Pizza Inn back on track

Pizza Inn back on track
Tags: Pizza Inn, Public Companies
September 22, 2008 - Richard Slawsky

For a long time, it didn't look as if Pizza Inn was going to make it to its 50th anniversary, much less return to its glory days.

The company, based in The Colony, Texas, and founded in 1958, grew to nearly 800 units in 33 states before declaring bankruptcy in 1989, a result of increased competition in the pizza industry. Although Pizza Inn managed to regain its footing a few years later, the number of restaurants fell to less than 400.

To make matters worse, a series of boardroom intrigues beginning in 2002 left the company without a clear direction, mired in litigation and bleeding cash.

Today, things are a bit different. Pizza Inn is riding a wave of five straight comparable-store sales increases and is expanding both domestically and internationally. After losing $6 million in 2006, the company has returned to profitability.

"I think we've really turned the corner," said Charlie Morrison, who, after serving as acting president and chief executive officer since August 2007, was officially named president and CEO in December 2007.

"We make an outstanding product," he said. "Certainly, we've gone through a lot of challenging times, and survived based purely on the quality of the pizza and the service we provide."

Overcoming an era of greed

Much of the turmoil at Pizza Inn began in August 2002, when then-CEO Jeffrey Rogers was forced to leave the company. Rogers had borrowed $1.9 million from Pizza Inn to buy company stock, and when the stock price fell, Rogers was left deep in debt.

The company, believing Rogers couldn't pay back the loan, let him go and appointed Ronald Parker CEO.

Rogers, however, ended up selling 2.7 million shares of Pizza Inn stock to investment firm Newcastle Partners, which left him with enough cash to pay off his debt to the company -- and gave Newcastle a controlling interest in the pizza chain.

Parker and three of his top executives persuaded the board of directors to enact changes to the executives' employment contracts that would guarantee lavish payouts in the event of a change of control. Newcastle, which eventually seated two of its nominees to the board, was sharply critical of the move as well as of Parker's pay package.

After Parker resigned in December 2004, he demanded his "change of control" payout, which amounted to more than $5 million and could have bankrupted the company again. In turn, the company sued Parker and the law firm that had advised him in rewriting the employment contracts.

Meanwhile, the company's performance continued to slide.

"There was a lot of distraction and litigation-related things that made it very hard to focus on running the fundamentals of the brand," Morrison said. "Bringing Newcastle on board was a real positive for the brand, helped focus us on a path for growth in the future. They have been a wonderful shareholder in the company and helped shape us to where we are today."

Light at the end of the tunnel

In 2005, the company named former Whataburger chief operating officer Tim Taft to the CEO post. Taft, aware of the suspicion that many franchisees held of the parent company, took the post for a first-year salary of $1. (Read also, New Pizza Inn CEO eager to start turnaround)

"I believe so strongly in the vitality of this brand that I'm going to come in for a buck," Taft told Pizza Marketplace when he was hired. "If the company does well, then I'll do well. If the company doesn't, then I won't."

One of the first things Taft set out to do was to repair relationships with franchisees, who liked what they heard.

"When Tim came and spoke to us, he laid out the things he was going to do in the next few months," Tom Smith, a 32-year Pizza Inn franchisee, told Pizza Marketplace in 2006. "Probably 94.8 percent of those were done when he said they'd be, and I can't honestly tell you what the other 5 percent are."

In September 2006, Pizza Inn settled its litigation with Parker and the company's former law firm, clearing the decks for a fresh start (Read also, Pizza Inn settles with Parker, former CEO, for $2.8 million).

Along the way, Taft hired Charlie Morrison, formerly the president of Steak and Ale, as the company's chief financial officer. Franchisees were shocked, however, when Taft abruptly resigned after just 18 months in the CEO post to "pursue other interests."

Despite the speculation surrounding Taft's departure, he had accomplished what he was hired to do, he said in a September interview with Nation's Restaurant News. In the meantime, Morrison, who was named interim CEO in the wake of Taft's departure, set out to calm anxious franchisees.

"When Tim left, we immediately had the opportunity to host a bunch of regional meetings, and I got on the road and met face to face with groups of franchisees one on one, all the way from some of our largest franchisees to single-unit operators," Morrison said.

"We assured them that things were fine in the company, that we were on track, that Tim had done some very wonderful things to help get the brand back on its feet and that this was an opportunity for us to continue down that path," he said. "There was a sense of surprise, but I think that the way we dealt with it certainly reassured them that things were going to be OK."

Getting ready to grow

In the nine months since Morrison has taken the CEO post, the company has signed deals to open restaurants in the Middle East and Mexico, as well as opened several new locations in the United States. The company also is eyeing expansion in China, where it already operates two restaurants.

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In recognition of the company's 50th anniversary, Pizza Inn also reintroduced "Jo Jo," the pizza-tossing, mustachioed mascot who decorated most of the Pizza Inn signs in the company's glory days of the 60s, 70s and 80s.

"If there was one thing we had lost before I took over, it was the nostalgia associated with Pizza Inn," Morrison said. "And if you think about the heritage and the nostalgia, Jo Jo has a very strong position in that."

The company has launched a "back-to-basics" program focusing on the fundamentals that brought the company its original success. Pizza Inn also is launching a new prototype restaurant, the first of which is slated to open in Denton, Texas, within the next few weeks.

As is the case with other pizzeria operators, Pizza Inn has been struggling with high commodity prices and a weak economy. Morrison is confident, however, that the company is on the right track.

"If you look at our performance, we have run almost six straight quarters of positive same-store sales growth, so what we are doing is working," Morrison said. "And as long as we stick to our guns we should come out on the back end a much stronger company."