The KKD management team touched upon each of the three key tenets to our bullish thesis at the C.L. King & Associates Best Ideas Conference this morning.  We continue to have a favorable view of KKD’s international growth opportunity, accelerating U.S. unit growth, and the financial profile of the company.  For a more in-depth analysis of these topics, we suggest you revisit our note “KKD: Room to Run.”


The presentation largely highlighted management’s growth strategy, which includes a plan to expand to 900 international stores and 400 domestic stores by FY17E.  We believe KKD will be able to reach this target and will do so while driving strong financial returns, especially as the smaller format shops begin to resonate with the franchisee community.  Management also acknowledged their commitment to increasing beverages as a percentage of sales mix.  Loyalty initiatives are not expected to provide a lift until calendar 2015.


Although KKD reported 2Q14 results that were disappointing to some, we remain comfortable with our thesis.  In fact, despite a miss on the bottom line, we thought KKD had a good quarter and one that was in-line with our expectations.  The company managed to grow both revenues (+10.4%) and same-store sales (+10%) in the quarter – both impressive numbers, in our opinion.


The one point of contention we hear from some of our counterparts concern difficult same-store sales comparisons on the road ahead.  As everyone already knows, this is true, but, we believe management will be able to weather these difficult comps without ceding much sales momentum. 


Highlighted by the chart below, KKD generates some of the best returns on incremental invested capital in the restaurant space.  This, in addition to its capital-light model and accelerating franchise unit development, should allow for high returns to continue well into the foreseeable future.






Howard Penney

Managing Director


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