This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why Franchises Are Good for Investors

BOSTON ( TheStreet) -- For investors searching for growth stocks, they need look no further than companies that franchise, such as McDonald's (MCD - Get Report) and DineEquity (DIN - Get Report).

Whether its shoes or automobile parts or burgers and fries, many stocks of companies that have more franchised locations than company-owned stores are outpacing the return on the S&P 500 this year. Krispy Kreme Doughnuts (KKD - Get Report), for example, has seen its stock surge 20% as the business recovers following the Great Recession.

It's likely most people have a friend or relative who has talked about buying that McDonald's franchise and opening their own store. That entrepreneurial dream supplies these public companies with a reliable cash stream and lowers expenses. In terms of growth, that makes these stocks attractive to investors hunting for opportunities.

"The benefit of franchising is that, if you have a system that can be replicated well, then franchising is a good growth strategy," says Lorne Fisher, chief executive and founder of Fish Consulting, a public relations and consulting firm that counts AFC Enterprise's (AFCE) Popeyes and Dunkin' Donuts, which will soon hold its initial public offering, as clients.

"That's really what it is, a growth strategy," Fisher continues. "Companies look to grow their brand and system with reduced capital needs. They look to have low capital expenditures and still grow the brands and reap the benefits, which are in the form of royalty fees."

Companies that move from company-owned and operated stores to a franchise business model also reap rewards from the transition. While revenue will slump, as they aren't getting sales totals they enjoyed previously, many reduce expenses in the process -- increasing profit margins, Fisher says. In industries such as the restaurant business, where margins are already razor thin, this becomes even more important.

Jack in the Box (JACK - Get Report), for example, saw company restaurant sales drop 17% in its most recent quarter and nearly 16% this year alone due to the decline in the number of company-operated restaurants. But Jack in the Box says this is part of its refranchising strategy and notes that the sales decline has already been partially offset by increases in same-store sales at its restaurants.

Franchising is not without its hurdles. It's a federally regulated business model, watched by the Federal Trade Commission and individual states. Companies see upfront costs related to legal paperwork and filings, although they benefit from eliminating the costs of starting stores from scratch, then running and maintaining them.

The companies themselves talk up the benefits of the business model. McDonald's says the company views itself primarily as a franchisor and believes franchising "is important to delivering great, locally relevant customer experiences and driving profitability."

AFC Enterprises says the model provides "diverse and reliable earnings with steady cash flow, and relatively low capital spending requirements." The company says that, over the past five years, cash flow produced by its model has primarily been used to pay down debt and buy back stock.

The future looks bright for franchisors and franchisees alike. The International Franchise Association, the oldest and largest organization representing franchising worldwide, estimates that the number of franchise establishments will grow 2.5% this year. Economic output, which is the gross value of goods and services produced, is projected to grow 4.7%, to $739.9 billion.

"The forecast of stronger growth in 2011 for franchise businesses is good news for our country," IFA CEO Stephen Caldeira says. "When franchise businesses are stronger, so is our economy as a whole."

For investors, navigating the land of franchises can be daunting and confusing. Fisher points out that the common misperception is that franchises are an industry, but many types of industries have companies that franchise.

It is also easy to make the mistake of confusing which companies do and don't. Starbucks (SBUX), for example, franchises internationally, but all U.S. stores are company-owned. For that reason, less than 10% of the revenue generated in the most recent quarter comes from franchising.

TheStreet looked at publicly traded companies that derive a substantial portion of their revenue from franchise operations, starting with costs collected from potential franchisees:
1 of 11

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AFCE $52.44 0.00%
DIN $86.29 0.76%
JACK $68.50 0.09%
MCD $129.85 1.10%
KKD $16.97 0.24%


Chart of I:DJI
DOW 17,667.29 -83.62 -0.47%
S&P 500 2,052.95 -10.42 -0.51%
NASDAQ 4,733.5580 -29.6660 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs