As pizza chain adds new corporate stores, it also considers refranchising
Papa John’s grew revenues 17.1 percent to $472.9M and comp(arable) sales by 23.8 percent year over year during its third quarter of 2020, continuing its latest string of solid sales growth The pizza chain has been focusing on diversifying its menu through new introductions and limited-time offers. What resulted was an increase in ticket and an expansion of sales while growing channels, including third party delivery, where mix has tripled from 2 percent to 6 percent over the last six months, noted executives on a third-quarter earnings call.
Profitability, too, has increased. Higher sales have translated to increased franchise revenue, higher commissary profit and better margins from company-owned stores. Consolidated income before taxes increased to $20.9M, an increase of $20.2M from last year. Adjusted diluted earnings per share totaled $0.35, a $0.42 increase from the $0.07 loss in last year’s quarter.
Profiting from menu introductions
According to Papa John’s Chief Executive Rob Lynch, Papadias have helped increase average check. Originally thought of as a lunch daypart boost, Papadias have become add-ons to orders, increasing total basket size. The limited-time Buffalo Chicken Papadia, introduced this summer, is on track to become a permanent part of the menu, he revealed.
The Shaq-a-Roni pizza provided lift to the average check, also. The special promotional pizza, priced at $12, was higher than the average price for a Papa John’s pie. As sales and margins have been on the rise, executives have noticed an increase in franchise interest, as well.
Benefiting from a pandemic-minded consumer
The pandemic has provided momentum to Papa John’s and other pizza businesses. These concepts are well-suited and well-acclimated to takeout business, including delivery and pickup, particularly in US markets. Domino’s and Pizza Hut have also performed well this year. In their most recent quarters, Domino’s posted US comp sales growth of 17.5 percent compared to last year, while Pizza Hut grew US comp sales by 9 percent.
During 3Q, Papa John’s domestic comp sales increased 18.2 percent from last year’s quarter. Meanwhile, North American franchise stores increased comp sales 25.6 percent from last year. Papa John’s loyalty program is also boosting sales and recurring business. Loyalty members are producing higher revenue than non-loyalty members. The Louisville, Ky.-based chain hopes to continue to personalize the experience for these customers and engage them in the long term.
There’s no doubt that part of the lift to sales is temporary, and that after the pandemic, there will be less tailwind to sales from homebound consumers hesitant to dine out. This is, admittedly, part of an upcoming, long-term reckoning for many quick-service brands, not just pizza chains. Drive-thru, delivery, in-store, and curbside pickup options are appealing to customers who want to manage the health crisis safely.
Recalibrating franchise development
A Midatlantic development agreement announced in September will provide additional expansion in the Philadelphia and New Jersey markets. HB Restaurant Group, which owns 43 Papa John’s restaurants will add another 49 over the next seven years. According to the announcement, it’s the largest Papa John’s franchise agreement in 20 years.
Executives say the brand is underdeveloped both domestically and internationally, as they build a pipeline that includes 190 stores in the United States and 1,200 units internationally. And with increasing demand, Papa John’s has lowered inducements on new franchises.
With only 200 stores in China, Papa John’s has plenty of runway there. South America is another future outpost: Brazil, Chile and Peru will provide opportunities for growth. Although 38 international stores have closed this year, executives are signaling a new chapter of international expansion.
Part of tapping unmet demand abroad requires a complete franchise infrastructure. Lynch indicated that the Papa John’s UK office would be the consolidated, central international hub for growth and that Papa John’s was strengthening the global franchise team.
With a bullish perspective on the near future, Papa John’s plans development of corporate-owned stores next year on top of the franchise development already planned. Currently, Atlanta is home to Papa John’s largest corporate market. While it plans additional corporate stores, it may refranchise its existing 597 restaurants, providing an accelerated development path for franchise partners.
“And we have (approximately) 600 company restaurants that provide that opportunity for the right partner,” noted Lynch. “And so we have a lot of those conversations going right now with external partners who want to come in and buy a number of restaurants and then build on top of that.”
Leveraging a brand renaissance
Earlier this year, the company announced that it was planning to relocate some staff to the Metro-Atlanta market. A search is underway and should be completed by the end of the year. The new Atlanta corporate offices should open by summer of 2021, while many key functions will remain in Louisville.
“Atlanta is the home of a large number of consumer and QSR brands and provides great access for us to a deep talent pool,” said Lynch. “Atlanta’s world class airport will also connect us to the domestic and international markets that are key to our brands future.”
Papa John’s also authorized a repurchase of stock in the amount of $75M, signaling the organization is closer to business as usual, at least more so than many other restaurant chains.
Year-to-date revenues increased 11.8 percent to $1,343.4M. Income before taxes increased $49.5M to $59.3M. Domestic comp sales increased 15.6 percent while global comp sales increased 14.9 percent for the nine months that ended September 27, 2020. Adjusted diluted earnings per share increase to $0.99 compared to a diluted loss per share of $0.06 for the same period last year.
This article uses data from a Papa John’s earnings release and information from Seeking Alpha, as well as a third quarter earnings call.
Photo credit: Papa John’s (featured preview image)
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