Krispy Kreme's Q3 Beat: Is the Turnaround Finally Here?

Krispy Kreme reported third-quarter earnings on Nov. 5 that beat expectations, sending the stock higher. The company posted an adjusted loss of $0.08 per share, which was 3 cents better than the same quarter last year. Net revenue came in at nearly $329 million, down 12.5% year over year, but that decline was largely expected due to the company's refranchising efforts.

On an adjusted basis, excluding restructuring and other one-time items, Krispy Kreme earned $0.06 per share, up from $0.01 a year ago. That's a significant improvement and shows the company's cost-cutting and strategic shifts are starting to pay off.

The big story is Krispy Kreme's pivot to a less capital-intensive model. The company is refranchising its stores, meaning it sells company-owned locations to franchisees. This year, it opened 98 new shops globally, nearly all franchised, and slashed capital expenditures by almost 65%. As a result, free cash flow improved dramatically, from negative $92 million in last year's third quarter to negative $10 million this quarter.

Krispy Kreme also reduced its net leverage ratio from 6.7x to 5.5x, thanks to debt reduction and higher adjusted EBITDA. CEO Joshua Charlesworth said franchisees now generate about 42% of system-wide sales, and that percentage is expected to grow. Management raised full-year revenue guidance to $1.35–$1.4 billion and lowered capex guidance to $40–$45 million, both positive signs.

For long-suffering Krispy Kreme shareholders, this quarter offers a glimmer of hope. The stock is down over 72% in five years, plagued by high debt, competition, and failed strategic moves like partnerships with McDonald's and Walmart. But the refranchising strategy appears to be a step in the right direction.

By selling company-owned stores to franchisees, Krispy Kreme reduces its capital needs and shifts to a more asset-light model. This should improve returns on capital, expand margins, and generate more consistent cash flow. The sharp improvement in free cash flow and the reduction in leverage are early evidence that this plan is working.

Wall Street took notice. Bank of America analyst Sara Senatore maintained a buy rating and raised her price target from $5.50 to $6.30 per share, implying significant upside from current levels. If Krispy Kreme can continue to execute and deleverage its balance sheet, there could be more upside ahead.

However, it's not all clear skies. The broader doughnut industry faces headwinds, including changing consumer preferences and the rise of GLP-1 weight-loss drugs, which could reduce demand for sugary treats. These uncertainties mean the turnaround is still unproven, and investors should be cautious.