Doughnut maker Krispy Kreme Doughnut Inc. (KKD) recently formed a venture with an affiliate of Sun Holdings, LLC for the refranchising of three company-owned shops in Dallas, Texas. Upon completion of the deal, these three stores will be Krispy Kreme’s franchised stores. The deal is targeted to speed up Krispy Kreme’s domestic franchise expansion.

We believe, the latest alliance reflects the franchisee Sun Holdings’ intent to make Dallas one of the prime markets for domestic expansion considering the state’s potential to generate about $40.8 billion in restaurant sales, as per the national restaurant association.

Investment Management company Sun Holdings boasts superior local market knowledge and has a proven track record in the restaurant industry. It operates about 400 restaurants in Texas and Florida, including brands like Burger King Worldwide, Inc. (BKW), AFC Enterprises Inc.’s (AFCE) Popeye’s, Golden Corral and Arby’s.

Since fiscal 2009, this Winston-Salem, N.C. based-company signed a number of new franchise agreements. As of Feb, 2013, there were 9 Krispy Kreme franchise stores in Texas. In fact, Krispy Kreme also has future development agreements with existing franchises in Texas to open 4 new stores.

Franchising a large chunk of its system reduces the capital requirements of the company and thereby drives earnings per share and return on equity (:ROE). Alongside, free cash flow will continue to grow, allowing reinvestment for increasing brand recognition and enhancing shareholder return.

While restaurateur Burger King expects to have 100% of its system franchised by 2013, another burger-giant, McDonald’s Corp. (MCD) currently has around 81% of its restaurants franchised.

As of May 5, 2013, this Zacks Rank #2 (Buy) company operated 95 company outlets and 678 franchises globally. Management intends to own over 400 domestic shops by Jan 2017 most of which are likely to be franchised.

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