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Sales challenges take root at Freshii

The healthy fast-casual chain’s stock has lost 80% of its value since its 2017 IPO, says RB’s The Bottom Line.
freshii
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the bottom line

The healthy franchise Freshii went public in its native Canada in early 2017 with a promise of rapid growth.

The company was hoping to catch on with a consumer increasingly demanding healthy fast-food options and planned to triple its unit count by the end of 2019 from 244 at the time.

But the chain has run into challenges that have put that promise into question.

The chain’s same-store sales, which had grown solidly for years despite rapid unit growth, slowed down last year and fell 6.1% in the fourth quarter and 1.2% for the year.

Closures have also started popping up. The chain closed 18 locations last quarter. That was offset by 26 openings, but the closures have slowed considerably the chain’s unit growth.

The moves sent the company’s stock falling again. They fell 17% the day after the earnings report and have fallen since. Freshii’s stock has declined by 80% since that January IPO.

“I’ve spent a significant amount of time over the last 100 days, assessing how we ended up where we are today, with repeated challenges on net store openings, same-store sales trends that have recently turned negative, a cohort of underperforming stores that need to be addressed and a resulting share price that sits around $3.25, down significantly from our highs of just 18 to 24 months ago,” CEO and Founder Matthew Corrin said on the company’s fourth quarter earnings call last month, according to a transcript from the financial services firm Sentieo. The stock is now below $2.50.

Freshii has long demonstrated an ability to get attention, in part because of Corrin’s marketing prowess.

Corrin generated attention by making offers to much larger chains. He once wrote a letter offering to co-brand with McDonald’s Corp. as that chain had sales challenges. He also offered franchises to closing frozen yogurt operators and to Subway franchisees.

That, plus its promise of healthy fast food, earned it a lot of franchises. Unit count in the U.S. and Canada has grown by 80% since the IPO. Systemwide sales last year grew 25% to $171.7 million.

At the same time, the company has inked deals with companies to put its food on airlines—it agreed to put its food on Air Canada flights in 2017, for instance, and once had stores in some Target locations before that deal ended more than a year ago.

Last month, meanwhile, the company did it again, announcing an agreement with Walmart Canada to put grab-and-go items in the retailer’s locations North of the border.

But health food chains have a mixed record of success. The healthy franchise chain Lyfe Kitchen has struggled. The 50-unit My Fit Foods abruptly shut down all 50 of its locations in 2017. Yet the chain sweetgreen last year received funding that gave it a $1 billion valuation.

And growth demands for many franchised chains can often lead to mistakes. Freshii has been under immense pressure to add units, and a unit-growth warning late in 2017 send its shares falling at the time.

“For three years of very rapid growth, going from 178 stores at the end of 2015 to 439 stores at the end of 2018, we have more partners than we are comfortable with who are not yet reaching their target financial goals,” Corrin said. “So we are going to be focusing heavily on driving franchise partner profitability in the coming quarters.”

Indeed, franchises don’t grow if they are not profitable.

Corrin noted that in 2018 the company lapped same-store sales growth of 6.4%, as well as 7.7% the year before, so the chain faced difficult comparisons.

Corrin said that two-year same-store sales growth in 2017 was 30% in the chain’s home Toronto market, and while same-store sales slowed in that market last year, profitability remains “extremely healthy” there.

In Western Canada, he said, the chain grew from 80 to 110 stores. “We saw some cannibalization as a result of very strong annual store growth in that region,” Corrin said. “History tells us that this cannibalization should be temporary and these stores ultimately benefit from increased brand awareness and start growing again.”

Still, the sales challenges led to more unit closures late last year and Corrin suggested more could be coming.

“These decisions are always tough, but they are necessary in our opinion and important to ensure we are making the right decisions for the brand, partners and shareholders over the long term,” Corrin said. “We will continue to evaluate and address this bottom cohort of stores in 2019 in order to ensure the brand is represented in its best form at all locations.”

Some stores could be “transferring an underperforming store to another already successful partner.” But others will close or be relocated.

Corrin also said the company is becoming “more measured” as it chooses franchisees.

Freshii is testing menu simplification to improve operations and the customer experience to build same-store sales.

Freshii will also look at upgrading its proteins and certain premium toppings. And the chain is planning its first global media campaign called “Let there be lunch,” which will include global media, public relations, in-store and in-market efforts.

Freshii has done more regionally focused traditional ads with some radio, billboards, digital offers, bus ads and flyers.

“We have a lot of work ahead to get back to the type of growth and results that I expect from my franchise partners, from our shareholders and from myself, quite frankly,” Corrin said.

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