Previously: Papa Murphy’s International last summer was reportedly planning a public stock offering.
What’s new: The company filed its initial public offering with the Securities and Exchange Commission on March 12 to raise up to $70 million.
What’s next: The SEC will spend the next few weeks reviewing the documents in detail and, assuming regulators approve, Papa Murphy’s stock price will be set to trade under the symbol “FRSH” on the Nasdaq exchange.
Papa Murphy's International has long maintained a low-key local presence as it expanded its network of franchised pizza outlets across the nation, while quietly increasing its workforce to 183 employees at its modest headquarters near Westfield Vancouver mall.
But the seller of take-and-bake pizzas shed more light on its ambitions this month with its bid to become one of the few Vancouver-based companies listed on the New York Stock Exchange. The company, controlled by a New York investment firm, filed papers to the Securities and Exchange Commission to raise $70 million through an initial public stock offering, or IPO, on the Nasdaq Exchange.
It's a move fraught with opportunities and challenges for the company created 19 years ago through a merger of two chains, Papa Aldo's and Murphy's Pizza. With the IPO filing, the company now faces increased scrutiny of its books by earnings-hungry investors as it sheds its private skin and goes public. On the upside, the move could raise the money to help pay off its debt to Lee Equity Partners, a firm that acquired controlling interest in Papa Murphy's in 2010 and brought in its own management team headed by Ken Calwell, a former top executive at burger chain The Wendy's Co.
Beyond that, Papa Murphy's hopes to secure the resources to expand its reach well beyond its present 1,400 outlets into new national and international markets. The company sees potential for up to 4,500 outlets selling its products targeted at busy families who want healthy, inexpensive meals. It expects this year to grow by between 105 and 115 stores.
But Papa Murphy's bid for growth in a hyper-competitive industry faces hurdles. Its filing reveals the company has lost money the past three years even as it added outlets and saw same-store sales increases in each of those years. And while Papa Murphy's is ranked in fifth place in both sales and number of outlets among pizza chains, its net losses — including a $2.6 million loss in 2013 — as well as a lack of national recognition and current unsettled relations with some franchisees are among the company's challenges.
The last issue was not discussed in the SEC document. However, a strong undercurrent of discontent from the company's franchisees surfaced just prior to the company's filing. The dissatisfaction is apparent in a letter written to the Papa Murphy's board by a group of franchise owners who represent 820 stores, including owners of multiple stores. The letter, obtained by The Columbian, was signed by Larry Hodge, president of the Papa Murphy's Franchisee Association and owner of Papa Murphy's outlets in California. Hodge declined to comment, referring calls to the corporate office, as required by company policy.
The Sept. 20 letter raised several issues, including poor communication between management and franchisees; faltering profitability at franchise stores; a sense that Papa Murphy's was shifting its focus from quality to low-cost offerings; and questions about the company's strategy to pull off a successful public offering. The tactics, the letter asserted, included buying some of its most profitable franchises for conversion into company-owned stores.
The company's SEC filing also reveals that, while the company was adding new cost-competitive products and franchisees, it was losing money. As it fought for market share in the highly competitive fast-food industry, Papa Murphy's lost $2.6 million on total revenues of $80.5 million in 2013. It lost $2.1 million in 2012 and $606,000 in 2011.
The company's bottom line looks better when adjusted before interest, taxes, depreciation and amortization. Its adjusted EBITDA earnings, as they are called, were $24.4 million in 2013, an increase of 10.4 percent over the previous year. In 2012, Papa Murphy's lists its adjusted EBITDA at $22.1 million.
Franchise owners assert that management made strategic moves to boost the company's adjusted EBITDA earnings, while noting that their earnings suffered. In their letter, they cite figures from a benchmark study showing 324 franchise stores — approximately 25 percent of the chain — operating at a loss and 401 stores making less than required to cover the standard debt service to open a store.
"The primary challenge our brand faces surrounds the severe decline in profitability of Papa Murphy's franchised stores in recent years," the letter stated.
The letter asserted the company had slowed its expansion into new markets, offering weak initial returns but with long-term growth potential. Papa Murphy's SEC filing confirms it purchased 10 stores in 2013 to grow its portfolio to 69 company-owned stores, which comprise about 5 percent of all Papa Murphy's outlets.
Papa Murphy's executives had scheduled a March 12 interview with The Columbian to discuss the letter. But after its March 11 stock offering filing, the company said it could make no comment during a 30-day "quiet period" required by federal securities law.
With neither Papa Murphy's or its franchisees talking, it's difficult to gauge the depth of discontent with management decisions and strategies. But strained relationships between a franchise-based company and its franchise owners are not uncommon in a competitive industry that is highly sensitive to rapid changes in consumer tastes and price concerns.
For example, tense relations between franchisees and management once plagued the fried-chicken chain Popeye's Louisiana Kitchen.
The company hired Cheryl Bachelder as CEO in 2007, and she is now credited with turning the chain around by listening to franchisees about new store designs and other changes. Papa Murphy's franchisees cite the Popeye's turnaround in their letter as an example to emulate.
Examples of botched relations abound. Among them, Denver-based Quiznos Corp.: which last week filed Chapter 11 to restructure its sagging business. Many of its franchise owners complained of being squeezed out by high operating costs.
It is also unclear how many Papa Murphy's franchise operators agree with the letter to Papa Murphy's board. Although the letter states the association represents owners of 820 stores, its sentiments do not reflect the opinion of local outlet owner Jim Lovelace, who co-owns 37 stores, including some in Vancouver.
Lovelace, a Vancouver resident, disagrees with some of the group's core criticisms, even though he is a member.
"In any franchise organization, you're going to have different points of view, shall we say," he said.
Lovelace speculated the franchisees' issues about quality were centered around a specialty pizza introduced in 2012 as the $5 Fave. The lower-priced pizza is promoted in plain cheese, pepperoni-only and sausage-only varieties to attract new customers.
"It's a smaller pizza; thinner," Lovelace said. "It was an opportunity to get a low price out there."
As for Papa Murphy's best pitch to investors, the company must show high sales volume, even if increasing sales comes at the expense of franchisee profitability, says California industry consultant John Macaluso.
In the SEC filing, financial statements show Papa Murphy's stores average sales of $11,100 per week. But a summary of the franchisees' letter asserts that average weekly sales for new stores were less than $7,000. Franchisees say those stores "do not generate enough return on investment to justify the $250,000 to $300,000 investment they require."
"If the company is preparing an IPO, they'll want to show a higher average unit volume which looks good to investors," said Macaluso, with the Newport Beach firm The Franchisee Expert.
"But the franchisee is making less money at the end of the day."
Papa Murphy's Timeline
1981 — Take-and-bake pizza operation Papa Aldo’s is launched in Hillsboro, Ore.
1984 — A similar start-up, Murphy’s Pizza, is launched in Petaluma, Calif., by Bob Graham, who concocts a take-home dough recipe that produces restaurant-style pizza.
1988 — Graham convinces fast-food executive Terry Collins of the potential for the take-and-bake pizza concept. Collins purchases 51 percent interest in the seven-store Murphy’s chain for $500,000.
1990 — Collins buys take-and-bake chain Papa Aldo’s and quickly replaces the chain’s inferior product with Murphy’s superior pizza.
1995 — The chains merge operations and incorporate as Papa Murphy’s International Inc., with a total of 140 stores. Collins establishes the headquarters in Vancouver, where he lives.
1997 — Papa Murphy’s revenue tops $120 million as the company opens its 300th franchise, making it the nation’s 11th-largest pizza chain.
1998 — The company opens its 400th store, in Vancouver.
1999 — Tom Morrell is named company president. Collins remains Papa Murphy’s chairman and chief executive officer.
2003 — With sales of $332 million, the company appoints veteran fast-food executive Mark Laramie as president. The chain is voted “Best Pizza Chain in America” by Restaurants and Institutions Magazine, a title it still holds.
2004 — Charlesbank Capital Partners buys Papa Murphy’s and provides liquidity for the existing shareholders.
2005 — The chain expands into the Midwest and South, growing to more than 850 stores. John Barr is named chief executive officer and Jeffrey Hill becomes chief strategic officer to replace founders Terry Collins and Bob Graham, who continue as investors.
2007 — Papa Murphy’s hires Clarice Turner, a former Yum! Brands and Taco Bell Corp. executive, as president and CEO. The company grows to 1,000 stores and $500 million in revenue.
2008 — The company is named fifth-largest pizza chain in the nation, based on number of outlets, which rises to 1,335 stores. It reports revenue of $585 million.
2009 — The company reduces its growth projections and leaders caution growth plans could be curtailed by tightened business-lending standards during the recession. Turner resigns.
2010 — New York-based Lee Equity Partners buys the 1,200-store Papa Murphy’s chain for $180 million, positioning the company for a new phase of expansion.
2011 — Amid slumping pizza sales, major sellers such as Pizza Hut and Domino’s unveil new products and sales strategies. Papa Murphy’s joined the price-war hostilities with a $10 pizza and tests a line of competitively priced menu items.
2011 — Papa Murphy’s names a new president, Ken Calwell, a former chief marketing officer for the Wendy’s burger chain and other companies. Sales grow to $702 million, up 10 percent from 2010.
2012 — The company agrees to open 100 stores in the Middle East. It also teams up with Franchise America Finance and Bancorp Bank on a $7.5 million credit program to supply loans for at least 100 new stores in 2013.
2013 — The company receives top rankings for service and cleanliness in two consumer surveys, earning the rank of No. 1 pizza chain in the “2013 Consumer Picks” survey conducted by Nation’s Restaurant News.
2014 — The Vancouver-based take-and-bake pizza chain files an initial public stock offering with the U.S. Securities and Exchange Commission to raise up to $70 million under the ticker symbol “FRSH” on the Nasdaq Exchange. It operates a total of 1,418 stores.
Sources: The Columbian files, Papa Murphy’s International