When a good stock leaves a bad taste
Stocks can suffer for many reasons, this U.S. advisory tells us. But coming back from poor management and a bad economy is a big job.
We hear a lot about the recovery of the economy these days.
But how about the recovery of individual stocks?
Stocks can go bad for many reasons. But the worst-case scenario almost inevitably comes from inefficient management in the face of an unforgiving economy.
We’ve seen even the biggest of companies shaken to their roots in such circumstances. And some never recovered.
But today we take the case of a smaller company. It’s a company you may not know unless you’ve travelled a fair bit in the southern United States, a pizza chain based in Texas.
But this stock could stand in for many other stocks that have lost their way ... although not every stock has a private eye in its story.
The stock is Pizza Inn (NASDQ-PZZI). Its story comes to us from Mr. Max Bowser, one of America’s leading advocates of microcap stocks. He has the stock on his list of “Minipriced Stocks in Buying Range” in The Bowser Report as he watches its progress carefully.
For the inside story, Mr. Bowser acknowledges his debt to a comprehensive article on the company by Mr. Barry Shlachter in the Fort Worth Star-Telegram. Fort Worth is the company’s home base.
And the company is striving to make its way back to happy days.
Jo-Jo the cartoon chef
Pizza Inn is 51 years old. That means it goes back to the rock ‘n roll 50s, when pizza exploded onto the scene in North America.
It’s trying to revive the spirit of those days. It is, says Mr. Shlachter, “bringing back checkered tablecloths and breathing life into its discarded mascot Jo-Jo, a dough-flipping, mustachioed cartoon chef.”
But retooling its image is just one step the company is taking. As the reporter comments, “Not all memories at the chain are happy ones.”
At various times over the past 20 years, Pizza Inn has slipped into red ink, lost stores, sued its founder in a trademark dispute, lost a case against a former CEO with a big severance claim, lost a legal fracas with Pepsi, and claimed a lone legal victory over its former attorneys.
You might surmise that the product on the tables must have been pretty good to survive all of this legal mayhem. But there were other flaws in this franchised operation.
Difficult to succeed
Mr. Charlie Morrison came on board as the chief financial officer of Pizza Inn in the summer of 2007. Within four months, he was the CEO. And he had some problem-solving to do.
“Franchises didn’t maintain their facilities,” said Mr. Morrison in an interview with the Star-Telegram reporter, “and we didn’t focus on how to grow their business.”
In fact, it wasn’t just that management had not been doing the right things — it was doing some weirdly wrong things.
“Instead of keeping franchised restaurants to standards, a key corporate activity was policing them to ensure they used proprietary products sold by the chain,” stated Mr. Morrison.
“We made it very difficult for them to succeed,” he added laconically.
There was even a gumshoe on the case.
The dumb thing
Mr. Jim Baenisch, now 71, has been a franchise owner for 45 years. He once owned as many as 25 outlets in five states. Yet at one point, Mr. Shlachter relates, the company went as far as to “hire a private detective to determine whether he was concealing sales and therefore paying smaller royalties.”
“They had this guy sit in one of my restaurants and watch,” Mr. Baenisch told the reporter. Yet there’s an even stranger twist to this tale.
“The dumb thing was, they told me at the time they were doing it,” he said. “They had me come into the office to meet the guy, who tried to get me to confess. It really irritated me. If I could have, I would have walked away from Pizza Inn.”
But he stayed. He still owns one franchise, and now he’s bullish on the future of the chain. He just spent $75,000 remodelling his outlet.
From spying to saving
Pizza Inn has turned from spying to saving, pointed out Mr. Morrison, who was once the head of the Steak & Ale chain, and an executive with Boston Market and Pizza Hut. The company has reduced prices on key ingredients like cheese, flour and pizza sauce.
Shortly after he became CEO, Mr. Morrison also called in 10 large franchise operators to pick their brains on how to bring the firm back to its glory days. A new advertising agency and new architectural firm were brought in to spruce up the chain.
There are encouraging signs. New Pizza Inns have been opening in South Carolina and Texas. Earlier this week, the company opened a second restaurant in the Sultanate of Oman.
It already has many outlets in the Middle East, like one it recently opened one in Jeddah, Saudi Arabia, near the King Abdullah University for Science and Technology. Students everywhere love pizza, apparently.
There is more to be done. Revenue and net income were down for the past fiscal year, Mr. Bowser adds in his footnote to the story. “Admittedly, management has steered the company away from a loss. But the stock won’t flourish until sales and profits reach new highs.”
The shares are at $1.71 today. They have been as high as $2.72 and as low as $0.98 in the past 52 weeks.
You may never invest in Pizza Inn (or eat there, for that matter). But there is a universal principal involved — know what’s going on with your stocks. Even a company with a successful product can go astray if management loses touch.
So it’s up to you to do some detective work of your own.
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