Papa Murphy’s released its investor report for the fourth quarter of 2018 on Thursday — coincidentally Pi Day — and the results were modestly good news for the take-and-bake pizza chain, which is headquartered in Vancouver.
Thursday’s report comes at a time when Papa Murphy’s has been struggling for several years amid a changing food market landscape, and officials pointed to the fourth-quarter results as an indication that the company’s recovery efforts are on the right track.
“We’ve made great strides to make Papa Murphy’s an even more convenient option for consumers,” CEO Weldon Spangler said in a Thursday conference call with investors and stock analysts.
Revenue was reported at $32 million for the fourth quarter of 2018, matching the unaudited results that the company first published in late February, and exceeding the $28.01 million guidance that stock analysts had offered — although that still represents a year-over-year decline from the $38.5 million in revenue in the fourth quarter of 2017.
The company’s fourth-quarter 2018 income was $2 million or 12 cents per share, again beating analyst guidance but falling short of the $12 million reported for the fourth quarter of 2017.
Spangler and Chief Financial Officer Nik Rupp said the large decline in revenue and income was partially due to some extenuating circumstances that led to higher reported income in 2017, including franchise store contributions to a one-time marketing fund that was used to conduct a national TV marketing test.
Sales decreased 16.9 percent year-over-year during the fourth quarter, although Rupp stressed that the decline was largely due to a decrease in the total number of stores. The same-store sales rate decreased by 1.3 percent compared to the fourth quarter of 2017, and that was characterized as a positive sales trend compared to recent quarters.
Papa Murphy’s made headlines in November when it announced that it had undertaken review of strategic alternatives including the possibility of selling the business, but that topic went largely unmentioned on Thursday in both the report and the call.
“Although we’ve made significant progress, were not yet in a position to make further public comment regarding the review until it is completed,” Spangler said.
Spangler’s portion of the call focused on multiple initiatives that the company undertook last year to try to drive positive sales, all centered on a core message of broad and consistent value for the product.
Those initiatives included a new online ordering platform rolled out in March, a mobile app that debuted in the fall, a home delivery option in some stores and an overall shift toward increased digital and targeted marketing efforts that emphasized the convenience of the Papa Murphy’s brand.
Online ordering continued to increase in the fourth quarter, Spangler said, growing by 34 percent over the third quarter of 2018, and online orders continue to be higher than in-store orders — now 28 percent larger on average.
Deliveries are still a relatively small percentage of Papa Murphy’s orders but grew to a record 4 percent in the fourth quarter, and Spangler said the company’s goal is to double the number of stores offering delivery by the end of 2019.
The mobile app has been downloaded 243,000 times, Spangler said, and has generated almost the same number of orders. The company plans to add a loyalty program to the app in the coming year.
The 1.3 percent same-store sales decline was an improvement over prior quarters, Spangler said, and he added that several regions showed consistent positive sales throughout the quarter and the company overall showed positive sales in the month of October.
Spangler said the company has also made progress in an ongoing effort to strengthen its relationship with its franchise owners with the introduction of a new in-store skill training program that began in the fourth quarter, and a plan for more regional franchise owner meetings this year.
Those efforts have been met with increased buy-in from franchise owners, he said, citing as an example a free-pizza promotional offer that the company ran in January. The deal was arranged in four weeks, and 96 percent of the company’s restaurants joined in.
“That kind of participation would have been incredibly hard to accomplish, if not impossible, just a year ago,” Spangler said.
Papa Murphy’s has also been pursuing an initiative to refranchise many of its company-owned stores, and Rupp joined the call to outline the changes in the company’s store lineup that took place in the fourth quarter and 2018 overall.
Papa Murphy’s ended the fourth quarter with 106 company-owned stores, a decrease of seven stores from the end of the third quarter and 39 stores from the end of 2017.
There were 1,331 franchised Papa Murphy’s locations at the end of the quarter, he said, and 15 new franchised stores are expected to open in 2019.
The company’s goal is to have no more than 50 company-owned stores by the year 2020, Rupp said, with franchised stores making up at least 95 percent of the company’s overall portfolio.
“2018 was a year where we built a solid foundation for long-term sustainable growth,” Spangler said in his concluding remarks. “We continue to believe that we have the right strategic initiatives in place to drive long-term success for Papa Murphy’s.”
Analysts did not ask any questions during the conference call. But analyst Colin Kelly spoke to The Columbian on Thursday on behalf of Signia Capital Management, which is Papa Murphy’s third-largest institutional shareholder. Kelly said the company’s explanations for the revenue declines made sense due to the number of one-time costs Papa Murphy’s faced in 2017.
“A better measure of the company’s progress would be to look at the fact that pro forma net income for the full year 2018 was $7.3 million or 43 cents per diluted share compared to a pro forma net income of $1.9 for 2017 million or 11 cents per diluted share,” he wrote in an email. “Additionally, adjusted (earnings before interest, tax, depreciation and amortization) for 2018 was $22.3 million compared to $20.5 million a year ago.”
Kelly said Signia supports the management’s efforts to turn the business around, and said that a “fundamental turnaround” or a sale could both result in increased value for consumers. Signia also supports the company’s push for online ordering, he said, which is a major sales driver for many of Papa Murphy’s industry competitors.
“We have been supportive of management’s efforts to enhance shareholder value through a fundamental turnaround in the business,” he wrote.
Johnathan Maze, a food industry writer at Winsight Media, said a potential sale of the business would be possible but tough to imagine due to the company’s current position.
“It’s a franchised brand with some struggling operators and a business that isn’t quite as convenient as customers want these days,” he wrote in an email. “Plus the chain isn’t growing — it’s been shrinking. The product is delicious, but that hasn’t been enough recently.”
At closing time on Thursday, Papa Murphy’s stock — which trades on the Nasdaq as FRSH — was up 7.83 percent to $6.20, although it dropped to $6 after-hours. The company’s stock price has been hovering around $5 for the past few years.
