Freshii Plunges as Lofty Growth Targets Prove to Be Unreachable

  • Company cites end of partnership with Target among reasons
  • The shares decline to half of their IPO price in January

Freshii Inc. fell the most since its initial public offering after the quick-service restaurant chain slashed its store-opening forecast for the current fiscal year and its earnings guidance for 2019, citing an ambitious schedule that proved to be impossible to meet.

The shares tumbled as much as 40 percent before closing down 35 percent at C$5.75 in Toronto, half the January IPO price of C$11.50. Trading volume was more than 30 times the full-day average of the past three months.

Freshii was among a series of high-profile, retail-focused IPOs on Canada’s commodity-heavy benchmark over the past 12 months -- together with Aritzia Inc., Canada Goose Holdings Inc. and Jamieson Wellness Inc.

Freshii said it now expects to open 90 to 95 net new stores in 2017, down from an earlier forecast of 150 to 160. The company expects to have 730 to 760 stores open by the end of fiscal 2019, down from 810 to 840. It also cut its 2019 system-wide sales forecast to $275 million to $285 million, down from an earlier outlook of $355 million to $365 million, and now sees adjusted Ebitda of $15 million to $17 million, down from $20 million to $22 million.

“Today’s announcement is extremely disappointing to me,” Freshii Chief Executive Officer Matthew Corrin said on a prerecorded call. “We did not anticipate that entering so many new markets all at the same time would impact our typical nine-month timeline from the execution of a franchise agreement to opening the store.”

The company blamed the end of a partnership with Target Corp., which saw the closure of 18 restaurants, delays to multi-unit franchisee store openings, and “unforeseen challenges” from a far greater number of net new store openings relative to 2016.

Credibility ‘Crippled’

Corrin said Freshii “learned a lot from this experience” and has taken several steps to address the delays.

CIBC analyst Mark Petrie cut his rating on the stock to neutral from outperform and reduced his price target to C$9 from C$14. As of Monday, the stock had four buys, six holds and no sell recommendations.

“Disappointing 2Q results and confusing communication had already crippled credibility with investors, and this clearly compounds the issue,” Petrie said in a note Tuesday. “While we believe the consumer and franchisee propositions remain attractive, and see 2019 guidance as achievable, the near term presents too much uncertainty to recommend the stock today.”

RBC Capital Markets cut its rating to sector perform from outperform and reduced its price target to C$8 from C$12.

“We believe FRII’s trading multiple prior to the guidance revisions already reflected a degree of uncertainty in the company’s ability to meet its previous targets,” RBC analyst Sabahat Khan said in a note, using Freshii’s stock ticker. “The guidance revision is likely to exacerbate investor concerns.”

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