Krispy Kreme Doughnuts (NYSE:KKD) is buying Michigan -- or at least the rights to the Krispy Kreme market in Michigan.
The maker of hot glazed doughnuts has announced an intent to acquire a 73% interest in the Michigan market from franchisee Dough-Re-Mi, Co., which will likely retain the remaining interest. The proposed purchase price: $18.6 million in Krispy Kreme Doughnuts. (No, not doughnuts themselves, silly -- $18.6 million in company stock.)
Krispy Kreme operates 310 locations and buys back franchisee locations when feasible, partly because results at company-owned stores are typically stronger than those at franchises.
Under the proposed deal, Krispy Kreme will acquire five of Michigan's seven Krispy Kreme locations, a move that would be modestly accretive to earnings after one year. Two stores will be closed and later reopened nearby, with better locations and updated facilities.
Operating relatively few stores across the country and around the world, Krispy Kreme has been a growth story straight through the bear market, rising steadily since going public in 2000. (It took its time going public, too, having been founded in 1937.)
In 2002, Krispy Kreme had 13% of the doughnut shop market share in the U.S., more than double its reach of just a few years earlier, though still well below Dunkin' Donuts' 57% share. The English-owned standby has more than 5,000 locations, making it more than 15 times larger. But Krispy Kreme has gone from 150 stores to more than 300 in less than three years, and doesn't plan to stop aggressive expansion anytime soon.
After growing earnings 47% annualized in the last five years, 32% annualized earnings growth is estimated for the next five years, mostly through new store openings, but also via new concepts, including specialty sales in Wal-Mart (NYSE:WMT). At $39.50 per share, Krispy Kreme's stock trades at 34 times 2004 earnings estimates.
