Bottom Fishing in Freshii – $FRII

I’ve been following Freshii for a few years. It’s a good example of busted IPO. It may provide an opportunity for investors with a strong stomach.

Share Performance

Freshii went public at $11.50 in late 2016. Below is how shares have performed since then.

Look out below. It’s easy with hindsight to criticize those early investors. There was a lots of hype for the business. The CEO is the founder of the company who started the first few stores and grew the franchise quickly. Growth was fast and the establishment was popular. Needless to say there were many positives.

Initial capital was brought in to grow store count rapidly. The inital goal was between 810 and 840 stores with EBITDA of 20-22mil by end of 2019. They ended 2019 with 470 stores. If you purchased shares at $11.50 and everything went according to plan, you were paying 15x ebitda 3 years out. Doesn’t seem that expensive for a franchise with low capital requirements, good growth prospects, incentivized management and a decent economy. Perhaps paying up for growth when it doesn’t materialize can be damaging.

The company invested in talent to source and assist franchise partners in store operations. They had 9 to support 240 stores in 2016. It became evident in early 2018 that they weren’t on track to to have as many stores open as the initial offering documents mentioned. The SSS started to break the previous positive trends and the app was subpar. Eventually in Q3 2018 the company pulled it’s guidance and shares tanked from $4 to about $2.50. The SSS underperformance continued in 2019 and shares continued to languish. Then covid.

Right now shares are not much above the March 2020 lows and trades at market cap of 30-35mil USD and EV of 0-5mil USD. If you purchase shares today, you are getting the business that does 18-22 mil in revenue with low capital requirements for essentially nothing. This of course is assuming that the cash isn’t squandered.

Their franchise fee is 6% of gross store sales. They require franchise partners 1.5% that must be spent on advertising. They use a Master Franchise Agreement for International locations. They have 70 locations internationally.

Part of the value proposition to franchise partners is that the upfront captial required is lower than other potential choices due to lower kitchen equipment required.

Looking Back at Income and Cash Flow

Below is the income statement since they have reported numbers.

Like most franschise companies, FRII has high gross margins. They have been bumping around operating break even since going public.

CFFO (before working capital invesment) has been positive every quarter except Q1 2020.

Risks

It’s important to understand the risks with FRII. The share price wouldn’t be where it is without some hair. All you have to do it enter the cashtag into the search bar on twitter and get a sentiment check on how negative things are.

  • The company’s brand does not carry the same brand value as competitors like Subway, Chipotle, etc
  • The food is quite expensive given it’s simplicity. They have minimal kitchen equipment which means that the food is not cooked fresh and can lead to a poor user experience. The company averages 3.5-4/5 on google reviews.
  • The cash could be spent on things that don’t add value to stakeholders.
  • They may have little or no interest in new franchise partners or existing partners opening new stores.
  • covid
  • The management team is young and has limited capital market experience.
  • There are dual class shares and the CEO owns the voting shares.
  • There are some change in control measures to make it costlier to do a takeover.

Positives

  • The CEO started the company from the first store and knows how to operate a store.
  • If there is a take over initiated, the voting shares only carry the same weight as the common store.
  • The have some CPG partnerships that can move the needle in revenue and customer reach. These include Shell and Air Canada.
  • Expectations are very low and it won’t take much news to move the share price.
  • Despite the challenges, the company has maintained the level of cash on the balance sheet. The company is debt free.

Conclusion

Despite the negativity, I think FRII presents an interesting opportunity. Expectations are low, the business is captial light and management has skin in the game.

Anyone else crazy enough to own this one?

Thanks,

Dean

*the author is long (a very small amount) of FRII

2 Comments

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2 responses to “Bottom Fishing in Freshii – $FRII

  1. Awesome summary, thank you. Taking a glance at the company, it looks good and as you have mentioned, the Enterprise value is close to Zero(if not Zero at current price!) What do you think is the intrinsic value per share of this company or at what price would you sell the stock at?

    • Hey. Thanks for commenting.
      I don’t have an intrinsic value per se, but I feel the shares are quite cheap as long as the company maintains its market position and we one day live in a world with no lockdowns.

      Hope that helps.

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