Krispy Kreme downgraded on worry Ozempic will hit demand
KRISPY Kreme might still be a popular choice for doughnut lovers, but the boom in weight-loss drugs such as Ozempic and Wegovy has one Wall Street firm warning investors about the stock.
Truist Securities downgraded shares to hold from buy and cut the price target to US$13 from US$20, citing the uncertain impact of drugs known as GLP-1s on packaged food snacks. Analysts led by Bill Chappell expect the overhang will not fade for six to 12 months, “if not longer”.
“We believe in the Krispy Kreme model,” Chappell wrote on Monday (Oct 30). “However, we have a difficult time recommending the name at least until the GLP-1 wave has started to form.”
Shares pared losses from earlier in the day to close unchanged on Monday. The stock is up 25 per cent year-to-date till the last close. Among analysts tracked by Bloomberg, Krispy Kreme has three buy recommendations, four holds and zero sells.
Chappell said he has “no idea” what the impact of GLP-1s will be on overall food consumption, and that “is the problem”. It’s too early for there to be an accurate estimate, he added. It would have been better for Krispy Kreme and its peers if GLP-1 usage was already impacting third-quarter results as it would allow investors to forecast how it would affect the business in 2024 and 2025.
Another factor that compounds the issue is that top-line growth for most companies has been driven by price over the past two years, which Chappell believes will “only feed into the GLP-1 narrative as pricing benefits recede and overall sales growth decelerates in the next few quarters”.
“We believe the stocks will be stuck in a holding pattern at best with strong potential for additional multiple contractions as the initial impact of GLP-1 use becomes more apparent,” said Chappell.
The boom in weight-loss drugs has made analysts less certain on makers of sugary snacks. Earlier this month, Barclays downgraded their recommendation on Swiss chocolate maker Barry Callebaut and German sugar firm Suedzucker, seeing GLP-1s as posing a “structural bear case for food ingredients”. On the flip side, Barclays said there was a “real debate” about whether Danone could be a winner from the huge demand for the drugs, noting its focus on healthier categories such as yoghurt and water.
Longer term, Chappell believes in Krispy Kreme noting that the company will continue to gain market share in the worldwide indulgent snack category and grow volumes in 2023 as it “continues to fine-tune” its business model. BLOOMBERG
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