Moody's upgrades Krispy Kreme ratings
July 30, 2010
by Jeff Gelski
NEW YORK – Moody’s Investors Service on Thursday upgraded several ratings for Krispy Kreme Doughnuts Corp. The corporate family rating moved to B3 from Caa1 while the bank debt rating moved to B2 from B3. The short-term speculative grade liquidity rating was affirmed at SGL-3. The rating outlook is stable.
The upgrade and stable outlook acknowledge Krispy Kreme’s recovery credit metrics due to pay down of debt and modest improvement in operating performance in the past year. Krispy Kreme has reduced its bank debt by more than 40% since the beginning of 2009.
“Operationally, margin has improved and top-line decline has decelerated as the company continued to rationalize its domestic operations and expand its international footprints,” Moody’s said.
The company’s debt/EBITDA for the 12 months ended May 2 improved to 3.1 times from above 5 times a year ago. Moody’s expects that credit metrics likely will remain at levels consistent with the B3 rating and liquidity to be adequate in the near-to-medium term.
The B3 CFR, according to Moody’s, reflects Krispy Kreme’s strong brand recognition, solid growth potential in international markets and geographic diversification. Moody’s also noted litigations surrounding the class-action and shareholder derivative actions brought against the company since 2004 have been settled.
The B3 CFR incorporates Krispy Kreme’s still weaker operating margin and return on asset compared to other quick-service restaurants.
“Moody’s believes the low margins are partly driven by low utilization/over capacity of its domestic stores, particularly its company-owned stores which generate roughly two-thirds of the company’s total revenues,” Moody’s said. “In addition, our rating opinion considers the company’s earnings volatility due to its significant exposure to commodity inputs, as well as operating result sensitivity to sales volume given the high operating leverage.
“The rating also reflects our view that the growth prospect for its store in the U.S. is somewhat limited considering its singular product offering. While the international growth opportunity seems more promising, these expansions could potentially leave the company more exposed to some operating and non-operating risks.”