Is Papa Murphy’s in trouble as up to 50 pizza stores face closure?

Papa Murphy’s is preparing for a sizeable retreat after parent company MTY Food Group identified dozens of loss-making US restaurants for closure.

MTY plans to shut 68 corporate-owned locations across its portfolio, including roughly 45 to 50 Papa Murphy’s stores.

The process will take six to nine months, with most closures expected during the fiscal third quarter.

The affected restaurants collectively lost more than C$10 million over the past year, while closing stores and exiting leases could cost another C$10 million to C$12 million.

Management calls the move a disciplined clean-up, but Papa Murphy’s is clearly carrying more strain than MTY’s other US brands.

Why Papa Murphy’s is taking most of MTY’s cuts

The closures are heavily concentrated in several groups of Papa Murphy’s restaurants that MTY brought under corporate control about two years ago.

Chief executive Eric Lefebvre told analysts that the company had repossessed three clusters of stores from franchisees because it believed they could be turned around.

Some locations improved, but MTY eventually concluded that several of the markets were not well-suited to the take-and-bake pizza chain.

Between 45 and 50 Papa Murphy’s restaurants are now expected to close, although Lefebvre said they do not account for most of the losses or exit costs associated with the wider 68-store programme.

On MTY’s earnings call, Scotiabank analyst John Zamparo pressed management on the timing and financial nature of the plan.

Lefebvre said the bulk of the closures should occur in the third quarter and confirmed that the C$10 million loss figure represented four-wall EBITDA, meaning losses generated at the restaurant level before central corporate expenses.

The programme is targeted rather than an attempt to dismantle Papa Murphy’s franchise system.

MTY had 7,040 restaurants at the end of the quarter, including 6,808 franchised or operator-run locations. The 68 closures represent about 1% of that network.

Still, Papa Murphy’s disproportionate share makes the announcement a brand-specific warning, not simply routine trimming across MTY’s collection of more than 80 restaurant concepts.

A failed turnaround meets a brutal pizza price war

The weak stores are closing against a difficult operating backdrop.

MTY’s second-quarter same-store sales declined 2.1%, including a 2.2% drop in the US. Organic system sales fell 1.7%, while corporate-store profit margins narrowed to 5% from 9% a year earlier.

Papa Murphy’s has performed worse than MTY’s other recent US businesses.

Lefebvre said the American pizza market has “very little loyalty”, with customers often choosing whichever chain offers the lowest price.

Promotions can boost traffic, but constant discounting risks squeezing franchisee margins.

That competition is particularly awkward for Papa Murphy’s. Customers collect an uncooked pizza and finish it at home.

The model can reduce restaurant equipment and labour requirements, but it competes with supermarket pizzas as well as chains offering cooked food, home delivery, loyalty rewards and aggressive digital promotions.

The weakness is already visible in MTY’s wider US figures.

Lefebvre said June sales would have been relatively flat without Papa Murphy’s, describing the chain as being under greater pressure than the company’s other banners.

He later told analysts that no other MTY brand was struggling on the same scale.

The 68 restaurants selected for closure were also performing far worse than the network. Their average same-store sales were declining by between 8% and 9%, according to Lefebvre.