Papa Murphy's outlines key issues, challenges in SEC filing

By Cami Joner, Columbian retail & real estate reporter

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Analysts and prospective investors will be examining the financials of Papa Murphy's International in the weeks ahead in preparation for the stock sale on a date that has not been announced. Here are some of the key points the company has presented, as required, in the S-1 form of its Security and Exchange Commission filing:

Growth strategy.

Papa Murphy's carefully outlines a growth strategy that depends as much on selling more franchises as it depends on increasing pizza sales. It wants to leverage both to cultivate profits.

Papa Murphy's leaders estimate the company can grow from the 1,400 or so stores that now make up the chain to approximately 4,500 stores across the United States. That plan calls for crowding another 2,500 stores into existing markets, a strategy that relies on franchisees who are willing to pay an average of approximately $200,000 for the first fiscal year. The cost includes a standard initial franchise fee of $25,000.

Franchisees pay a continuing royalty fee of 5 percent of weekly net sales for the right to use the Papa Murphy's trademark. The franchisees also contribute 2 percent of weekly net sales to a national advertising and development fund.

Papa Murphy's franchise owners opened 98 stores in 2013. They are expected to open between 105 and 115 new stores this year.

"We expect the majority of our expansion will result from new franchise store openings," along with a few strategically placed company-owned stores, the filing states.

Papa Murphy's also intends to broaden its appeal by introducing new offerings at both lower and higher price points.

Challenges to growth.

The SEC requires companies to present every imaginable threat to profitability, ranging from the farfetched to the real risks that exist in a market economy. Papa Murphy's lists several realistic worries for prospective investors, both on Wall Street and in the marketplace.

At the corporate level, the company first must be able to secure a stock price that will appeal to investors. It also must realign its relationship with Lee Equity Partners as the company diminishes or ends its relationship with Papa Murphy's. The investment group now has a controlling membership on the board of directors, and the SEC filing indicates uncertainty about its future. Its investment decision likely will be a key factor in setting the company's direction, as well as the appointment of executive-level staff. Papa Murphy's President and CEO Ken Calwell's contract expires in June.

At the retail level, Papa Murphy's also faces competition to attract and retain franchisees to drive its growth and a steady supply of healthy food ingredients to maintain its image for offering fresh pizza. It says it needs to establish a national brand identity in competition with the four much larger chains that dominate the pizza market, while trying to capture market share from smaller competitors. It now operates in 38 states, Canada and the United Arab Emirates.

The company notes a concern that its stores could end up competing against each other, a phenomenon known in the industry as cannibalization, as it expands operations.

Competition.

Papa Murphy's SEC filing states that it has 20 times more outlets than the next-largest take-and-bake pizza purveyor, but it sees its competition as being primarily against other pizza restaurants and ready-to-eat take-out venues. It acknowledges numerous competitors, among them, grocery stores offering all manner of take-and-bake and frozen pizza pies and any companies offering take-out food for a family weekend meal at home.

The SEC filing adds that Papa Murphy's leaders see plenty of room to grab market share in the $38 billion fast-food pizza industry that still has room for consolidation. The top four pizza chains together only account for about 41 percent of the market, the SEC filing notes. The market is expected to reach $44 billion by 2017.

Profitability.

Its market rivals are all threats to Papa Murphy's bottom line, as it struggles to keep its consumer prices low while dealing with franchise-related issues of real estate acquisition and employee costs, as well as fluctuating costs for cheese, dough and fresh ingredients.

"They're facing higher commodity costs for cheese and flour and a lot of new competition. That's why over the last few years, profit margins are getting squeezed" at some pizza chains, said John Macaluso, a California franchise consultant who spent a portion of his career at Burger King. He started with the chain shortly after it was purchased by Pillsbury Corp. and stayed with the company as it went public and was swallowed by a corporate investor before again going public.

Circumstances for the franchisees changed, sometimes for better and sometimes for worse, with every change of corporate transaction, Macaluso said. "It all depends on who buys it," he said.

In the case of the change underway at Papa Murphy's, he said, "You have to realize that the corporate team, Lee Equity Partners, has owned Papa Murphy's for three or four years and now they want to sell and make a profit on it."