Among the major publicly traded companies, it’s tough to find an enterprise that suffered a worse Thursday session than Krispy Kreme (DNUT). After providing some culinary solace during the doldrums of the COVID-19 pandemic, the brand is struggling for traction amid pressures colliding against the consumer economy; namely, an improving but still stubbornly high inflation rate. However, stakeholders of DNUT stock probably couldn’t have anticipated what just happened.
Following a rather disappointing (but not outright awful) earnings disclosure for the second quarter of 2023, investors couldn’t get out of DNUT stock soon enough. When the smoke finally cleared, shares lost almost 14% of equity value. To be fair, on a year-to-date basis, DNUT is up 19%, which stands a bit better than the performance of the benchmark S&P 500. Unfortunately, the technical posture right now screams sell.
So, what happened? Undeniably, the Q2 print shoulders most of the blame. However, investors may be concerned about Krispy Kreme’s standing in the underlying food and beverage retail sector. Mainly, the brand might not be resonating with the consumer like it once did. If that’s the case, circumstances in the consumer economy might only worsen, which raises alarm for DNUT stock.
Q2 Print Draws Much Activity in DNUT Stock
On paper, Krispy Kreme wouldn’t seem a natural candidate for a horrific single-day implosion. According to its press release, the company reported net revenue of $408.9 million, representing a 9% year-over-year lift. As well, organic revenue grew 11.4%, led by the domestic market.
Moving to the bottom line, Krispy Kreme posted GAAP net income of $100,000, comparing quite favorably to a net loss of $2.4 million in the year-ago quarter. Further, GAAP-diluted earnings per share for Q2 2023 came out to breakeven, whereas in Q2 of last year, the company incurred a diluted loss of 2 cents per share.
Adjusted EPS came out to 7 cents, which while slipping a penny from the year-ago quarter met Wall Street’s consensus estimate. However, analysts were expecting Krispy Kreme to post sales of $410.75 million, which missed by roughly half-a-percent.
In the grander scheme of things, such a miss doesn’t seem like a lot. However, consumers are showing clear signs of struggle against inflation, perhaps most notably by holding onto their vehicles for longer than ever. Therefore, meeting revenue targets represents a heightened performance benchmark.
To be sure, Krispy Kreme’s Chief Financial Officer Jeremiah Ashukian presented a picture of steadily rising optimism. During the Q2 conference call, while Ashukian acknowledged that “costs remain elevated versus historical levels, we expect to start seeing inflation ease in the back half of this year…”
Unsurprisingly, DNUT stock witnessed a flurry of activity in both the open and derivatives markets. Notably, DNUT ranked among the top highlights in Barchart’s screener for unusual stock options volume. Specifically, total volume hit 3,991 contracts against an open interest reading of 16,736. Further, the delta between the Thursday session volume and the trailing one-month average metric came out to 807.05%.
Interestingly, call volume pipped put volume but barely, at 2,171 contracts versus 1,820. This pairing yielded a put/call volume ratio of 0.84, which is somewhat on the high side. Typically, the delineation between bullish and bearish sentiment sits at 0.70 due to the upward bias of the market.
Krispy Kreme’s Brand Power Under Question
Adding to skepticism for DNUT stock, the Barchart Technical Opinion indicator states that it’s now an 8% sell. Further, the indicator warns that DNUT could continue on its present (negative) trajectory over the short term. That’s probably a reasonable assumption.
On the fundamental side, the disappointing Q2 print again provides enough fuel for investor anxieties. However, over the long run, what the data shows may be that Krispy Kreme’s brand power is coming under scrutiny.
Back in the second quarter of 2020 – during one of the worst periods of the COVID-19 pandemic – Krispy Kreme’s revenue hit nearly $245 million. This represented 0.59% of the $41.69 billion that the food services and drinking places sector posted in total that quarter.
However, since Q4 2020 when this metric stood at 0.57%, Krispy Kreme has been gradually losing its share of the total food and beverage retail market. In the most recent Q2, this metric slipped to 0.46%, lower than the 0.48% posted in Q1 of this year.
Unfortunately, the data appears to imply that consumers are choosing to spend what little discretionary funds they have on competing retailers. That’s not great news for DNUT stock unless the consumer economy substantively improves.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
