The post Krispy Kreme Dividend Cut: The Reasons Behind the Decision appeared first on Dividend Power.
Krispy Kreme, Inc. (DNUT) completely cut its dividend due to the impact of low gross margins, negative free cash flow, high leverage, and negative interest coverage. High cost of goods sold and corresponding low gross margins have hindered consistent profitability. The firm eliminated its dividend in the first quarter of 2025.
The share price has fallen dramatically since the equity’s IPO in 2021. Investors sold this dividend stock due to concerns about operating results and declining profitability, and a potential dividend cut, as safety concerns increased. It is unlikely the dividend will be restored in the near future.
Overview of Krispy Kreme, Inc.
Krispy Kreme, Inc. was founded in 1934 and is headquartered in Charlotte, NC. The company was privately held by JAB Holdings from 2016 to 2021, when it went public through an IPO in 2021. The firm sells donuts through franchised and owned stores, grocery and convenience stores, drug stores, and quick service restaurants. Krispy Kreme and McDonald’s ended their partnership in June 2024 because of costs and profitability concerns. The firm also sold its stake in Insomnia Cookies in June 2024.
Total revenue was $1,665 million in fiscal year 2024 and $1,539 million in the past twelve months.
Dividend Cut Announcement
During the first quarter of fiscal year 2025 earnings announcement, on Thursday, May 8th, Krispy Kreme Inc. (DNUT) cut its dividend to zero. The company’s quarterly dividend rate was $0.04 per share before the announcement. The dividend is now $0 per common share, a 100% reduction. In the announcement on May 8th, the company stated,
“Following a review of the Company’s capital allocation strategy and investments available to fuel our growth, the Company has made the decision to no longer pay quarterly cash dividends to holders of the Company’s common stock. This decision provides greater financial flexibility, enabling debt paydown and a focus on profitable, high return growth.”
Later, in the second quarter earnings call transcript, the CFO stated,
“We have also made the decision to discontinue the quarterly dividend. This decision was made after careful consideration of our capital allocation strategy and we expect this capital to now be used to pay down debt.”
Effect of the Change
By completely cutting the dividend, Krispy Kreme aimed to slash its quarterly and annual cash requirement for the payout, thereby increasing its financial flexibility. The firm is losing money, organic sales are declining, and the balance sheet is leveraged.
The company’s dividend rate has been constant since it began paying a dividend in Q4 2021, so it has not had a streak of increases. The result is that less free cash flow is required for the dividend payout, permitting the quick service restaurant to focus on profitable growth and reducing debt.
Challenges
Krispy Kreme is facing a challenging business environment due to high costs, soft customer demand, and a leveraged balance sheet.
High Costs
Krispy Kreme is not profitable because of higher costs. In fiscal year 2022, following the IPO, gross margins exceeded 23%. However, they dropped to 10.5% in 2023 and were negative at (1.2%) in 2024. Because gross margins are a function of revenue and cost of goods sold, it is clear that Krispy Kreme cannot profitably sell donuts to its customers. The firm is trying to adjust its business model by becoming asset-light, refranchising, and restricting its JV, ending the McDonald’s partnership, outsourcing logistics, and more. That said, these moves will take time.
Soft Customer Demand
Organic sales were lower due to economic conditions that resulted in soft customer demand. Store traffic volumes are lower as the company reduces discounting and ended its unprofitable McDonald’s partnership. Customers are also facing inflationary pressures and are reducing discretionary purchases. Donuts are considered discretionary.
Debt and Leverage
Krispy Kreme is a leveraged company with over $1.4 billion in net debt. It currently has roughly negative (1.21) times interest coverage and about a 7.73 times leverage ratio. The firm does not have a reported credit rating. However, the level of net debt, negative interest coverage, leverage ratio, and lack of consistent profitability are all major risk factors for a speculative rating. The firm’s free cash flow was negative in three of the last five years. Omitting the dividend will free up about $24 million annually to address debt.
Dividend Safety
Because of poor revenue and earnings per share (“EPS”) trends and dividend safety metrics, Krispy Kreme’s dividend safety is low. Earnings per share have declined each year since the IPO. Consensus estimates are for ($0.28) in 2025 and ($0.07) in 2026.
Source: Portfolio Insight
Because Krispy Kreme eliminated the dividend, earnings covered the dividend, but FCF did not. However, the firm’s declining revenue and EPS, along with rising leverage and negative interest coverage, resulted in inferior dividend safety metrics. The company would have received a dividend quality grade of ‘F’ from Portfolio Insight.
Final Thoughts on Krispy Kreme (DNUT) Dividend Cut
Even before Krispy Kreme completely cut the dividend, it was on shaky ground. But high costs, soft customer demand, declining revenue and EPS, and a weak balance sheet were significantly pressuring the company. Additionally, the dividend safety metrics were relatively poor. Ultimately, it needed to eliminate its dividend distribution. It is unlikely the dividend will be resumed.
Related Articles on Dividend Power
Crown Castle Dividend Cut: The Factors Behind the Reduction
3 Worst Performing Dow Jones Stocks in 2022
The post Krispy Kreme Dividend Cut: The Reasons Behind the Decision appeared first on Dividend Power.