KRISPY KREME IS BACK – FAR FROM A BARGAIN!
The preliminary filing indicated a raise of $100M, but that amount was understood to be a “place holder”. A final prospectus, with filing price and number of shares to be sold was disclosed this morning. At the midpoint of the filing range ($22.50) the company will sell a minimum of 26,666,667 shares for net proceeds of about $565M. The ultimate raise could be 15% higher if the “green shoe” option is exercised by the underwriters. There will be 160,890,354 shares at minimum, 164,890,354 at a maximum. This would value the Krispy Kreme equity at a minimum of $3.6B. The use of proceeds is described below.
VERY BRIEF COMPANY BACKGROUND
Founded in 1937, Krispy Kreme came public in 2000 and was a hot stock for several years. However, very rapid expansion undermined the novelty effect, the Atkins diet craze may have hurt sales, the brand image was undermined by distribution points such as C-stores, and franchisees were further disillusioned by the profit the franchisor made on the distribution of product mix and donut making equipment. (Shades of TCBY!) A stabilization and building effort began in 2005, resulting in JAB Holding taking the Company private in 2016, for $1.35B. In the preliminary prospectus filed on June 1st, there was $1.2B of debt, $350M of which was owed to JAB. Prior to the IPO, since June 1st, a new $500M term facility repaid JAB.
USE OF PROCEEDS
As presented in the prospectus filed today: “We intend to use the net proceeds that we receive from this offering, together with cash on hand, if required, to repay certain of our outstanding indebtedness under the Term Loan Facility (referred to just above), to repurchase shares of common stock from certain of our executive officers at the price to be paid by the underwriters, and to make payments in respect of tax withholdings relating to certain restricted stock units that will vest or for which vesting will be accelerated in connection with this offering, with the remainder, if any, to be used for general corporate purposes.”
It is noteworthy that the Use of Proceeds did not include repaying JAB, but a Term Loan took out JAB, then was repaid out of Proceeds. Looks a little better, we guess.
It is also worth noting that both JAB and Olivier Goudet (Chairman of the Board and CEO) have “indicated an interest”, which “is not a binding agreement”, in purchasing shares of the IPO: $50-$100M in the case of JAB and $5M for Goudet.
THE OPERATING NUMBERS
From 2016 to 2020, Net Revenue increased from $557M to $1.122B (a CAGR of 19.1%), but a large portion of that revenue growth was generated from the buyback (for $465M) of franchised stores. Over the same period, Global Points of Access increased from 5,720 to 8,275. The GAAP loss before taxes increased from $14M in 2018 to 37M in 2019 to $64M in 2020. The Net Loss in Q1’21 was $3.1M , compared to a $11.5M loss in ’20. Adjusted EBITDA looked (predictably) higher: $124M in 2018, $146M in 2019, $145M in 2020, and $46.4M in Q1’21, up from $36.4M.
The Global Points of Access grew further in Q1’21, to 9,077, up 9.6% in just three months. As presented early in the 200 page prospectus: “Krispy Kreme doughnuts are ….universally recognized for its melt-in-your-mouth experience. One differentiating aspect …is our Theater Shops with our ‘Hot Now’ light….the most awesome doughnut experience imaginable….we are an omni-channel business, via (1) our Hot Light Theater and Fresh Shops (2) delivered fresh daily through high-traffic grocery and convenience stores (3) e-Commerce and delivery and (4) our new line of packaged sweet treats offered through grocery, mass merchandise and convenience retail locations.
THE VALUATION
On a pro forma basis after the IPO, there will still be about $630M of remaining debt (net of $78M cash). Adding that to the equity value (at the $22.50 offering price) of $3.6B provides an Enterprise Value of about $4.3B. If we assume a current annual EBITDA run rate of about $185M, the Enterprise Value would be twenty three times.
For those observers that like to look at old fashioned EPS (even if it is Adjusted) Adjusted Net Income was $42.3M in calendar 2020 (compared to the $11.5M GAAP Loss), or about $0.26 on the 160M shares to be outstanding. Adjusted Net Income in Q1’21 was about $0.11/share, up from about $.07. The offering mid-price of $22.50 is therefore about 85x calendar Adjusted Net Income and 51x the annualized Q1’21 Adjusted run rate. We don’t know what the company or the underwriters are projecting and, if (or when) the current $185M Adjusted EBITDA run rate (and the Net earnings) can increase substantially. If so the fundamentals would obviously catch up to the valuation.
We don’t believe the outlook is risk free. When the last IPO took place, in 2000, customers were lined up for blocks around a newly opened location. Not so much today. We suggest investors wait for a more advantageous entry point.
Roger Lipton
