News

Freshii closes Target units, reports delayed openings

September 29, 2017

After operating 18 locations inside Target stores for the past two years, Freshii announced this week that it's closing all of them with 17 shuttered in the 13-week period ending Sept. 24. The last will close by the end of the year and according to a news release, Freshii CEO and Founder Matthew Corrin said "sales levels didn't support a continued investment of resources by both parties."

While the impact that the closure of the Target locations will have on system-wide sales revenue is not material (annual impact on royalty revenue was estimated to be about $120,000 to $140,000), the closures have had an impact on the company's store openings in the 13-week period that ended Sept. 24, Corrin said in the release. The chain has dropped the total of net openings to 90-95, down from its previous prediction of 150-160 stores.

Future non-traditional relationships
Although it failed, the Target experiment will help Freshii improve on future non-traditional relationships, said Corrin, whose team has conducted an extensive review of the Target relationship, including site selection, branding, operations and menu-mix.  

As a result, Freshii will revise its non-traditional location operating model going forward to include an increased focus on tailoring menu offerings as is appropriate and on improving in-store labor practices.  

"We believe that the takeaways from this review will result in more effective non-traditional partnerships going forward, and despite the impact on third-quarter openings, that concluding the company's relationship with Target is in the best interests of the company," Corrin said.

Growth rate stalled

The Target closures were just one factor that led to the chain's slower-than-expected net store growth in fiscal 2017, according to the release. Freshii has revised its 2019 outlook down by an additional 20 stores. Other hindrances to growth included delays among multi-unit franchisees as well as developmental delays.

Multi-unit franchise delay
This past year, Freshii had partnered with a greater number of large, multi-unit franchisees relative to prior years. Markets, including the United Kingdom, California, Florida, South Carolina and Virginia, have been more conservative in their initial real estate selection processes than Corrin initially anticipated. 

"As a result, we are now expecting a number of multi-unit franchisee store openings originally projected to occur in the fourth quarter of fiscal 2017 to extend into fiscal 2018," Corrin said.

Development delays
Because Freshii's development team was tasked with facilitating a far greater number of store openings relative to 2016, it was stretched, which led to unforeseen challenges.

In order to address development delays, the company has taken a number of steps in 2017, Corrin said. Freshii has:

• Consolidated its Canadian general contractor group in North America, using only the most efficient contractors going forward, in order to improve overall build-out efficiency.
• Added two team members to its in-house design group to increase capacity.
• Engaged a global project management firm to oversee and manage store build-outs.
• Deepened relationships with several dedicated external real estate consultants to source and coordinate site selection in North America.

Fiscal 2019

Freshii is revising its outlook for the period through the end of fiscal 2019 as follows:

• System-wide front door store count of between 730 and 760 stores by the end of fiscal 2019, down from between 810 and 840 stores. (There are no e-stores included in this revised fiscal 2019 outlook.)
• The company reiterates its prior annual same-store sales growth outlook of between 3 percent and 4 percent for the period, fiscal 2017 through fiscal 2019.
• System-wide sales growing to between $275 million and $285 million by the end of fiscal 2019, down from between $355 million and $365 million.
• Selling, general and administrative expenses as a percentage of system-wide sales of between 5 percent and 6 percent for the period fiscal 2017 through fiscal 2019, up from between 4 percent and 5 percent.
• Pro Forma Adjusted EBITDA growing to between $15 million and $17 million by the end of fiscal 2019, down from between $20 million and $22 million.