Krispy Kreme shares sank after costs for exiting its unprofitable McDonald’s venture in the U.S. resulted in a quarterly loss that exceeded analysts’ expectations. The company also took a large impairment charge.
The Charlotte-based doughnut chain reported an adjusted loss of 15 cents per share in the three months ending June 29, exceeding a projected loss of 4 cents, according to Zacks Investment Research. Exiting about 2,400 McDonald’s restaurants led to lease impairment and termination costs totaling $28.9 million in the second quarter.
The stock tumbled 9% to $3.10 in early afternoon trading, bringing its year-to-date decline to 69%. Shares have traded between $2.50 and $12.67 in the past year.
After the McDonald’s flop, Krispy Kreme CEO Josh Charlesworth is embarking on a turnaround plan aimed at U.S. expansion that can kick off profits. The company wants to grow internationally through refranchising agreements that preserve the company’s capital.
“Losses related to our now-ended McDonald’s USA partnership were more than originally projected,’’ Charlesworth told analysts on a conference call. “We are quickly removing our costs related to the McDonald’s partnership and expect to begin recouping profitability in the third quarter.’’
In other steps to improve its financial flexibility and reduce debt and costs, the company is negotiating to reduce its ownership stake in its western U.S. joint venture, outsourcing U.S. delivery and increasing its use of existing assets, such as doughnut production.
By year’s end, Krispy Kreme plans to complete its exit from about 1,500 “underperforming doors,” while adding about 1,100 more profitable locations, the CEO said on the call. The company is boosting distribution to major chains such as Walmart and Costco, he said.
Earlier this summer, marketing shifted to the chain’s iconic original glazed doughnut, Charlesworth said.
“We’re glad to see management lay out a blueprint to get things back on track but will need to see more quantification and results before getting more constructive,” Truist analysts led by Bill Chappell in a note quoted by Bloomberg. The analysts rate the shares “hold.”
Despite the addition of doughnut locations, organic revenue slipped nearly 1% in the quarter after a reduction of discounting and consumer softness led to fewer doughnut shop transactions.
The combination of a lower market capitalization, overly optimistic internal forecasts and actual operating results led management to conduct a quantitative impairment test.
It led to the conclusion that the estimated fair values of reporting units in the U.S., U.K., Ireland and Australia and New Zealand had declined below their carrying values. As a result, management recognized a cumulative, non-cash partial goodwill impairment charge of $356 million in the second quarter.
Last month, Krispy Kreme named Raphael Duvivier as its third CFO since June 2022. Charlesworth was the financial chief from 2017 until 2022.
JAB Holding owns more than 40% of Krispy Kreme shares. The Luxembourg-based company owns many businesses, including Coty, KeurigDrPepper and Panera Brands.
