Krispy Kreme (DNUT) short, mcap=$1.89bn, price $11.29 vs $15.98

DNUT short pitch:
– Krispy Kreme – glazed donut brand with a complicated turnaround story of debatable effectiveness.
– Downside could be 100% at QSR peer valuation levels and bankruptcy is a probability.
– The risk/reward here is rather asymmetric and favors the downside given the Company’s execution risk, negligible FCF profile, and near-term maturity wall that should serve as a catalyst.
– This business generates only $30m in unlevered FCF per year, likely insufficient to support $780m of debt at market rates.
– DNUT has $750mn of bank debt going current in June 2023 and the company might require an equity raise.
– So far cash flows have been insulated from rising rates as the Company’s current bank debt is underpriced at L+225 with rate risk hedged at 4%.

DNUT valuation:
– DNUT trades around 1% LFCF yield, whereas franchise-heavy, free cash generative peers are at 4% LFCF yields.
– Restructuring risk is a probability here, in which case shares could have a 100% downside in a bankruptcy.

Exp. gain: 100% to $0/share.

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