The iconic, donut brand Krispy Kreme (DNUT  ) went public earlier this month. Shares had a bumpy debut as they opened at $17 which is below the pre IPO price range of $21 to $23. On its first day of trading, shares caught a bid to close at $21.50 but then have backed off about 10% since then. Ultimately, the company was able to raise $500 million at a valuation of $2.7 billion.

Company Profile and IPO Details

Krispy Kreme last went public in 2000, until it was bought out in 2016 by JAB Holdings in a $1.35 billion deal and combined with Insomnia Cookies. JAB Holdings is a German conglomerate that has been investing in quick-service restaurants and coffee chains like Panera Bread and Caribou Coffee. JAB will retain a significant ownership stake in Krispy Kreme and also holds a majority of Board seats.

In its IPO prospectus, the company included that it had sold 1.3 billion donuts across 30 countries in 2020. Krispy Kreme was actually a high-flying stock in the 2000s but it crashed when the company overreached on growth, and the low-carb craze led to slowing sales momentum.

Krispy Kreme's CEO, Michael Tattersfield took the job in January 2017. Previously, he served as the CEO of Caribou Coffee from August 2008 to July 2017. The company believes it has growth opportunities by expanding to new markets in the South and West Coast of the U.S. and international markets like Latin America and Europe. Some other growth opportunities include packaged goods, Insomnia Cookies, and e-commerce.

In 2020, Krispy Kreme's revenues increased 17% to $1.1 billion and generated a net loss of $61 million. It is a significant improvement from $557 million in revenue in 2016. The company has incurred net losses in the last 3 years as it focuses on growth. The company has been buying back franchises and now owns 85% of locations.

Outlook

There's a lot to like about Krispy Kreme given that it has nearly doubled its revenue in the last 5 years and does seem to have more growth potential in terms of geographic expansion, packaged goods, and e-commerce sales. Shares are not inordinately expensive given this upside.

However, there are also some concerns including JAB's heavy ownership of the company and its $1.2 billion debt burden. Private equity companies are incentivized to sell at the top of the cycle and buy at the bottom often loading up the company with debt. This could be quite onerous if sales do turn lower. Further, Krispy Kreme is competing in a $650 billion market with larger, entrenched players like Starbucks (SBUX  ), Dunkin' Donuts, and McDonald's (MCD  ).

In 2000, Krispy Kreme was quite hot, and it would have massive sales when opening a new location. However, shares quickly plateaued as the items were popular on a novelty basis rather than in terms of generating consistent sales.