916|