During the KKD growth days the company neglected franchisee profitability which made for good profits short term but made it less attractive for franchisees in the longer term with a few going out of business. KKD also struggled with accounting issues and management was replaced in 2005. While the company grew overseas KKD began the painful process of closing half its stores in the US. Today there are now 748 KKD stores in 22 countries around the world. In 2011 KKD finally increased the number of stores in the US the for the first time since 2005.
Management has tinkered with the store format introducing stores at half the original size from 4,000 square meters to 2,000 square meters focused entirely on the retail consumer. The new CEO seems to have learned from the previous errors as long term franchisee profitability is now key to the business. The new store formats provide 30% cash on cash returns which is attractive for franchisees. At a company store level returns are even more attractive, since they do not pay royalties company stores can return around 50% on capital. With the new store format KKD is actively marketing again for franchisees and now that same store sales are increasing double digits the returns for franchisees are some of the best in the industry.
Not just donuts
KKD is known for donuts but they want to be known for more. KKD is offering more beverage choices and package deals with goals to increase coffee sales to 12% of sales from 5% currently. As a comparison Dunkin Brands has 60% of sales from coffee, profit margins also tend to be better than food. For the near term KKD is focused on donuts and coffee but they have hinted that they have the opportunity to sell other offerings for different parts of the day.
Same store sales have since increased to 11% source KKD
Dunkin opens more stores yearly than Krispys Kreme's total stores
The number of KKD stores in the US is tiny given Dunkin Brands footprint of 7,300 stores in the US with plans to double to 15,000. Dunkin has plans to open between 330-360 new locations this year more than KKD's US store count! KKD has 250 US stores of which the majority are in the South East of the country with a January 2017 goal of 400 stores in the US. Overall KKD has plans for 1,300 worldwide stores by January 2017.
The only holes in this story are in the donuts
KKD has a market value of $1.2 billion quite small when compared with peers like Dunkin Donuts and Starbucks. KKD also has $200m in operating losses which is available to offset any future tax. Time to get on those diets, KKD is back to growth.
Jason
Come visit our booth at the Sydney Trading and Investment Expo on the 19th-20th of July.
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
