Market Beat: Cookies & Office Space
Krispy Kreme explores a sale of its high-growth cookie business, and office real estate is still unpopular.
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Krispy Management
Donut maker Krispy Kreme announced today that it would be exploring a sale of its Insomnia Cookies business unit, in what amounts to a baffling move to divest one of the most promising snack businesses out there.
For those who don’t know, Krispy Kreme makes donuts found in gas stations worldwide, whose principal feature is that they dissolve into a gross, sugary goo in your mouth (wholly my opinion, don’t come at me).
Insomnia Cookies, by contrast, was acquired in 2018 by Krispy Kreme, and makes an incredible product (in the immortal words of Bobby Axelrod, “Whenever you can, put a company in your mouth.”), with a high degree of customer loyalty and a smart go-to-market strategy of occupying space near colleges and college bars and offering late-night munchies.
It’s a fairly wild turn of events as well, since Krispy Kreme posted this slide in their December 2022 Investor Day deck (less than a year ago!):
Even as recently as the last quarterly earnings call, management discussed plans to expand the Insomnia operation.
Now, while the company has never broken out Insomnia revenues separately, the 10Q did contain a handful of disparaging remarks towards the business, citing rising input costs in the cookies business as squeezing margins.
If I were a shareholder of Krispy Kreme, this whiplash would cause some consternation and more than a few questions and issues, such as:
Why the sudden change of heart? Less than a year ago this business was branded—by the company—as the ‘Next Krispy Kreme.’ Was this a strategic error, or has the brand just deteriorated that badly? Either way, shareholders should know.
While you don’t expect management to say “this business kind of stinks,” you also don’t expect them to tout how excellent a business is only to sell it.
Management, for its part, hasn’t said “this business kind of stinks,” but they did say they were exploring the sale in order to focus on the core business of donuts, which seems to me like some kind of corporate gobbledy-gook speak for “this business kind of stinks.”1
At the end of the day this is, for me, an interesting case study for investors to assess how credible a management team to be.
Tough Times, Indeed
At this point, nobody should be surprised to hear that the office sector of commercial real estate is, to put it bluntly, sucking pretty bad. A Bloomberg survey yesterday reported that 65% of market participants believe that the market for office properties will need to suffer a serious crash before recovering.
Let’s reflect on that statement for a moment. Consider this passage from a Wall Street Journal article published today:
Overall, the average return rate in the 10 U.S. cities tracked by Kastle Systems matched the recent high of 50.4% of 2019 levels for the week ended Sept. 20, though it slid a little below half the following week.
The disappointing return rates are another blow to office owners who are struggling with vacancy rates near record highs. The national office average vacancy rose to 19.2% last quarter, just below the historical peak of 19.3% in 1991, according to Moody’s Analytics preliminary third-quarter data.
In other words, 20% of office space nationwide is sitting empty, and market participants still feel that further pain is necessary before office properties become attractive for buyers. A sad picture, indeed.
It doesn’t even sound like the efforts of corporate bigwigs are making much of an impact:
More than before, chief executives at blue-chip companies are stepping up efforts to fill their workspace. Facebook parent Meta Platforms, Amazon and JPMorgan Chase are among the companies that have recently vowed to get tougher on employees who don’t show up.In August, Meta told employees they could face disciplinary action if they regularly violate new workplace rules.
But these actions haven’t yet moved the national return rate needle much, and a majority of companies remain content to allow employees to work at least part-time remotely despite the tough talk.
Most employees go into offices during the middle of the week, but floors are sparsely populated on Mondays and Fridays. In Chicago, some September days had a return rate of over 66%. But it was below 30% on Fridays. In New York, it ranges from about 25% to 65%, according to Kastle Systems, which tracks security-card swipes.
Below 30% on Fridays is… well, wow. It’s bad.
And, unfortunately, there’s little reason to think things will get better. With student loan payments set to resume this month (something we have talked about before here), higher-for-longer interest rates on the horizon, and the specter of renewed COVID-19 protocols, there are plenty of storm clouds on the horizon for office property owners.
Final Thoughts…
Traders dumped a record $40 billion of stock futures in the past week. The ESG backlash is in full swing. The wild Canada vs. India feud keeps heating up. The cost to Netflix & chill is about to go up. Efforts to boost the CFA pass rate don’t seem to be working. You’re not imagining things: customer service is getting worse. Jamie Dimon thinks a 3.5 day workweek is the future. Wall Street thinks your home is overvalued.
Again, my own opinion.