The red-hot M&A restaurant sector could soon add a 1,400-unit chain to the mix. Papa Murphy’s is conducting a formal review of all strategic alternatives, chief executive officer Weldon Spangler revealed during the company's third-quarter recap. This includes, but is not limited to, a potential sale of the business. Papa Murphy’s hired North Point Advisors to assist with the review—a process intended “to explore and evaluate strategic alternatives to maximize shareholder value and position the company for long-term success,” Papa Murphy’s said in a statement.
There is no specific timetable for identifying potential transactions or transaction candidates, the company added. There is also no assurance that any transaction will be completed. Papa Murphy’s said it wouldn’t comment further unless its board of directors approves a specific course of action.
“While we are beginning to see traction in our turnaround strategy, our board remains fully committed to pursuing all path to maximize stockholder value and position the business for long-term success,” Spangler said.
Papa Murphy’s reported systemwide same-store sales declines of 2.1 percent in the third quarter, year-over-year. Although negative, the percentage change was Papa Murphy’s best in 12 quarters. And Spangler said the sales trend continued to improve and is tracking slightly positive through the first five weeks of the fourth quarter. Comps dropped 2.4 percent in Q2.
There’s a pretty wide split between the performance of company and franchised units. Global franchised restaurants witnessed a same-store sales drop of 1.8 percent in the third quarter. Company-run units saw a 6.9 percent decline.
Papa Murphy’s is working toward returning to at least a 95 percent franchise system with no more than 50 company-run restaurants by 2020. The chain refranchised seven Dallas restaurants in Q3, bringing the total to 113 company restaurants and 1,347 franchises.
The unit count is shifting in other ways, too. Franchise owners opened one domestic and one international store in Q3 and closed a total of 17 domestic restaurants. Compared to the prior year, Papa Murphy’s cut its franchise count by a net of 47 locations (90 closures, 14 openings, and a net refranchising of 29 company units over the last 12 months). As Papa Murphy’s focus remains refranchising, it expects franchise owners to open about 11 domestic new stores in 2018, and one international.
On the corporate side, Papa Murphy’s unit count is down 35 net compared to Q3 2017. Six closed over the last year along with the refranchised stores.
Spangler credited “the adoption of key marketing messages,” for comp sales improvement this past quarter. During Q3, 39 designated market areas—up from 31—demonstrated comps growth. “These DMAs have fully adopted marketing initiatives with a low, broad and consistent value message, have gone all in on these initiatives and have synchronized all marketing channels to drive traffic to the stores,” Spangler said.
“Markets that have activated everything from digital communications to in-store signage and scripted crewmember messaging are seeing the greatest transaction sales lift while protecting profitability.”
The other driver involves delivering on the company’s two-pillared core strategy—consumer facing initiatives, “which are focused on driving profitable sales through relevance and convenience and non-consumer facing initiatives,” Spangler said.
And non-consumer facing initiatives, focused on improving execution through people and process.
On the first note, convenience is the critical element, Spangler said. In turn, Papa Murphy’s fully rolled out a new online platform in partnership with Olo in March. Spangler said the chain continues to see an increase in the mix of online orders, with an improvement of about 26 percent compared to the second quarter. Check averages are tracking 25 percent higher than in-store orders.
Additionally, delivery orders grew about 67 percent since Q2. Delivery is now available in more than 400 stores through partnerships with third-party providers. Papa Murphy’s expects to expand to 450 restaurants by year’s end after adding relationships with Postmates and EatStreet.
In early September, Papa Murphy’s also launched its new mobile app. “The app has the same great features as the desktop version, allowing customers to add credit cards to their profiles save recurring orders and utilize coupons and promotions,” Spangler said. “In addition, it is seamlessly integrated into our POS to minimize operational impact. While there's been little marketing support to-date around this launch, we already have over 84,000 downloads. We believe the app, along with a loyalty program that we are in the process of developing, is a great facilitator of driving convenience, while giving us targeted marketing capabilities that we have yet to fully activate.”
In regards to non-consumer facing initiatives, Spangler said “strengthening our relationship with our franchise owners,” is the top priority.
“Our success is wholly dependent on their success, and it is our job to give them all of the tools and support that they need in order to thrive,” he said. “We don’t think of this as a onetime initiative to be rolled out but rather, as an ongoing process to build and maintain trust. We have made significant progress along these lines and believe most of our franchise owners would agree.”