Papa Murphy's reaches out to franchisees

Vancouver-based pizza chain works to address concerns

By Cami Joner, Columbian retail & real estate reporter

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Papa Murphy's International appears to be making moves to patch up its troubled relationships with some franchise owners, an issue that has drawn attention from investment analysts and prompted critical reviews of the Vancouver-based company's recently issued stock.

A recent newsletter from the Papa Murphy's Franchisee Association, representing a group of franchise owners of about 820 stores, includes a letter from association president DJ Cavenaugh outlining steps the company is considering to support some of its weaker franchises. Many new franchise owners, especially those introducing the take-and-bake pizza into new markets, say they scarcely are breaking even after covering costs, including franchise fees. Papa Murphy's released the newsletter to The Columbian. The company went public with a stock sale on May 2 on the Nasdaq Exchange under the ticker FRSH.

The latest newsletter, dated June, follows a February newsletter that spelled out numerous concerns of franchise owners about profitability. That newsletter, which was posted on the Internet and has drawn the attention of some analysts, includes a board update indicating that about one-third of the chain's 1,360 franchised stores were in serious financial trouble. Those approximately 430 stores had averaged less than $8,000 in average weekly sales, the letter stated, up from an estimated 25 percent of the chain making less than the break-even amount in September.

"For a store with a manager and $175,000 debt service, the break-even (point) is approximately $10,800," the February newsletter stated.

Jayson Tipp, the company's senior vice president for marketing, strategy, and technology, said Friday in response to questions from The Columbian that the company's leadership team met with franchisee association leaders in Denver on March 11 to discuss those issues.

"We had an excellent discussion on a wide range of topics including all of the programs and initiatives underway to grow sales in all stores and other opportunities and challenges facing our business over the next 12 months," Tipp said in a written statement. "Papa Murphy's stores experience some of the lowest closure rates in the industry, and our SBA loan track record shows that our franchisees are able to cover loan payments more consistently." Just this week, he said, company leaders completed tour meetings with 150 "franchise partners" on a wide range of issues.

The franchisee association has brought in Papa Murphy's founder, Terry Collins, to work with the company on franchise owners' concerns. Collins would not comment for this article.

Eric DeLamarter, founder of investment management firm Half Moon Capital LLC in New York, said the information in February's newsletter that one-third of the franchise stores were not making break-even sales was a cause for concern. "It's not a sustainable structure as it stands," he said.

One analyst report recommended buying the stock on a "short position," which is the sale of a borrowed security or commodity that expects the asset will fall in value. "If FRSH wants to achieve their store growth goal, they will need to improve franchisee performance in the geographies they want to penetrate," an analysis by Ariana Research stated, referring to the February newsletter to the franchisee group.

The June newsletter outlines a proposal the franchise owners' organization made at the Denver meeting to provide financial relief to low-volume stores. The group proposed a six-month suspension of royalties and advertising contributions for any store with under $6,000 in average weekly sales, with payment deferrals for stores with $6,000 to $8,000 in weekly sales.

"This issue is a clear and immediate danger to the system as a whole, as well as to individuals who have invested their livelihood in Papa Murphy's," the June newsletter said. "Time is obviously of the essence, as we are closing in on the slowest season of our business. We fear many stores will not make it through a long, hot summer."

Company vice president Tipp said in his letter to The Columbian that "significant portion of our national advertising fund has been used to assist developing markets with media purchases and community based marketing. This year, (Papa Murphy's) has tripled the level of media support to lower performing stores and developing markets."

One local franchise owner said Friday the picture isn't as bleak as the one painted in February. The company's struggling shops will see sales improve over time, as the product catches on in markets now dominated by television advertisements for other pizza sellers, said Chris Copp, a Vancouver-based owner of Papa Murphy's shops. That's why the stores are more profitable in markets more heavily saturated by cooperative stores that all contribute to regional advertising, he said.

"It's the nature of the beast," said Copp, who owns eight stores in the Portland area, 12 in Kansas City, Kan., and nine in Wichita, Kan.

His Portland stores pool advertising resources with 83 other stores that buy television ads broadcast from Centralia south to Albany, Ore., and from the Pacific coastline east to Pendleton, Ore.

"Your sales live and die with that," Copp said. "It's really a business driven by TV."

In its earnings report, Papa Murphy's said total revenue increased 18.9 percent year-over-year to $25.1 million in the three months ending March 31, while domestic store sales increased 3.3 percent. Its stock, which initially sold for $11 a share, closed Friday at $10.95, up $1.09 for the day.