Krispy Kreme (NASDAQ:DNUT) shares have now started trading on the Nasdaq stock exchange. The firm’s initial public offering (IPO) raised $500m by selling 29.4m shares at $17 a share, well below the expected range. Nonetheless, once listed, there was plenty of investor appetite. The share price jumped by over 23% on its first day of trading.
Should I glaze over this latest IPO or take a bite? Let’s take a look at the investment case.
The Krispy Kreme business
Krispy Kreme doughnuts have an 83-year-old history. Well-known globally, this sweet treat company sold 1.3bn doughnuts across 30 countries last year.
Its business spans multiple channels, including its network of doughnut shops and rapidly growing e-commerce and delivery business. Krispy Kreme also branched out into cookies when it bought the delivery chain Insomnia Cookies in 2018.
It has a particular focus on sharing and gifting. In fact, more than 75% of its doughnuts are sold in sharing quantities.
Ingredients of its success
I like that Krispy Kreme has a long and rich history. To me, it highlights a sticky business with many returning customers. Its brand is strong and is widely synonymous with doughnuts. Much like Google with search engines and Mcdonald’s with fast-food.
According to the company, “indulgence foods have proven to be recession-resistant historically”. As a leader in the indulgence food category, it could provide relatively stable earnings through the market cycles.
When looking at new investments to add to my Stocks and Shares ISA, I like to see steadily growing sales. So, it’s pleasing to see that Krispy Kreme is a growing business. It reported sales of $1.12bn in 2020, more than double the $557m reported in 2016. I also like that its sales consistently rose by 19% per year between 2016 and 2020. This could bode well for Krispy Kreme shares.
I do have some concerns, however. Krispy Kreme competes with many larger food & beverage companies like Starbucks and Dunkin’ Brands. Aggressive pricing by its competitors could reduce sales and profit margins. With limited barriers to entry, new competitors could also have similar negative effects.
Another ongoing risk to Krispy Kreme shares is Covid-19. The pandemic continues to disrupt many businesses. Especially those that rely on retail footfall and social gatherings like Krispy Kreme does. Many consumer behaviours have changed over the past 14 months. For instance, people are spending less time commuting, leading to fewer shop visits. There is still some uncertainty surrounding how this will change going forward.
Should I buy Krispy Kreme shares?
All things considered, I won’t be buying these shares. I’m going to put Krispy Kreme on my watchlist for now. I generally prefer not to buy shares in recent IPOs and would rather wait to see where the share price settles. That’s especially so after the big share price jump on the first day of trading.
Also, I think there are many other better US growth stocks that I’d rather buy right now.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), and Starbucks. The Motley Fool UK has recommended the following options: short July 2021 $120 calls on Starbucks. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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