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3 reasons to avoid Krispy Kreme’s IPO (for now)

Restaurant chain Krispy Kreme (NASDAQ: DNUT) went public earlier this month. It’s a highly recognizable brand and certainly something that many retail investors will consider adding to their portfolios.

In this video clip from Motley Fool Live, recorded on July 2nd, Corrine Cardina, director of the Motley Fool office for health care and cannabis, asks contributors Jon Quast and Jeremy Bowman what they think of the stock. They cite three reasons to avoid the stock for now: Despite the quality of their product, it isn’t a high-traffic chain, it has a lot of debts, and it doesn’t seem like much optional going forward.

Corinne Cardina: I want to talk about a really contemporary restaurant inventory. It’s an IPO [initial public offering] that just happened. It’s been public before, but it’s back, and it’s Krispy Kreme. The ticker is DNUT, donut. It also possesses Insomnia Cookies, which are a college late night favorite. What do we think Is that a sweet stock at the price or do you think this should be avoided for now? Jon, why don’t you start with Krispy Kreme?

Jon Quast: We’ll talk about this in a minute, but I think the top guides to investing in restaurant stocks is not to stomach investing. I think Krispy Kreme donuts are the best donuts in the world. I am sorry, Dunkin ‘ People. I’m a Krispy Kreme guy, 100%. But as a business, it’s a little difficult for me.

One of the things that caught my eye about the S-1 is the document they submit to the IPO that says customers visit less than three times a year. If you think about it now, it makes a lot of sense. Even myself who is a donut lover I love, I don’t go there often. It’s a treat, and that’s really what’s going on here. Even if you have a good quality donut, people don’t bring it up on a regular basis. That is one of the difficult things.

Also, what is really hard about Krispy Kreme as an investment is that they go public with so much debt. $ 1.2 billion prior to IPO; the IPO proceeds are intended to repay these. You had more interest expenses than operating income in 2019.

As an investment, I want to see how they manage that debt burden. I want to see how they can increase sales, operating income, and all those things before I think about investing.

Cardina: Jeremy, what do you think of Krispy Kreme?

Jeremy Bowman: I agree with what Jon said. I also think it’s great that her customers only visit her three times a year. You think of a company like Starbucks or even dunkin ‘donuts, which you might consider competitor to Krispy Kreme. These are places that people visit every day. Restaurants are a recurring revenue model. It’s one of the great things about them. I think you want to go to places that invest in some stocks that will get repeated traffic.

Krispy Kreme is a brand we all know. I think they have great brand equity in donuts, but I don’t see it go beyond that. Up to the point I just made you think coffee is an opportunity for them, but they didn’t really get into that. They try to sell other baked goods in supermarkets, but they did so as early as the early 2000s. They were the big fad, the stock spiked for a couple of years, then overfilled and crashed.

I’m a little careful about that. It feels like we’ve seen this movie before and Jon goes into debt and things like that, it feels like there are plenty of reasons to stay away.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

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