The Doughnut That Encircled the World

Krispy Kreme (KKD Quote) said Friday that it plans to sign doughnut franchise agreements in two international markets by 2003, as part of a move abroad aimed at supporting the company's long-term growth goals.

While the company's foray into Canada late last year has so far been successful, some analysts worry that further international moves are too risky for the Winston-Salem, N.C., circular dough peddler at this stage. The company doesn't think so.

The first franchise agreement will probably come in the next 18 months, according to Chief Operating Officer John Tate, and could be located in Australia or the U.K. Other countries the company is looking at include Japan, Spain and Mexico.

Krispy Kreme's earnings almost doubled in the fourth quarter, surging to $8.3 million, or 14 cents a share, from $4.3 million, or 8 cents a share, in the year-ago period. Total company revenue, which includes sales from company stores, franchise operations and Krispy Kreme Manufacturing & Distribution, rose 43% to $117.1 million, from $81.9 million in the fourth quarter of fiscal 2001.

That kind of earnings growth might not last forever, though the company's cult status on Wall Street doesn't seem to be in jeopardy. Krispy Kreme expects earnings to grow 57% in 2002 to 44 cents a share, and 39% in 2003 to 61 cents a share. Longer term, the company expects 35% growth, Tate said.

So Many Choices What a Krispy Kreme in another land might look like

Shares of Krispy Kreme ended New York Stock Exchange trading up 77 cents, or 1.9%, at $40.32.

Krispy Kreme CEO Scott Livengood has said the company doesn't want to wait until it really needs the increased growth before moving abroad, as building a profitable operation overseas can take time. "[Livengood] wants to carefully and rationally lay the base now, so that when they need that growth, they'll have it," Tate said.

Analysts, at least the skeptical ones, say there isn't much proven doughnut demand outside of North America, and the company has plenty of work left to do in the U.S. "The question is, is this too risky," said Greg Schroeder, an analyst at Fulcrum Global Partners, an investment advisory firm based in New York. "I'm not aware of other markets outside of North America where the reception to doughnuts would be a big hit. It's a North American treat."

Tasty Investors like it

Meanwhile, the U.S. retail doughnut market is worth around $5 billion today, and Krispy Kreme's 217 stores are still largely concentrated in the southeastern U.S., Schroeder pointed out. He thinks the company should focus on advertising and cost efficiency in the U.S. "It seems better to stay focused and committed" to the core market, he said.

Tate countered that the company is "not looking at any countries where nobody has eaten a doughnut." A chain called Mr. Doughnut operates 11,000 stores in Japan, he argued. In the other countries the company is looking at, mom-and-pop shops tend to dominate, he said.

Krispy Kreme may have good reason to pin high hopes on international markets. Early critics of Krispy Kreme's move into Canada claimed that the Canadians would remain loyal to their own national doughnut chain, Tim Hortons, a unit of Wendy's (WEN Quote). But according to Tate, Krispy Kreme's Toronto store set a record for opening week sales volume.