Restaurant franchisor MTY Food Group Inc. is taking a bite out of its own empire, closing 68 underperforming stores over the next nine months.
The Montreal-based company operating restaurants under 80 brands, including Thai Express, Manchu Wok and Bâton Rouge, announced the reduction Friday. It said the closures will span some Papa Murphy’s locations but did not disclose what other banners are part of the cull.
Chief executive Eric Lefebvre put the blame on a lack of sales. The closing locations have collectively lost the company more than $10 million in the last year and for the most part, their performance was “deteriorating.”
“The decision will reduce our store count in the near term, but we believe it is the right long-term action for the business,” he told analysts on a call.
“It will allow us to reduce losses, improve the quality of the corporate store portfolio and focus our resources on locations and brands with stronger return potential.”
MTY has 7,040 locations. The vast majority are franchised or under operator agreements and more than half are in the U.S. About 230—including the 68 closing—are corporately-owned.
The closures are part of a strategic review MTY began in November with an eye to boosting shareholder value. It has warned the process, which is continuing, could result in a sale of the business.
As part of the review, Lefebvre said MTY analyzed each of its locations. Where there was a path to improvement, it invested in the store, but in other cases, the fundamentals just didn’t make sense to continue on.
Even though many Papa Murphy’s locations are on the chopping block, the pizza chain saw a lift in sales when the U.S. men’s national soccer team played in the World Cup recently.
However, the brand is facing intense competition and a lack of consumer loyalty that has made promotions even more necessary to drive sales.
Some of the closing locations were from three clusters of Papa Murphy’s stores MTY repossessed two years ago with a belief that they could be turned around.
“After nearly two years of efforts and some successful turnarounds in those markets, we came to the conclusion that these markets are probably not appropriate for Papa Murphy’s at this time and we chose to close a lot of these stores in these locations,” Lefebvre explained.
Yet he said the brand doesn’t account for the majority of losses or the bulk of the $10 million to $12 million MTY will spend to shutter the 68 locations and settle those leases.
More closures and sales of locations could follow, he said.
“It’s not a fire sale, but we’re also in the process where we can reduce the corporate store portfolio,” he said.
Lefebvre revealed the closures at the same time as MTY reported its second-quarter results. The period ended May 31 brought $15.4 million in net income attributable to owners or 67 cents per diluted share for the quarter ended May 31.
The result compared with a profit of $57.3 million or $2.49 per diluted share in the same quarter last year.
On an adjusted basis, MTY earned 97 cents per diluted share in its latest quarter compared with an adjusted profit of $1.17 per diluted share a year earlier.
Revenue for the quarter totalled $279.9 million, down from $304.9 million in the same quarter last year, as same-stores sales fell 2.1 percent.
Lefebvre said the quarter was shaped by rising costs and shifts in consumer demand.
“You look at chicken or beef, it’s gotten a lot more expensive. The availability of some of our products, for example, our ribs, is a little bit more challenging and the cost is going up,” he said.
At the same time, consumer demand is “a little bit choppier.”
“It’s hard to say that the consumer is not consuming because they are going to restaurants and consumers are out there, but they’re certainly a little more difficult to attract to our stores at the moment,” he said.
“People are not throwing money at us so we really need to work for each meal opportunity.”
Lefebvre wasn’t sure whether that’s a sign of the customer being more discerning or feeling more of the pinch from higher costs. Gas prices, for example, have risen significantly amid conflict in the Middle East.
“That does take away consumer discretionary dollars out of the restaurant space because it’s going into the gas tank,” he said. “So we’re looking forward to see things going back to normal.”
