Papa Murphy's (FRSH) is trading sharply higher today (+8%) after reporting Q4 results last night. In case you're not familiar with FRSH, it operates the largest Take 'N' Bake pizza chain in the US. Unlike traditional pizza delivery chains, FRSH's customers create their customized pizza online or at the store, then pick-up and bake at home. FRSH actively targets mothers/families looking to solve the "dinnertime dilemma" of providing a high-quality, home-cooked meal, without investing significant time or money.
The vast majority (just under 90%) of its 1,575+ restaurants are franchised. Its Take ‘N' Bake model is attractive to franchisees because it's low cap-ex (no ovens, no freezers), there is no dining area so its store size can be small (cheaper rent) and this model requires fewer employees.
FRSH is small, but showing decent growth with annual revenue as follows: $97.4 mln in 2014 then $120.2 mln in 2015 and $126.9 mln in 2016. While these revenue numbers may seem small considering they have more than 1,575 locations, keep in mind, that the vast majority of those are franchised. As such, FRSH receives only royalties, the actual store sales are not included in these sales numbers. In terms of company-owned sales, FRSH reported 2016 revenue of $82.1 mln, up 10.5% from $74.3 mln in 2015.
FRSH has been struggling lately and the company recently announced some changes to return the business and its franchise system to growth and increased profitability. In January, Papa Murphy's launched its first-ever national advertising campaign. The company is also focusing on driving sales growth through product innovation and the addition of more customer convenience through its recently launched e-commerce platform and the delivery test with Amazon Prime Now.
Another big recent change has been Papa Murphy's CEO Ken Calwell stepping down in January 2017 to pursue other interests. Chair of the Board, Jean Birch, has been appointed interim CEO. The company is currently searching for a permanent CEO and will consider both internal and external candidates. Ms. Birch has over 26 years of restaurant experience, previously serving as President of IHOP Restaurants, President of Romano's Macaroni Grill, and President of Corner Bakery Cafe.
The company has also taken steps to flatten and right-size its corporate structure to be better focused on the support of its franchise owners. And finally, just this week, FRSH launched a limited test of delivery with Amazon restaurant delivery service Prime Now.
Turning to the Q4 results, EPS came in at $0.09, which was down from $0.16 in the prior year period, but a good bit above market expectations. Revenue rose 5.0% year/year to $35.5 mln, in-line with FRSH's January 9 guidance. Domestic system comparable store sales decreased -7.8%, including a 7.5% decrease at domestic franchise-owned stores and an -11.1% decrease at company-owned stores.
Despite some difficult recent results, FRSH believes there is significant opportunity to drive results in its existing business, by increasing awareness and trial through the right combination of advertising and product innovation. As mentioned earlier, an ad campaign was launched in January and then picked up again, just after its perennial favorite HeartBaker Pizza, which the chain features every year around Valentine's Day. The campaign focused on FRSH's core family customer and it featured high-quality products that are sold at aggressive price points.
However, FRSH is less than thrilled with the initial results of its national cable television test, but does believe it helped FRSH change the recent comp sales trajectory, even as the competition got louder and more aggressive since the year began. In terms of the product innovation pipeline, since the successful launch of its Gourmet Delite line of artisan pizzas in Q4 of 2014, FRSH's focus has been on the launch of its new e-commerce platform. As a result, the company concedes that meaningful product innovation has been noticeably absent. FRSH says product innovation will return in 2017 and it expects to maintain a robust new product pipeline going forward with a number of new products in test.
In sum, FRSH was a hot stock in early 2015 when it doubled from $10 in early 2015 to $22.72 in June 2015. However, it has been steadily declining since then, falling below $5. Pizza prices have gotten aggressive out there, Domino's (DPZ) now does the $7.99 carryout special all week long and Papa John's (PZZA) has gotten more aggressive on price. FRSH is still in the early stages of its turnaround and they have a long way to go, but investors seem pretty happy with the Q4 results.