Monday, June 6, 2011

Pizza Inn, New Concepts, and Press Releases.

Often times, investors will simply take a press release or company filing at face value, without investigating any further. Many times, this can work out, however, sometimes a quick phone call can have a huge effect on an investment decision.

Since I have been a long time follower of Pizza Inn, I found this press release to be quite interesting. In it, we learn that they are testing out a new concept store, which, from what I can tell, is basically going to be the Subway of the Pizza World (or, kind of like a Pizza Hut Express)... quick, custom, personal size pizzas in 5 minutes. A pretty neat concept, which seems like it could work very well. In the press release, there is mention of the company franchising up to 100 units a year. Which sounds REALLY good; especially when you take into consideration that there are presently less than 300 Pizza Inn locations- their franchise base would vastly grow, which, would likely explode the profitability of the firm.

I called the contact person on the press release, here is the rough layout of a conversation I had today (not verbatim, but pretty close)...

Monica Feid: "This is Monica."

Me: "Hi, this is Jeff Moore and I am a potential investor in Pizza Inn. I have a question for you regarding the press release of the new pizza concept store."

Feid: "Yes, Pie Five."

Me: "Yes, I was curious as to the number in the press release, the company expects to franchise 100 per year? How did they come up with this number, are there already franchisees interested in it?"

Feid: "Well, it isn't a franchisable concept yet, there is no FDD for it. There is one store that they are testing at the corporate level."

Me: "Then why make mention of the 100 franchised locations a year?"

Feid: "They are testing it at the corporate level first."

Me: "But where did they get that 100 number from?

Feid: "That was the number that Charlie said."

Me: "Right, but, I am just trying to get a feel for where that number came from? Why 100 a year? Why would they say that if it is untested?"

Feid: (Chuckling) "Well, that is what they said in the press release."

Me: "Ok. Whatever. Thanks for your time."


Now, I am sure that the company probably does have plans to franchise up to 100 of these restaurants a year. But, I do question when a company says such good things about a concept that is completely untested. I also question that, in light of the fact that the company has been in business since 1958 and according to their last quarterly filing, there were 293 franchised locations... In the same filing last year, there were 308... Not the most stellar thing for results. While trends are often times meaningless, the closure of franchised restaurants may indicate problems with the company.

I do find it bothersome that they would want to talk up the concept, especially when there is the potential for there to be significant fees coming in from the new franchisees (which could make investors become bullish and pay more for the company). Additionally, even if the company only got a fraction of the revenue from the new concept that they do with their present operations, with even 50 new locations a year, that could mean huge returns for shareholders... But, is it wise for people considering going long, to bank on the concept doing well?

I guess what I am getting at, is that if any company would ever say that they could increase their franchise base by as much as 30%+ a year on a new concept, they would probably be met with a slew of skepticism. Are we really to believe that this pizza chain can grow restaurant count in a way that is numerically about even to the likes of an operation that is of the caliber of Chipotle, but, in relative percentage terms puts them to shame? Granted, Chipotle operates their stores and Pizza Inn plans to franchise them; however, the economics of CMG are stupendous, and I have trouble imagining a franchisee of PZZI having less trouble opening up shop than CMG. A Chipotle is cheap to open up and cash flows like crazy.

Here are the store numbers for CMG:

Sorry, but, I don't buy the story in the Pizza Inn press release... With that said, the company seems to be well run in many other regards; in fact, I have historically really liked the company and have often been on the verge of buying their stock numerous times. After having one of the more interesting board room spats in recent memory, the company is actually making money now and seems poised for growth. It is unfortunate that often times, companies over promise on new concepts that are untested. In the spirit of fairness, since I talked to the contact person on the press release and not the CEO who made the comment, I will be more than happy publish any response from PZZI.

To sum up with some good puns, I think that the promise of the new concept is a bit over baked, and frankly, that makes me lose a bit taste for the company.

Disclosure: None. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, do, talk, write, or so much as even think about.

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