July 01, 2011 - 1:07pm EST by
2011 2012
Price: 2.95 EPS $0.26 $0.32
Shares Out. (in M): 8 P/E 11.0x 9.0x
Market Cap (in $M): 24 P/FCF 11.0x 9.0x
Net Debt (in $M): 0 EBIT 3 4
TEV ($): 24 TEV/EBIT 8.0x 6.0x

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Pizza Inn, Inc. ("Pizza Inn", "PZZI", or the "Company") is a franchisor and operator of roughly 300 pizza restaurants.  This microcap, trading at roughly 10x forward EPS (T+2), has strong returns on its invested capital, huge inside ownership (45%+), and significant recent insider purchases.  Headwinds that have capped financial, and share price, performance over the last several years are now largely behind the Company and the pieces are in place for reinvigorated growth.

PZZI was written up here in early 2010 by maggie1002.  I refer you back to maggie's post for more in-depth detail on the Company's history.

Pizza Inn is a franchisor and operator of roughly 300 pizza restaurants, with a regional focus on the Southeastern United States.  The Company has a number of distinct store formats, ranging in size from small (200-400 ft2) take-out-only units located within other retail establishments (convenience stores, food courts, airports, etc.) to much larger (2,000-4,500 ft2) freestanding full service units.  Roughly 75% of the Company's units are domestic, with the vast majority of these operating under franchise agreements.  A small handful of domestic units are wholly owned and operated, providing the Company with a testing ground for both new store formats and menu items.  The Company's international units, which make up the remaining 25% of store base, are heavily concentrated in the United Arab Emirates and Saudi Arabia, and are operated under master licensing agreements.

PZZI has a colorful corporate history.  Founded in 1958, the Company grew to nearly 750 units in the mid-1980s but was forced to declare bankruptcy in 1989.  Beginning in 2002, a succession of CEOs and boardroom dramas caused senior management to lose focus.  This led to deteriorating operating performance, a loss of franchisees, and rapidly declining financial performance.  It wasn't until 2007 that a measure of stability returned to the senior management ranks, when then-CFO Charlie Morrison took over as CEO.  He moved quickly to refocus the Company operationally, with a renewed emphasis on product quality and customer service.  Morrison's turnaround was marked by consistent growth in same-store sales through the third quarter of 2008, at which point the headwinds from the recession proved to be too much to overcome.  Same-store sales fell into negative territory and remained there through the end of calendar 2010.  Pizza Inn's store base, meanwhile, declined modestly throughout this recessionary period as well.  This decline resulted in large part from the imposition of a number of new investment requirements on franchisees, which although beneficial to the brand long-term, incented a number of franchisees to shutter marginally performing units.

The headwinds resulting from the combination of negative same-store sales and declines in the store base have yielded a relatively uninspiring growth profile over the last several years and, until recently, a languishing share price.  Although management has done an admirable job maintaining its profitability throughout this challenging period, the top line has declined modestly and operating income has been relatively flat.  For several reasons, however, this trend should shortly change for the better.

  • Same-store sales finally turned positive during the March 2011 quarter for the first time in over two years.
  • Management began testing a new unit prototype in late 2008 for its large full-service units. The results have been strong, with revenue per unit roughly double that of the older layout. This new prototype is now beginning to work its way through to the franchisees, and as penetration increases revenue growth should follow.
  • The vast majority of the underperforming unit closures are now behind the Company. New franchise agreement signings have been decent, and international growth in particular has remained consistently strong.
  • The Company recently announced the launch of a 2nd primary concept: Pie Five Pizza Co. The concept focuses on a higher-end segment of the market than its existing Pizza Inn brand, with an initial development focus for 100 units.

A return to top line growth should propel meaningful operating margin expansion.  This, in turn, could easily drive earnings north of $0.30/share within the next couple of fiscal years from its current run-rate of approximately $0.20/share, implying an attractive forward price/earnings multiple of roughly 10x.  The Company's focus on franchising and master license agreements limits its capital needs, thereby driving impressive returns on investment.  In its last full fiscal year, during which the Company faced numerous macro headwinds, it still managed to generate a respectable 35% return on its invested capital.  As top line growth and operating leverage return to the business model, these returns should improve commensurately.

PZZI's impending inflection point has not gone unnoticed by the market.  Over the course of the last several months, shares have rallied from under $2.00/share to nearly $3.00/share.  Despite the run-up, Company insiders have been consistent purchasers of the stock in recent months, adding to their substantial 45% ownership interest in the Company.  It is reasonable to conclude that they, as well, see an attractive, high return business that is nearing a positive inflection point.


Reinvigorated top line growth: 1) continued positive comp store sales, 2) growth in core concept store base, 3) sale of more international master agreements, 4) success of new Pie Five concept.  Margin expansion.  Going private transaction.
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