Papa Murphy's Holdings' (FRSH) CEO Ken Calwell on Q2 2016 Results - Earnings Call Transcript

| About: Papa Murphy's (FRSH)

Papa Murphy's Holdings, Inc. (NASDAQ:FRSH)

Q2 2016 Results Earnings Conference Call

August 03, 2016, 04:30 PM ET

Executives

Ken Calwell - President, CEO

Mark Hutchens - CFO

Analysts

Sharon Zackfia - William Blair

Reena Krishnan - Jefferies

Sam Beres - Robert W Baird

Operator

Good afternoon. And welcome to today's Papa Murphy's Holdings Inc Second Quarter 2016 Earnings Conference call. All participants are now in a listen-only mode. After the presenters' remarks, there will be a question-and-answer session. As a reminder, this call is being recorded.

I would now like to introduce Mark Hutchens, Chief Financial Officer. You may begin your conference.

Mark Hutchens

Thank you Dan. Good afternoon, everyone. And welcome to our second quarter earnings call. Let me start by noting our formal remarks and responses to your questions may contain forward-looking statements regarding future events or the future financial performance of the Company. Any such items, including guidance with respect to targeted results for 2016 and statements relating to our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Any forward-looking statements are not a guarantee of performance and actual events or results could differ materially from those anticipated in forward-looking statements due to a number of risks and uncertainties. I refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's Form 10-K for the year ended December 28, 2015 and Form 10-Q for the quarter ended March 28, 2016. Those documents contain and identify important factors that could cause actual results to differ materially from those anticipated in our projections or forward-looking statements.

The forward-looking statements made on this call speak only as of the date of this call and the Company undertakes no obligation to publicly update any forward-looking statements.

Today's discussion also includes non-GAAP financial measures that we believe may be important to investors as metrics to assess the operating performance of our business. Our earnings release contains reconciliations of non-GAAP measures to the most directly comparable GAAP financial measures in accordance with SEC rules and the release and reconciliations can be found on the Company's corporate website at investors.papamurphys.com.

Here with me this afternoon is Ken Calwell, our President and Chief Executive Officer. Ken will provide some introductory remarks about our Company and then I will walk you through our second quarter financials and outlook for the full year. Ken will then conclude with some closing remarks before we open it up for Q&A.

With that, I would like to turn the call over to Ken.

Ken Calwell

Thanks Mark. Good afternoon. And thank you all for joining us on the call today. We appreciate your participation and your continued interest in Papa Murphy's. As you saw from our release, we reported the following results; Revenue of $29.9 million, an increase of 2.7% compared to the second quarter of 2015. Net income of nearly $1 million or $0.06 per diluted share compared to a net loss of $1.4 million or a loss of $0.09 per diluted share in the second quarter of last year and adjusted EBITDA, a $6.5 million that compared to the second quarter of last year.

In addition, we opened 28 new stores in the quarter all in the U.S. This was a 75% increase in the number of domestic new store openings compared with the same period last year. As you saw in our release, revenue in the quarter was adversely impacted by a decline in domestic comparable store sales of 4%, which was at the low end of our updated guidance as discounting in the segment and across food service accelerated. We believe that a combination of continued low cheese and other commodity costs and macro economic pressures are fuelling the aggressive discounting as pizza and other restaurant companies re-invest lower food cost into more aggressive promotional offerings as they attempt to grow traffic in an environment of increasing excess capacity.

In addition, we believe sustained low commodity prices translates into lower grocery price points that are making it more attractive for customers to prepare meals and cook at home. We believe this last point impacts us even more than others in the pizza segment given our customers preference for fresh, high quality ingredients and home cooking.

While the industry has been soft for sometimes, the softness was increasingly noticeable during the second quarter and we see this as a continuing challenge as long as commodity prices remain well below their historic levels.

On our last call, we discussed in the back half of the quarter and into Q2, we focused marketing on the launch of our new e-commerce platform with the goal of transitioning customers to order online, where we continue to see non-promotional check expansion of between 25% and 30% compared with phone in and in-store orders.

We said that in the second half of Q2 and for the balance of the year our marketing will take a more traditional and balanced approach with pizza being the primary focus of the advertising while reinforcing the online ordering message. And while that has been our approach, it is increasingly evident that aggressive value offerings will play a considerable role in the space for the foreseeable future with key competitors accelerating their focus on value.

While we are well positioned to compete in a value focussed environment, in late Q2 and early Q3 we had been in a disadvantage in our ability to reach our customers with a strong value message, because less than 5% of our markets have what we would consider to be breakthrough levels of media available during these summer months.

As we move into our seasonally high point of media, towards the end of Q3 and in Q4, it is important to note that we expect to have lower absolute levels of media across most markets, as a result of the inflationary impact of the Olympics and the Presidential election on the cost of media.

We recognize that we must execute more effectively to drive transaction growth which will in turn lead to higher comparable store sales and even greater profitability. We are working on a number of new growth drivers to grow transaction through the second half of the year. I like to update you on our key priorities.

Our first priority is to deliver strong, value initiatives coupled with new product offerings that reinforce our quality leadership and drive transaction growth. For example in June, we launched a new $5 value menu featuring our $5 FAVES line of pizza as well as salad from Cookie Dough.

In markets on TV, the promotion drove cost store sales performance 540 basis points higher than markets not on TV. Also, subsequent to the quarter end on July 18, we announced that we were the first National pizza brand to feature a menu with a 100% chicken raised without antibiotics, reinforcing our position as the quality leader in the pizza segment in getting our customers even more ingredients that they feel good about serving their families.

As part of their 100% raised without antibiotics chicken launch and to reinforce our strong value message, we are featuring our Gourmet Delite pizzas at an aggressive online price point of $9. Again, we think the key to increasing comparable store sales in this environment will be to couple high offers with high quality and innovative product news and continue to incent [ph] new and existing customers to order online where even lower price points may be available.

Our second priority is to continue to improve online ordering capability and transition more of our customers to this high value channel. Online ordering gives our moms and family target customer the added convenience of a whole new access point to our products, we are also improving operational efficiency in our broad customer experience, resulting in even greater loyalty.

Over the long term we see online ordering as a significant incremental growth opportunity and we’ll continue to invest improved website functionality and customer acquisitions. In the second quarter, when promoted heavily we saw online ordering mix as a percentage of sales reach to the high teens with average check after the discount about equal to orders in store.

During non-promotional windows we saw online ordering mix as a percentage of sales sustained in the mid-single digit range while average check grew in the range of 25% to 30%. Additionally, through online ordering we are growing our customer data base that supports our growing precision marketing efforts. This will enable us to offer unique customizable offers to either more customers, which we believe will improve frequency.

Throughout the second half of the year we will incorporate online ordering messages into our traditional marketing as we continue to build customer adoption and increased the online ordering mix.

Our third important strategic priority is to raise brand awareness and gross sales in our under penetrated markets. By investing in advertising levels ahead of development and building up the markets on an accelerated basis to sustain that level of marketing, we continue to generate favourable consumer response and grow system sales.

While overall system sales in these markets grew by 19% in the quarter compared to the second quarter of 2015 comparable store sales growth actually declined by 5.3% resulting in a combination of increased unit counts and the increasingly competitive landscape which we believe impacts us even more in markets where our brand awareness is lower.

On a two year basis, comparing the recent quarter to the second quarter of 2014 system sales in these markets have grown by close to 55% while two year comparable sales growth in these markets was 9.2%.

Switching gears now to development. We opened 28 new stores in the quarter, all in the U.S. including 16 stores opened by franchise owners. This is a 75% increase in the number of domestic new store openings compared to the same period last year and brings our year-to-date new store openings in the U.S. to 53 units, 17 units more than we opened in the first half of 2015.

The process enhancements we put in place in the second half of last year with a focus on lowering the bill cost and reducing the cycle time from franchise sale to store opening have enabled us to deliver a significantly more balanced, new store opening cadence this year. And we remain on track to open between 115 and 120 new units in 2016, including around 25 company owned stores, exclusive of any new stores that might be opened by the company under our presale development initiative and later sold to a franchise owner.

This would reflect an increase of between 16% and 21% and the number of domestic new store openings compared to 2015. Through the end of Q2, we had opened 116 new domestic stores over the prior 12 months period. As I mentioned earlier, we continue to focus our development efforts predominantly in our less penetrated markets as we expected 115 to 120 domestic stores open this year. Opening this year we continue to expect about 70 to be opened in under developed markets, but we anticipate increased scale or result in higher awareness and ultimately higher sales and improved unit economics.

As noted on our last call, during the quarter we purchased nine operating stores in the Fort Smith, Arkansas and Joplin Missouri markets from a franchise owner. Similar to last year’s acquisitions in Knoxville and Jacksonville, we see tremendous opportunity to accelerate growth in these markets.

Unlike Jacksonville and Knoxville both of which required additional stores to reach what we believe to be a minimum level of penetration before unit volumes start to increase. Fort Smith and Joplin are already significantly penetrated and we see an opportunity to increase credit sales volume in these markets by as much as 50% to a significant increase in advertising and stronger and more consistent operations.

We continue to improve our development process to reduce the time to open a store and improve our ability to forecast store openings. We are seeing increased momentum in our presale development programs with both existing and new franchise owners looking to acquire stores being developed in the program.

With that said, we will continue to focus this program only in markets where we have Company operating capability. We remain highly confident in our long term new store growth opportunity and our ability to more than triple the current domestic store count and look forward to sharing our progress on future calls.

As a reminder, our short to medium term strategy is to target a store portfolio mix of around 10% company owned with a cap in the range of 180 to 200 units, implying a company ownership mix below 10% as the system grows.

Finally, before I turn the call to Mark, for a detailed discussion of our second quarter financial results, I’d like to say that we continue to place a short focus on our cost structure to ensure we have the resources we need to drive our strategic initiatives while maintaining a lean operating structure. As you are here, profitability in the quarter benefitted from lower SG&A expense compared with last year and this will continue to be a focal point for us in the second half of 2016 and beyond.

I’ll now turn the call over to Mark.

Mark Hutchens

Thanks, Ken. The following results of our second quarter which ended June 27. Total revenue in the quarter was $29.9 million, an increase of 2.7% compared to $29.1 million in the second quarter of last year. The increase was due primarily to the company’s acquisition of 15 stores from franchise owners and 85 net new company and franchise store openings during the last year, partially offset by a decrease in comparable store sales and the refranchising of four stores to an existing franchisee. Note that there is no revenue in this quarter associated with the resale of POS license to franchisees.

Franchise royalties in the quarter totaled $9.5 million compared to $9.8 million in the second quarter of 2015. The decrease was driven primarily by the 3.7% decrease in comparable store sales and domestic franchise stores in our acquisition of a net 11 franchise-owned stores, partially offset by the increase of a net 48 new franchise units.

At the end of the second quarter, there were 1,375 domestic franchise stores in operation compared with 1,333 domestic franchise stores in operation at the end of the prior-year quarter. This reflects 85 new franchise opening offset partially by 36 franchise stores closures and a net seven acquisitions by the Company of franchise stores over the last 12 months.

Franchise and development fees in the quarter totaled $574,000 compared $830,000 in the prior year quarter. The decrease was primarily driven by lower forfeited fees and lower transfer fees offset partially by higher initial fees associated with the opening of six more domestic franchise owned stores than in the quarter of the prior year.

Sales of company-owned stores increased by 7.2% in the quarter to $19.5 million. The increase was due to the acquisition of 15 stores from franchise owners and the opening of 37 new company owned stores partially offset by the refranchising of four stores to an existing franchise owner and the 6.6% decline in comp store sales in the quarter.

Switching over to expenses, as we think about the companies store portfolio, we’ve obviously had a lot of moving pieces over the last couple of years and the reported number still provides you with a great look into what’s really happening in the business. So first I’ll walk you through the reported numbers and then I’ll walk you through the Q2 results for a group of four stores in ten markets stripping out stores impacted by recent friendly intrusion, stores acquired from franchisees and new stores opened over the prior 18 months.

To remind you, we embarked on more aggressive company store strategy beginning in late 2014 through which we are leading the broader system, not just in store operations, but also in the accelerated build out of market.

Ultimately, we expect the results of the investments we're making both on the balance sheet and through the quarterly P&L to result in the creation of positive shareholder value in both the company store and franchise segment, as our results serve as a catalyst to accelerate the growth of franchise development.

As Ken, mentioned we expect the result of the strategy to have our company store mix in a short to medium term at around 10% where the cap in a range of a 180 to 200 units.

Reported company store operating expenses in the quarter as a percentage of company owned store sales totalled 94.1%, an increase of 623 basis points compared with the prior year quarter.

Compared with the prior year compensation and benefits cost were about 260 basis points higher reflecting that the leveraging impact of the portfolio changes and the inefficiencies realized when opening new stores.

As we open or acquire a new stores in less developed markets with low average volumes. We've realized inefficiencies in labor due to minimum staffing requirements. We also realize the deleveraging effect and inefficiencies from the portfolio changes in occupancy cost which were about 130 basis points higher.

Other operating cost were 290 basis points higher primarily reflecting the impact of higher pre-opening expenses, which totalled $476, 000 in a quarter or about $300,000 more than the prior year quarter, reflecting the higher number of company openings in this year second quarter compared to last year.

This year-over-year cost increases were partially offset by a net 70 basis point reduction in cost of goods sold, would lower cheese cost more than offsetting the impact of the portfolio shift and inefficiencies of new stores.

Note that our average price of cheese in the quarter was 6.8% lower compared with the prior year quarter. And we currently have fixed price contract in place for around 42% of our forecasted system usage for the next 12 months at an average price of a $1.78 per pound.

Excluding the effect of a total of 80 stores that have been impacted in some way by the aggressive portfolio changes we've made in our company store division. Since the beginning 2015 leaves us with 76 stores across 10 company markets ranging from Boise and Portland, to Jacksonville and Dallas.

Compared to the prior year quarter operating cost in this core stores as the percentage of the sales were about flat with COGs favourability of 100 basis points and advertising favourability of about 70 basis points fully offset by higher labor, occupancy and other costs. In addition, comp sales in these stores outperformed overall companies store comps by about 140 basis points.

So it’s clear to see that the margin de-leverage in CST, is attribute to the growth of the portfolio in the penetrated markets in new stores. In fact the 36 new company stores opened over the previous 18 months negatively impacted segment margins in the quarter by 550 basis points, including 280 basis points associated with preopening and other cost, which the company adds back to adjusted EBITDA.

Overall, CST stores opened in a previous 18 months negatively impacted Q2 adjusted EBITDA by about $800,000 and our dilutive to earnings per share in a quarter by about $0.03.

Reported SG&A in the quarter was $5.9 million, $2.3 million lower than a prior year quarter. The reduction in SG&A expense was driven by year-over-year reduction in compensation and benefits of about $1 million and net reduction of approximately $500,000 in the accumulated deficit of the national advertising fund and the lapping of certain non-recurring cost in the prior year totalling about $500,000, partially offset by a year-over-year increase of about $300,000 in the cost to operate our e-commerce platform.

As a percentage of revenue SG&A expense in the quarter was 19.8% or about 796 basis points lower than in the prior year quarter. Overall, adjusted EBITDA was $6.5 million in the quarter, approximately flat compared with the prior year second quarter.

Adjusted EBITDA margins as a percentage of total revenues decrease to 21.6% from 22.1% in the prior year second quarter, primarily driven by the net growth in company owned store counts, the increased mix of company owned stores in lower volume markets and the quarterly decline in comparable store sales. A reconciliation of adjusted EBITDA to GAAP net income is included in our earnings release.

Depreciation and amortization expense in the quarter was $2.9 million, up from $2.4 million in the prior year quarter. The increase was primarily the result of depreciation associated with increased company owned store count and increased capital expenditures for the new e-commerce platform.

Overall, operating income in the second quarter increased to $2.8 million from $2.6 million in the prior year quarter. To recap, the operating increase was driven primarily from SG&A savings partially offset by lower royalties and fee revenues. Flow through on the company owned store sales decline and company store margin compression and higher preopening cost and appreciation related to new company store openings.

Now, I'd like to briefly touch on operating income by segment. For domestic franchise, operating income was $4.5 million represent the decrease of approximately $246,000 compared with the prior year quarter. The increase is attributed to a $1.1 million decrease in SG&A expenses partially offset by a $500,000 decline in segment revenues and $300,000 increase in depreciation and amortization.

For our company stores segment, the operating income loss of $716,000 in the quarter represents a decline of $1.3 million compared to the prior-year quarter. The decline in operating income is a result of the comp store sales decline of 6.6%, a shift in the company store portfolio including new stores in underpinning credit markets and higher pre-opening costs as a result of opening a greater number of new stores in the quarter compared with previous year's quarter.

Lastly, our international segment reported operating income of $73,000 in the quarter compared to $54,000 in the prior year quarter. The increase is primarily due to the opening of a net five stores in the previous 12 months. Net interest expense in the second quarter was $1.2 million, $100,000 higher than the prior year quarter.

Net income in the second quarter of 2016 was $952,000 or $0.06 per diluted share. This compares to a net loss of $1.4 million in the second quarter of 2015 or a loss of $0.09 per diluted share, and compares to a pro forma net income of $1.6 million in the second of 2015 or earnings of $0.09 per diluted share. Note, that there were no pro forma adjustments to net income in the second quarter of 2016.

Our effective tax rate for the quarter was 39.1% which were higher than the prior year quarter effective tax rate of 37.4% primarily because of the affect of an adjustment for the tax benefit shortfall created by share based payments and settlements that were made during the quarter. We expect the effective tax rate for Q3 and beyond to be a more normalized rate of about 38.5%.

We ended the quarter with $435,000 of cash on the balance sheet and net debt of $110.4 million which is approximately $2.1 million higher than at the end of the previous quarter, reflecting a net cash usage with positive cash flow from operations more than offset by $6.3 million of investments in acquisition, new stores and the e-commerce platform. At the end of the quarter, we had $3 million drawn on our $20 million revolver.

Based on our current growth plans and financial forecast we continue believe the expected cash flow from operations and available liquidity under the existing credit facility and revolver are sufficient to fund our business and anticipated capital expenditures for at least the next 12 months within the financial covenants prescribed in our credit facility.

With respect to our full year 2016 outlook based on our current assessment of the business we're updating our guidance as follows; we expect full year domestic system wide comparable store sales to decline in a range of 2% to 3%. This guidance includes an expected domestic comparable store sales decline in the third quarter, up approximately 3%.

We continue to expect domestic new store openings of between115 to 120 units including about 25 company owned store exclusive of any stores that maybe open by the company under the presale development program and later sold to a franchise owner.

We expect revenue to include transaction fees from franchise owners for the use of the new online ordering platform of approximately $700,000 and zero margin POS license revenue also of approximately $700,000.

The reduce transaction fee revenue is based on an expected lower average mix of orders placed online during the year, while the lower POS revenue and related cost is based on a revise arrangement whereby franchisees are now purchasing the POS licenses directly from NCR and going forward.

We expect SG&A expense of approximately $28 million to $29 million compared to previous guidance of $33 million to $34 million inclusive of operating cost of approximately $1.4 million associated with the new e-commerce platform and approximately $700,000 associated with POS licenses resold to franchise owners at cost.

Operating cost related to the e-commerce platform are lower than previously expected due to further development enhancement who are making to the platform which are required now to be capitalized.

In addition, we expect to incur preopening costs associated with the new company stores of between $1 million and $1.2 million inclusive of PSD inventory stores that are expected to be sold to franchisees in 2017.

And capital expenditures including the acquisitions of approximately $15 million and $17 million, including the enhancement made to the e-commerce platform refers previously. We expect the full year effective tax rate of approximately 39.5% reflecting the impact of a higher rate in Q2. And finally we expect dilutive share count of approximately 16.8 million shares.

With that, I'll now turn the call back to Ken for some closing remarks.

Ken Calwell

Thank you, Mark. We're disappointed by current performance and what continues to be an even more competitive in landscape. We believe that we are focused on the right near term strategies that will enable us to compete effectively in this environment including our focus on value and product innovation.

We are taking the opportunities to streamline our processes and reduce costs where appropriate. We continue to invest in e-commerce and in development. The pillars that will enable us to accelerate growth as the competitive landscape improve.

We want to thank you again for your interest in our company and we look forward to continue to share our progress with you in the coming quarters.

We're now happy to answer any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Sharon Zackfia of William Blair. Please state your question.

Sharon Zackfia

Hi. Good afternoon. I guess kind of most simply as the guidance implies some improvement and the comp trend in the back half of the year and I know Ken, you laid out a number of initiatives, but if you're going to see some improvement can you kind of give us any indication of whether you've seen that yet, whether the quarter improved as it went on. If July is a little bit better or which of the initiatives you've outlined that you think will take you to a bit less of a negative level?

Ken Calwell

Thank you. Yes. Sharon thanks for the question. A couple of things, one is with the back half of the year has focus on is a number of different pizza initiatives and some new innovation ideas, but with all of them have in common is that a low overall price particular when you look more competitive prices, you look at it within the overall industry, whether it’s a discounted price of the deal.

And so, that's – and the indication that we have that -- that's going to be strong forces. We have a number of those promotions I mentioned, the $5 FAVES value menu value menu, but we've had a number of those in first part of the year and we are – our research indicates, our results indicate that those have performed more strongly for us.

The other thing I would say, that the sets up the messaging, I think that messaging and pricing will be strong and we'll have some strong price points to use in the back of the year. There on the media side as we mentioned, the summer period for us is a challenging period just in terms of having enough overall media weight, I mentioned the small number of markets that we have, that we really have a benchmark threshold levels during the summer, during our low seasonality period.

The overall amount of media does start to increase in September and October, so what we've seen is as we've looked at different promotions that we've done year to-date is that in many cases we have some competitive value promotions out there that are pulling for us, but there's a real difference between how those are pulling in markets where they have significant advertising dollars and those that do not. I mentioned one of them on the call previously. So, what changes in the back four and a half months of the year is that we are steadily increasing level of overall media.

Pretty significant increase in September, but strong through September, through December that allows us to not only be able to have those lower cost pizza promotions out there that I mentioned, but also be able to advertise them at threshold levels in far more markets than we have during the summer period, which gives us reason to believe that to your point that we'll see the comps at least on a relative basis start to improve this as we go into the fourth quarter and as you continue right into the first quarter as well, because that same point holds true while as you go into the first quarter, the same point I should say, on messaging, pricing and TRPs, advertising TRPs, all stay true, not only through the fourth quarter but right into the first quarter of 2017.

Sharon Zackfia

And my second question was on the SNAP program, I'm not sure kind of what percent of your sales now are through SNAP and if you could give us any kind of updates as to whether or not Papa Murphy's whether you expect the concept to still be able to accept food stamps after some of other changes go into effect?

Ken Calwell

Yes. I think you know last summer I have seen it's around 10% or so, varies by markets for us. Now this is something we've been pretty close with, and we're not currently anticipating a negative impact of this. I think there were some early indications that there would be and then later pull back. Right now, we believe that that's securely in place and we'll continue to be something that we can utilize.

Sharon Zackfia

That's great. Thank you.

Operator

Our next question comes from the line of Andy Barish of Jefferies. Please state your question.

Reena Krishnan

It's actually Reena Krishnan sitting in for Andy. Could you guys give us a little more color on just when we look at the comp to the quarter between the company owned and the franchise stores, why those companies owned so much worse? What was going on there? Was that more reflective of more cannibalization, or is there something else?

Ken Calwell

Yes. So if you – so as you recall when I was talking about the company's portfolio we'd look at whether it’s the effect of the new stores or the portfolio changes or stores where we have effectively impacted them with friendly intrusion. You pull that out. The company comps were more like 5.2 negative instead of 6.6. I think then the difference between the 3.7 and the 5.2 has more to with the weight, and the fact that the company store portfolio now moving disproportionately into some of those under penetrated markets where again I think our perspective is these competitive pressures are disproportionately impacting our results in markets where we have lower penetration and therefore lower awareness. So, I think it is really been driven by the portfolio and the mix difference.

Reena Krishnan

Okay. Understood. And then in terms of one sort of housekeeping question, did you give us the numbers for how many on the company owned side were – in terms of the openings I guess were 12, but how much you acquired or closed. But it looks like if we're just trying to back into the total number, we want to make sure we has these numbers correctly for the ending unit count?

Ken Calwell

Yes. So, we acquired nine, open 12.

Reena Krishnan

And then, closed three on the international side?

Ken Calwell

They weren't any closes on the international side in the quarter. Let me if you have another question we can come back to that one in just a second.

Reena Krishnan

Okay. I can ask you about that later. Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Sam Beres of Robert W Baird. Please state your question.

Sam Beres

Hi, good afternoon. Thanks for taking the questions. Ken, you talked a little bit in terms of factors affecting the comps trend and talk a little about some of the internal things just as switching the marketing focus in Q1. Then also some of the external headwinds, so I know it’s probably high level exercise, but how do you think about breaking down kind of the comp softness between those internal things that you've done versus that external environment?

Ken Calwell

Yes. Good question. I think as we look at it it's probably – you know, I rank them this way the aggressive discount thing in the overall category, in the pizza category, we still believe this by far and away the strongest factor. And to answer your question on the percentage basis, we think that that's more than half of the overall issue in terms of the impact.

I think in terms of – in terms of the next one underneath that, I'd say that the aggressive discounting being number one, I'd say behind that is the TRP advertising TRP challenge. Now we of course knew going into the Olympic and a national presidential year that the overall advertising cost would be higher and we plan for that. However the challenge is that as you come into the summer months as I mentioned early would thus being local advertising not a national advertiser we are relying on those local TRP spends and we traditionally in each and every year we put our advertising highest in the high seasonality period of the year.

So, when we start to hurt on transactions as we came into the spring at the very time that we were launching the – at the end of first quarter or second quarter we are launching the online ordering, there were two things there, the launch of that online ordering, but at the same time our overall sales were coming down. And so, as we had -- as you came into the summer as I mentioned early we just didn't have the amount of advertising TRPs to be able to -- across the broad markets at least be able to affect the overall comp.

So I'd say number one was by far and away the aggressive discount thing. Number two, the TRPs, the TRP shift, and number three I would say, to a smaller degree the overall shift in media on online ordering.

Sam Beres

Great, That's helpful. Thanks. And maybe in terms of online ordering, I know you talked about maybe taking down the expectation of number and mix of transactions via that channel here for the full year, so I guess is taking down that expectation just a function of you are not putting as many marketing dollars behind it as you previously expected? Or have you seen the uptake and transition to that online ordering grow organically at maybe a slower rate than you had anticipated?

Ken Calwell

Actually I think primarily we're putting a little bit less overall marketing dollars behind at this year and building it more over the longer term. And I'd say what we have seen is the – and I touch on this earlier, but the overall mix during the launch was obviously large. What's been very encouraging is that we seen that mix stabilize and start to grow organically as you said and grow organically and still seeing that the nice increases in guest check associated with those online orders staying very high -- the higher end of the range that we've seen year to-date on this.

So, we again believe that it’s a right thing for our customers and we're seeing that with them voting with the -- your pockets book in terms of growing that mix organically throughout the year. So, we'll keep a long term focus on that, which as I said more balance kind of marketing approach between that message and our overall best pizza message.

Sam Beres

That's helpful. And then, maybe lastly, just in terms of the unit development outlook and appreciate the color you have given for 2016, but maybe in terms of looking out towards 2017, in terms of a softer comps trend line, how you seen that negatively impact franchisees appetite for development or what would the signs be if that would be the case?

Ken Calwell

Right now as we're looking at it, as I mentioned we're right on-track for this year hitting the range that we took about the 115 to 120 stores opening this year we really like the cadence and the way that’s [Indiscernible] into the year. As we look out, I think right now it’s hard to predict next year completely but just looking at overall base pipeline from a range perspective, I would say that we are looking at the -- the kind of the cadence of overall increases, overall store openings to stay very consistent with what we have seen this year and I think we’ll have as much we believe a much better view or window into that probably over the coming three to four months that right now I’d say that we see that the overall number of store openings per quarter kind of staying at the same cadence what we’ve been seeing this year.

Sam Beres

Great. Thanks.

Operator

There are no further questions at this time. I’d like to turn the call back over to management for closing remark.

Ken Calwell

Thank you. Again I just like to thank you all for your interest in Papa Murphy's and we’ll look forward to sharing progress with you in our coming quarters. Thank you.

Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

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