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Cold Stone Creamery
2020 U.S. Franchise Disclosure Document
Updated November 26, 2020
On February 14, 2020, MTY Food Group Inc. (MTY) disclosed whistleblower allegations. The company issued a press release 10 days later stating the claims were researched by Audit Chairman Gary O’Connor on behalf of the board, who found that they were reported by an “active employee”, “baseless”, “evaluated” and “dealt with in the past”.
MTY attempted to quiet its negative publicity and declining stock price later that day during its investor conference. For example, in response to concerns about the frequency of store closures within MTY’s sales leader, Cold Stone Creamery (CSC), CEO Eric Lefebvre stated, “obviously, there’s always going to be more store openings than more store closures for Cold Stone just because it’s such a big brand…. [T]hings are going to go well.” On March 9, 2020, Forbes published an article that called this statement into doubt.
On March 27, 2020, CSC published its 2020 U.S. Franchise Disclosure Document, which is required by U.S. Franchise Rule and enforced by the U.S. Federal Trade Commission. This law prohibits franchisors from “making statements that contradict” its required information (PDF pg. 89). CSC’s 2020 federal disclosures confirm our belief that MTY has intentionally misled investors regarding the whistleblower allegations.
For example, CSC solicits franchise investors using claims that its franchise network is not just growing, but is among the “fastest growing” and “rapidly growing”. The message of positive growth aligns with Lefebvre’s claims during the February investors conference. However, the federal disclosures and other documents reflect that CSC has not grown in the U.S. since at least 2007 and has closed 500+ stores in the same period—contradicting MTY, Lefebvre and or O’Connor’s statements to investors.
Lefebvre also claim’s CSC is a “big brand”. But CSC overstates its total locations to give investors the impression the brand is bigger than its own data supports. For example, CSC claims to operate “over 1,000 locations” or “well over 1,000 locations in the United States”. However, the disclosures confirm the company had just 898 U.S. franchises as of November 2019. Similarly, the company purports to operate more 400 international locations and 1,500 locations globally in more 30 international markets, none of which is supported by the federal disclosures or other documents.
The whistleblower allegations also reported omissions that are required by law. For example, “Table No. 5” is required by law, but was omitted from CSC’s 2018 (PDF pg. 106) and 2019 (PDF pg. 110) FDD’s. This table requires franchisors to publish growth data that gives “prospective franchisees insight into anticipated growth within the system…”. Without it, franchisors can promote investments using false growth statements without providing prospective franchisees the data necessary to discover the truth.
In 2018 and or 2019, CSC promoted its franchises using statements that falsely gave the impression the company was “one of the hottest tickets around”, a “can’t-miss” investment opportunity in “high in demand” that was “experiencing unprecedented demand”.
The table was added to the 2020 federal disclosures (PDF pg. 103) two months after we reported its omission to MTY. Thus, after years of using false statements that implied investors are “clamoring to get in on the action”, well before COVID, the table projected just nine new franchises for 2020. This contradicts MTY, Lefebvre and or O’Connor’s claims that the allegations were reported by an “active employee”, were “baseless”, “evaluated” and “dealt with in the past”. It also supports our claim that these were false statements to investors that are now being covered up.
Franchisee profitability was another major subject within the whistleblower allegations. CSC’s 2018 and 2019 FDDs disclosed that 84 (9.2%) and 97 (10.5%) franchisees, respectively, left the system in the prior year. The company’s 2020 FDD disclosed that 90 (10%) of its franchisees left the system in the prior year. Therefore, a total of 271 franchisees left the system in just three years—all before COVID.
Finally, and by far most importantly, CSC claims, (1) it grew its international locations by 13, and (2) that it had 341 international locations at the end of 2019. Based upon information from two separate sources, we strongly believe that each of these statements is false. The information shows that CSC declined internationally in 2019, had far fewer than 341 international locations prior to closing the Singapore stores, and that it had knowledge that the information in its 2020 FDD was false.
We believe these statements are intended to avoid legal liability to shareholders that lost $1.1B during MTY’s stock plummet and or regulatory action for CSC, MTY, Lefebvre and or O’Connor’s false statements to investors. We will publish more details on this subject shortly in an open letter to investors and follow up with another investigative news journal.
MTY’s board has a fiduciary obligation to act in the best interest of its shareholders. It’s our belief that MTY has been dishonest with its shareholders, which has led to significant shareholder financial losses since February 14, 2020. Investors should not be quick to believe these losses are due to COVID. Instead, they should contact their legal counsel to explore holding MTY legally accountable for their losses.
We are happy to provide additional information and support upon request.