nobleroman's vs papa murphy's pre ipo

5/28/2018 NobleRoman's vs Papa Murphy's Pre IPO

1/10

Take-n-Bake Pizza Wars: Papa Murphys vs. Noble Romans;Noble Romans Phone Survey

3/14/2014Companies mentioned:

Papa Murphys (FRSH) Pre-IPONoble Romans, Inc. (NROM) - $1.45

Why Read?

With the strong IPOs of Potbellys (PBPB) and Noodles & Co. (NDLS) this year, restaurant stockshave surely captured the markets attention. On March 11 th, 2014, Papa Murphys (FRSH) filed its S-1with the SEC looking to raise $70mn in their IPO. During this past week we conducted a phone surveyof Noble Romans (NROM) franchise owners, the only publicly traded competitor to Papa Murphys.Below we have included our findings as well as a comparative analysis of the two companies.

"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""! Noble Romans has a cheaper/superior product: Many of our sources cited the superior

ingredients used in Noble Romans products from local grocery distributors vs. the Sysco providedingredients used in Papa Murphys products.

! Noble Romans franchises cheaper to open and charges higher royalties: On average NobleRomans stand-alone franchises cost from $79,000-$159,600 while Papa Murphys franchises cost$216,430-$391,220 to open. Additionally Noble Romans charges 7% in royalties and 3% in

marketing fees while Papa Murphys charges 5% in royalties and 2% in marketing fees.

! Papa Murphys overstates future growth potential:In their S-1 they imply 3,136 stores build outbut we believe they can only build out to 2,590 stores with their current strategy. A source saidPapa Murphys pulled out of regions due to competition and regional tastes; we have adjusted ourTAM estimates accordingly.

! In-store oven a lunch opportunity: Currently ~90% of Noble Romans sales occur arounddinnertime. The company launched a trial run of in store ovens (still EBT applicable), which PapaMurphys already has to increase sales during lunch.

! Percentage of EBT customers varies:One of the most unique aspects of the take-n-bake businessmodel is its ability to accept EBT (food stamps) as payment because the pizza is not a finishedgood. Percentage of customers paying with EBT ranged from 6%-60%, with an average of 32%,and typically had higher average tickets.

! Noble Romans franchise phone survey:We were able to contact 12 franchisees that own 15 ofthe 19 franchises open. Out of the 12 we got good information from 7. The majority spoke highly ofthe support provided from Corporate and the majority of the franchisees would open another storegiven the chance.


2/10

#

Noble Romans has cheaper/superior product:

Pizza Prices NROM FRSH PZZA

Cheese 12in $8 $7 $12

Cheese 14in $10 $9 $13

Pepperoni 14in $10 $10 $14.60

5 Topping 14in $10 $16.25 $17

$%&'( )%*+,-. /%(. ,%0 12+34( 5%3 +//606%,+' 0%776,4.8 13(+06,4 +, (91(''(,0 :+';( 73%7%.606%, 5%302( 1;.0%*(3< =(+,>26'(8 ?+7+ =;372@-. 12+34(. AB,(3.I

This is not ghetto pizza, really high class! Franchise Owner

Because the dough is delivered and not made on-site, the pizzas have a much higher consistency in

quality Franchise Owner

The ingredients are better than the ones at Papa Murphys Franchise Owner

Noble Romans franchises cheaper to open and charges higher royalties:

Costs NROM FRSH

Up-Front Franchise Fee $15,000 $25,000

On-Going Royalty Fees 7% 5%

On-Going Marketing Fees 3% 2%

Start-up Costs $79,000-$159,600 $216,430-$391,220*Sources: NROM Shareholder Presentation, Worldfranchising.com, Franchisedirect.com

Noble Romans offers a much lower up-front franchising fees and the format has significantly lowerstart-up costs. Papa Murphys start-up costs are much higher due to additional equipment due to thedough being made on site, which often leads to inconsistent quality and lower consumer satisfaction.

Papa Murphys charges 3% less overall in on-going royalty and marketing fees, but also requires that

franchisees spend a minimum of 5% of sales on local advertising. We like that Noble Romans is able tocharge more in royalties, trading off lower up-front fees in exchange. Overtime, as the store base builds,this will lead to higher operating margins and reoccurring revenue.


3/10

J

Papa Murphys overstates future growth potential:

Observe there are no stores in New England, the Tri-State Area, PA, and almost the same number ofstores in IL as in OK. This piqued our interest.

We spoke to a former Director of Franchising for Papa Murphys and learned the following:

Papa Murphys pulled out of the Chicagoland market due to high competition from local pizzarestaurants and strong distinct local tastes and preferences. The director also cited this as the reason PapaMurphys has declined to enter the North East Market. We believe that as current markets begin tobecome saturated, Papa Murphys will be forced to either slow their store expansion or enter these

highly competitive markets and suffer lower average sales or higher failure rates.

We have included below an adjusted version of Papa Murphys total addressable market table includedin their S-1 to reflect these realities. We still feel we are being far too generous in these assumptions.

Region# ofStates TAM Stores

ImpliedBuilt Out

Storesper mil.

Est ActualTAM

Est. BuiltOut

Storesmil. BuAssum

Existing Markets: Core 20 98,663,241 1,026 1,026 10.2 98,663,241 1,026 10

Existing Markets: Developing 18 154,692,567 370 1,517 2.3 154,692,567 1,517 10

New Markets 13 60,558,232 0 594 N/A 4,797,141 47 10

313,914,040 1,396 3,136 258,152,949 2,590


4/10

K

In-store oven a lunch opportunity:

One of the main problems with the take-n-bake model is the customer needs to take the pizza home tofinish preparing and eat. But no longer. Papa Murphys and now Noble Romans are adding in storeovens where the customer can have the staff cook the pizza as a separate transactions.

Noble Romans will charge an extra dollar for this service and it is charged as a separate transaction ifthe customer still wishes to use EBT for the pizza purchase. During Noble Romans 4Q13 earnings call,

when the program was announced, CEO Paul Mobley conceded that this practice seems shady butreiterated it is within regulations and the law.

Many of the owners of Noble Romans franchises were unaware of this in-store oven trial run and werevery excited to hear from us about the possible addition. (We guess not many listened to corporateearnings conference calls). We urged them to call Corporate and inquire about the ovens.

We believe that the addition of ovens will increase daytime traffic as well as have a positive effect onweekly average store sales, a metric where Noble Romans currently lags Papa Murphys by ~$3,000per week, as the Noble Romans are breaking into new markets and a new concept.

Percentage of customers paying with EBT:

One of the most unique aspects of the take-n-bake businessmodel is its ability to accept EBT (food stamps) as paymentbecause the pizza is not a finished good. From our survey,percentage of customers paying with EBT ranged from 6%-60%,with an average of 32%, and typically had higher average tickets.

In November 2013, the US government reduced the benefits offood stamps and the Legislative branch has proposed additional

reductions. As of October 2013, 15.4% of people in the UnitedStates were using food stamps/EBT.

Noble Romans phone survey results:

!"#$%&'()) +,-

LI M% @%; 7'+, %, 6,1%37%3+06,4 02( 6, .0%3( %:(,.NOI P( .7%E( >602 Q1%00 =%&'(@8 02(@ 2+:( 023(( .0%3(. 02+0 R;.0 3%''(/ 02(* %;0< P( >+,0(/ 0% 0(.002( 6*76,4(/ +63 1%,:(@%3 %:(,.< SO&.%';0('@ T >%;'/ &( 6,0(3(.0(/ 6, 02%.( %:(,.


5/10

C

LI Z%;'/ @%; %7(, +,%02(3 $%&'(NOI [(.\2( 6. 03@6,4 0% %7(, *%3( 43%;7 +,/ 1%*7'(0('@ 12+,4(/ 02( 1;'0;3(< P( 036(/ 02( 73%/;10 6, O736'< T0. +'.% >+@*%3( 1%,.6.0(,0(3( 3(+''@ ;,.;11(..5;' ;7 02(3(602 1+.2`13(/60+. 6,0(3(.0(/602 02+, %02(3 53+,126.(. 02+0 2(-. >%3E(/ >6022%'( :+36(0@ %5 &((3 43%>'(3.02+0i. 73(00@ 1'(:(3%;'/ 3(+''@ 2('7 02( ';,12 &;.6,(..6'' 1%.0. +3( :(3@ (97(,.6:(< _%37%3+0( /%(. ,%0 2;30 7(%7'( >602 5((. 60. ,%0 0%% &+/ 3(+''@


8/10

b

LI Z%;'/ @%; %7(, +,%02(3 $%&'(NOI [(. 2( 6. %7(,6,4 +,%02(3(.0 1%+.0 6. 4(006,4 2+**(3(/ &@ $%&'( )%*+,. 6+. +'3(+/@ 06(/ ;7< _%37%3+0( 2+. &((, 3(+''@ 2('75;'\>+@ *%3( 2('75;' 02+, %02(3 7'+1(. 2(>+. '%%E6,4 +0< P( 026,E. 60 6. >%302 &;@6,4 .%*(

nobleroman's vs papa murphy's pre ipo

Documents