Shareholders of Krispy Kreme have filed a lawsuit over the delay in the McDonald’s partnership expansion, arguing that the doughnut chain overhyped the potential for the sale of doughnuts inside the fast-food giant’s restaurants.
The lawsuit argues that Krispy Kreme made misleading statements about the condition of its business in the aftermath of the McDonald’s deal. The class-action lawsuit was filed in federal court in North Carolina and potentially includes investors who bought shares between February 25 and May 7.
Krispy Kreme sold doughnuts in 2,400 McDonald’s locations before abruptly pulling the plug on selling them at any additional restaurant earlier this month. The company said it was a temporary move designed to figure out a way to cut costs associated with the partnership, or boost sales.
The company said that sales of doughnuts through McDonald’s locations had fallen below expectations following initial marketing. The decline followed a first quarter in which Krispy Kreme’s organic revenue declined 2.6%, while adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, fell nearly 63%.
The announcement came as hundreds of McDonald’s locations were poised to start selling Krispy Kreme doughnuts, according to sources.
Krispy Kreme makes doughnuts at about 360 U.S. doughnut shops and delivers them daily to retail sites such as grocers, pharmacies and convenience stores. The company has argued that increasing accessibility of its doughnuts through such retail sites—which it calls “DFD doors”—is key to the chain’s sales.
McDonald’s was considered a key DFD door, because its size, 13,500 U.S. locations, provided Krispy Kreme with reason to invest in further expansion. The two chains planned to gradually increase the number of restaurants from which doughnuts were sold over three years.
But average sales through those DFD doors declined late last year, according to the lawsuit. Krispy Kreme nevertheless projected full-year organic revenue growth of 5% to 7% and in February cited the McDonald’s rollout, saying that it “validated the attractiveness of the QSR channel.”
And then in April, Krispy Kreme again highlighted “profitable U.S. expansion” in a press release announcing the nomination of Bernardo Hees and three others to the chain’s board.
The lawsuit says such comments were misleading because they failed to disclose the early challenges of the McDonald’s partnership.
By earlier this month, Krispy Kreme delayed the McDonald’s rollout said it is working to “achieve a profitable business model for all parties.” Krispy Kreme also withdrew its full-year outlook, citing macroeconomic challenges and the uncertainty of the McDonald’s partnership.”
The lawsuit says that, between February and May, Krispy Kreme failed to disclose that the sale of doughnuts at McDonald’s locations were struggling and that there was “substantial risk to maintaining the partnership with McDonald’s.”
A representative for Krispy Kreme has yet to respond to a request for comment.
Krispy Kreme’s stock has fallen 68% this year amid weak sales and profitability and now the uncertainty over the McDonald’s partnership. It is down more than 80% since its 2021 IPO. The company has nominated Hees and three others to its board, signaling a potential major shift in focus toward reducing costs as those weak sales have pressured Krispy Kreme’s profitability.
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