Papa Murphy’s Holdings Inc., struggling with weak sales and a falling store count, is turning to more simplicity, value and convenience in its bid for a turnaround.
Speaking on the company’s third-quarter earnings call Wednesday, CEO Weldon Spangler said that the Vancouver, Wash.-based chain believes that “product consistency” is a big challenge for the chain.
Same-store sales at the 1,500-unit quick-service chain have declined for eight straight quarters, including a 4.1-percent decline in the third quarter ended Oct. 2. On a two-year basis, its same-store sales have fallen 9.9 percent. The number of Papa Murphy’s locations, meanwhile, has fallen by 40 over the past 12 months.
Spangler believes that the company’s increasingly complex operation has made it tougher for franchisees to make the pizzas and therefore has made consistency more difficult.
“Over time, our operation has become more complex as we’ve introduced many great new products to our menu,” said Spangler, who took over as CEO in June. “That’s made execution in our back-of-house more challenging and created the potential for consistent quality to suffer.”
The company has new training materials, and the chain is planning “more intuitive baking instructions” and “consumer focused videos.”
“We will continue to look for ways to reduce complexity in the stores and improve execution,” Spangler said.
He also said the company needs to improve its “value perceptions.” The chain is testing the “XLNY Pizza,” which is designed “to be a high quality pizza sold profitably at a low price.” The chain tested the pizza at different price points in different markets.
The company also believes convenience is keeping the chain from improved sales. “We continue to believe that our lack of convenience has been an inhibitor to our growth,” Spangler said.
Murphy’s has contracted with the digital ordering company Olo to handle its online and mobile ordering.
And the chain is eager to expand its delivery, something Olo can help with. Papa Murphy’s has delivery in about 80 stores in Seattle, Portland, Denver and Colorado Springs and plans to add more stores “each week.”
Delivery orders are “highly incremental,” Spangler said. The company expects that delivery will be in about a quarter of its locations by the end of the year.
Still, Murphy’s is banking heavily on refranchising, and the company is slowing its unit growth.
Papa Murphy’s took a $4.4 million impairment charge related to 36 underperforming locations in four company markets that it plans to sell to franchisees. “We continue to believe we will be able to refranchise these stores through one or more franchise owners who will develop additional stores in the markets,” CFO Mark Hutchens said on the earnings call.
Executives said that company stores have been hurting earnings. Hutchens said that stores opened by the company over the previous 11 quarters reduced earnings before interest, taxes, depreciation and amortization by $400,000. He said they hurt earnings per share by $1.04.
Still, franchisees are closing more locations than they are opening. Over the past year, franchisees closed 78 locations. They opened 47 units and acquired another nine from the company, leading to a net decline of 22 franchisee-owned units. The company closed another 18.
Papa Murphy’s has started working with a broker to sell as many as 100 company owned locations to franchisees, and believes it could sell 35 this year.
The company said it plans to get to 95 percent franchisee owned “as soon as possible” and is “taking steps to accelerate that transition.”
Contact Jonathan Maze at [email protected]
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