Krispy Kreme’s (DNUT) Unusual Options Activity Presents a High-Risk Contrarian Trade

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While Americans generally have a sweet tooth, investors aren’t necessarily feeling the love for Krispy Kreme (DNUT). Shares of the doughnut retailer and wholesaler have tumbled more than 23% so far this year. Further, while DNUT stock popped about 6.5% on Monday, the big-wig traders seem intent on betting against the underlying enterprise.

That’s the implication behind the latest unusual stock options volume indicator. This data interface allows retail investors to better understand what companies the smart money may be supporting (or betting against). At face value, circumstances appear quite favorable for DNUT stock.

Following the close of the June 10 session, total volume for Krispy Kreme options reached 10,564 contracts against an open interest reading of 48,694 contracts. Monday’s volume exceeded its trailing one-month average metric by 231.89%. Moreover, call volume hit 1,303 contracts, contrasting sharply with puts, which measured only 261 contracts.

On the surface, that seems quite positive. However, Monday’s options flow screener – which focuses exclusively on big block transactions likely placed by institutions – tells a different tale. In particular, net trade sentiment, which sat at $169,000 below breakeven, decisively favored the bears.

Conspicuously, the biggest premium for options with negative sentiment clocked in at $116,100. On the other end of the scale, the biggest premium for options with positive sentiment landed at only $11,400. Judging from the data, it appears that speculators are selling long-expiry calls; specifically, the Jan 17’25 $10 call.

That’s a risky bet but it’s also understandable. Essentially, traders will collect a profit from the premium should DNUT stock fall to $10 or below. Presently, shares trade hands at $11.32. Technically speaking, the $10 level is significant because it’s the demarcation point between single and double digits. Further, the bears attempted to drive DNUT down below this point in late May.

The speculation is that eventually, the bulls will tire. If they do, DNUT stock could easily return to $10 and perhaps lower.

Why the Bullish Case for DNUT Stock is Still Relevant

Although the volatility of DNUT stock adds to broader concerns against the underlying business, there are a few key reasons to be optimistic about the enterprise. First and foremost, the company posted solid results for its first-quarter earnings report.

Last month, Krispy Kreme revealed that it posted revenue of $442.7 million, beating the analysts’ consensus view of $434.1 million. Further, on a non-GAAP basis, earnings per share reached 7 cents, pipping the expectation for 6 cents by a penny. Gross margin (GAAP basis) also hit 29.5%, which was up from 26.2% in the same period last year.

“First-quarter results exceeded our expectations, driven by increased digital sales and strong consumer demand, highlighted by a record setting Valentine’s Day with specialty doughnuts available in 33 countries around the world,” remarked Krispy Kreme CEO Josh Charlesworth.

More recently, DNUT stock popped higher on Monday due to the upside potential tied to an upcoming deal with McDonald’s (MCD). This partnership will facilitate the sales of Krispy Kreme doughnuts at thousands of locations under the Golden Arches.

For fiscal 2024, analysts anticipate that revenue may reach $1.79 billion. In the following year, the top line could jump to $1.95 billion. That implies 6.1% and 8.9% growth, respectively, over the prior year. Significantly, this growth rate exceeds that of the doughnut store industry in the U.S., which has expanded by 4.1% on average between 2018 and 2023.

Not only that, the most optimistic projection calls for fiscal 2024 sales of $1.83 billion and 2025 revenue of $2.15 billion. If so, that would translate to growth of 8.28% and 17.49%, respectively. Based on a share outstanding count of 168.73 million, DNUT stock would be trading at 0.89X projected 2025 sales.

Notably, the restaurant industry currently runs a 0.99X trailing-year revenue multiple. So, DNUT stock would look very attractive, especially if the McDonald’s partnership gains traction.

Too Early to be Bearish

In the absence of the above positive markers, DNUT stock would present a tempting case for market bears. However, with enough going for it – especially the McDonald’s deal – it seems too early to jump aboard the pessimistic narrative.

Sure, DNUT stock has been volatile. And there are fundamental concerns about consumer behavioral shifts, particularly toward healthier eating habits. However, Krispy Kreme is easily exceeding the trajectory of its core U.S. market. Also, should the aforementioned partnership with the Golden Arches pan out better than expected, DNUT could rocket higher.

Again, it just might be too early to be so decisively on board the pessimistic train. With that, investors may want to consider the bullish case, especially since it might be relatively undervalued.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.