Herfy makes rapid growth in Saudi Arabia

What's Up: Herfy is strengthening its foothold in the Saudi fast food market, the food franchise is the second behind Mcdonalds, according to Al Rajhi Bank.

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Saudi Arabia's appetite for the fast food chain Herfy is growing as the company consolidates its second spot in the market behind McDonald's, Al Rajhi Bank said yesterday.

Herfy reported a 21 per cent increase in second-quarter net profits to 39.4 million Saudi riyals compared with the same period last year. It also reported a 28 per cent increase in sales to 188m riyals. The stock has rallied 9.4 per cent in the past six months.

Herfy opened four restaurants in the kingdom during the second quarter to reach a total of 177. Same-store sales increased 15 per cent compared with the second quarter last year, much higher than the level of about 7 per cent in the first quarter.

"This acceleration in growth can be mainly attributed to two factors: consumers' spending appetite as a result of the declared two-salary bonus by the government and many private entities, and Herfy's continuous adding of new items to its menu," said Khalid Alruwaigh, an analyst at Al Rajhi, based in Riyadh, in a note to clients. "However, we don't expect Herfy to replicate this growth in the third quarter as it coincides with summer holiday and Ramadan season. We expect Herfy to open seven new stores during the third quarter, in which four have been already opened in July."

The company has also opened two bakeries and has plans for two more before the end of the year.

In addition Herfy is entering a new segment, cafe shops, through the opening of its first store in September in Riyadh. The second store will be opened later in the year in Qassim.

"We believe that Herfy is testing the market by opening one store only, and hence, we don't expect to see a major effect on Herfy's financials this year," Mr Alruwaigh said. "It is worth noting the cafe industry is very competitive in the kingdom and well concentrated."

Herfy's margins are under pressure because of increasing global food prices.

Gross margins declined to 32.5 per cent in the second quarter, compared with 34 per cent in the same period last year. However, this decline was offset by strong sales and lower-than-expected general and administrative costs.

"We expect gross margins to remain within a reasonable level, above 32 per cent," Mr Alruwaigh said.