Krispy Kreme Doughnut Inc. (KKD) will widen its presence in the Philippines. The company has recently inked a development deal with Real American Doughnut Company Inc., its franchisee, in that country. Per the deal, Real American Doughnut Company will set up 23 more locations in the country over the next five years.
Real American Doughnut Company is a subsidiary of Max's Group of Companies, a leading corporation specializing in restaurant operations in the Philippines, Canada, Australia, Dubai and the U.S. Its association with Krispy Kreme dates back to 2006. Currently, Real American operates 26 Krispy Kreme outlets across the Philippines, indicating the popularity of the brand in that region.
The latest alliance replicates Krispy Kreme management’s intent to make the Philippines one of the prime markets for international expansion, considering stepped up economic growth and under-penetration of quick-service restaurants in that region as against the North American countries. Additionally, with a large portion of the population under the age of 15, the Philippines offers a trendy food market. There are other U.S. restaurateurs like Jamba Inc. (JMBA) and The Wendy’s Co. (WEN) that are eyeing the market.
Krispy Kreme’s expansion plan extends beyond the Philippines as its doughnuts are available in over 660 stores in 21 countries around the globe. According to management, the company’s overseas expansion is expected to be more in 2013 than in 2012. In second quarter 2011, the pace of growth was higher in the international market as against the domestic arena. Encouraged by a six-fold growth in international exposure in the last five-plus years, the company seeks to double its current overseas store base within 2016.
We believe the company’s extended global reach bodes well for its financials. On the flip side, there is some fear of deterioration in comparable store sales from cannibalization by the new stores.
Krispy Kreme currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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