Yahoo Finance Domino's sees a vulnerable Papa John's—but here's how the pizza giant's fighting back
The first shot in the 2020 pizza wars has been uncorked by Domino’s Pizza CEO Richard Allison, who in a recent interview took aim at one of the industry’s biggest brands.
Allison’s target happens to be a wounded veteran that’s trying to pick itself up from the battlefield and proudly soldier on. That would be none other than Papa John’s.
Robert Lynch, the company’s newly-appointed CEO after a year of turmoil “brings a really good track record from Arby’s. As a participant in the industry, I admire them,” Allison said in an interview with Yahoo Finance.
“I think they did a nice job over there,” he added — referencing the company’s turnaround efforts in the wake of ousting its founder John Schnatter.
“Papa John’s third quarter I think stabilized the business a bit, but they are still down about ten points [on sales] from where they were two years ago,” Allison said.
“It’s a brand that certainly has I think some equity out there in the marketplace...[but] the biggest problem they are going to have in the near-term is getting their franchisees back to the level of profitability where they get excited again about investing in the business,” the CEO told Yahoo Finance.
“I know they are planning to continue to subsidize their franchise system in 2020, which if I was sitting in Louisville [Papa John’s HQ] I would be doing the same thing most likely,” Allison said. “I think getting their franchisees to a level of profitability where they can take them off the subsidy drug that will be the real turning point to that business if they can get to that place.”
A Papa John’s spokesperson didn’t return Yahoo Finance’s request for comment for this story.
High hopes for Lynch
To be sure, expectations are running high on Wall Street that Papa John’s new CEO — who arrived in August — can drive a successful turnaround in 2020.
Papa John’s stock has surged 57% year to date on the back of excitement surrounding the well-regarded Lynch, who many restaurant insiders credit with the revival of Arby’s through the use of clever marketing and better tasting sandwiches.
Further igniting the stock price has been the ongoing involvement of activist investor — and restaurant turnaround pro — Starboard’s Jeff Smith. After injecting $200 million into Papa John’s in February, Smith is now chairman of the company, and helped lure Lynch to the team.
Up until Lynch’s arrival, Papa John’s stock and financials languished as it dealt with the furor stemming from Schnattner’s use of a racist epithet on a company conference call.
Smith and Lynch have worked hand in glove since the summer to develop a turnaround strategy for Papa John’s, which includes installing a new management team — something Lynch told Yahoo Finance in an interview was designed to get better ideas for the brand out into the open.
Another strategy has been to continue to offer royalty relief to Papa John’s franchisees, which is expected to continue in the near term. Many are dealing with weak sales and profits due to the consumer reaction to Schnatter’s comments. Some of Papa John’s franchisees have closed stores as a result of the profit pressure, in turn hurting the parent company’s financial statements.
Lynch is no stranger to dealing with franchisees, and one of his first acts as Papa John’s CEO was to tour the country and listen to their concerns.
He told analysts on a November 6 conference call that franchise owners were “very energized very excited and very committed to working with us collaboratively to get the system where it needs to be.”
And one of the next elements to Papa John’s turnaround is to drive some product excitement in 2020. Adding some “wow” to the chain’s menu has taken a backseat recently, as execs dealt with the crisis stoked by Schnatter’s presence.
Speaking to Yahoo Finance, Lynch teased that new products are likely on tap next year.
“Pizza is a dinner business, and I think there is an opportunity for us to leverage our innovation to create business in times of the day where our restaurants are under-utilized,” the new CEO said.
“I think we are going to conquer lunch first and then we will start thinking about breakfast. We think there is an opportunity for us to meet a broader array of customers for lunch,” he added.
Papa John’s has no plans to launch breakfast anytime soon, a company spokesperson said. But sandwiches — utilizing Lynch’s experience from Arby’s — appears a highly probable as a way to create business during lunch hours.
Ultimately, Wall Street will want to see a more serious pickup in Papa John’s sales in 2020 than what has transpired this year.
Papa John’s North America same-store sales rose 1% in the third quarter, a marked reversal from the 5.7% drop in the second quarter and better than Wall Street’s estimates. At the time, Lynch cited better traffic trends to its restaurants helped the brand.
Adjusted operating profits for North America company owned restaurants improved to $7.4 million, up from a slight loss a year ago. For North America franchised restaurants, operating profits increased to $20.4 million from $9.3 million a year earlier.
And international same-store sales rose 1.6% — the segment’s profits fell to $4.1 million from $4.5 million a year ago and in-line with forecasts.
While a welcome turn in trends this year, Papa John’s sales have lagged pizza rival Domino’s Pizza and are well below gains achieved by McDonald’s U.S. and Burger King.
Considering Papa John’s sells affordable family friendly fast food, the brand has more potential than modest quarterly sales gains.
Now it’s up to Lynch to reignite the business, and return fire to Allison (and those at Pizza Hut) in 2020.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi
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