Krispy Kreme IPO looks half-baked

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LONDON, June 2 (Reuters Breakingviews) - Krispy Kreme’s initial public offering is far from dollars to doughnuts. Five years after being bought by JAB, the maker of sugary pastries is going public again. Buying up franchises has boosted sales, but patchy performance and the trend towards healthier eating make a mooted $4 billion valuation look over-jammed.

The investor backed by Germany’s Reimann family has been busy since acquiring Krispy Kreme for $1.4 billion in 2016. Managers such as former Mars executive Josh Charlesworth have introduced new flavours, treat designs, and ways of selling online. The 83-year-old company has also spent some $465 million buying back stores from franchisees, a move that gives it greater control over its products, and also helped grow the top line by an average of 19% from 2016 to 2020 to $1.1 billion.

Yet the sweet treat maker’s transformation is hardly complete. Revenue growth after stripping out acquisitions has been patchy: it was 8% in the first quarter of this year but ranged from 1% to 5% a year since 2018. Its EBITDA margin, after adjusting for costs such as stock-based compensation and M&A-related expenses, has hovered between 14% and 16% over that same period. Conversely, sugary pastry rival Dunkin’ Brands, which operates a franchise model and was taken private last year, enjoyed margins close to 40%.

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A mooted valuation of $4 billion, reported by Bloomberg, looks rich. Assuming that figure includes debt, it would imply an enterprise value multiple of 26 times 2020 EBITDA, in line with more profitable coffee retailer Starbucks’ (SBUX.O) trailing multiple. Confectionery group Hershey (HSY.N) trades at a less fruity 18 times, according to Refinitiv. Arguably the closest peer, Dunkin’ Brands was bought for around 23 times the previous year’s EBITDA.

Companies that flog so-called indulgences, a euphemism for sugary foods, are going out of fashion. Mondelez (MDLZ.O) and Nestlé (NESN.S) are trying to increase the proportion of healthier products they offer. Krispy Kreme seems to be bucking the trend: its glazed doughnut contains 200 calories and more than 40% of an individual’s advised maximum daily sugar intake. Sweet-toothed investors may be tempted to take the doughnut and leave the stock.

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- Doughnut maker Krispy Kreme on June 1 published a prospectus for an initial public offering in New York. The group, which sells the sugary pastries online and in stores, said its revenue reached $322 million in the quarter ended April 4, compared with $261 million a year earlier. JAB, the Reimann-family backed investor, bought the company in a $1.4 billion deal in 2016, when it was ramping up its bets on coffee and restaurant businesses.

- The IPO proceeds will allow Krispy Kreme to reduce debt as well as creating a public market for the company’s stock.

- Bloomberg in May reported that JAB was considering seeking a valuation of about $4 billion for the business.

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Dasha is a columnist in London writing about the consumer goods sector, as well as Russia and Turkey. She has been at Reuters since 2012 as deals reporter in London and Turkey correspondent, covering the 2016 coup and the war in Syria. Prior to that she produced business news on BBC radio and worked as an investment banking analyst. She holds a degree in Politics, Philosophy and Economics from the University of Oxford.