Papa John’s Building a Foundation from Pandemic Breakthrough

    The pizza chain earned $134 million in free cash flow in Q3. 

    Fast Food | November 2020 | Ben Coley
    Papa John's Double Cheeseburger Pizza and Papadia.
    Papa John's
    How much of recent growth can Papa John's retain?

    Papa John’s CEO Rob Lynch couldn’t be more ecstatic with how his brand is positioned entering the final stretch of 2020.

    For the second consecutive quarter, same-store sales growth at North American restaurants breezed into the double digits at 23.8 percent. Company revenue increased 17.1 percent to $472.9 million. And thanks to the opening of more markets, international comps finished Q3 at 20.7 percent after a 5.3 percent bump the previous quarter. In Q3, 225 international stores were closed, but that has dropped to 90.

    But Lynch is a realistic restaurateur. He knows not to expect comp levels to maintain that pace as restrictions lift and more consumers are comfortable dining at restaurants. So after benefiting from pandemic tailwinds for most of the year, the key question becomes, how much of that growth can Papa John’s retain? Is there a foundation to build off of for 2021 and beyond?

    As the CEO explained, being realistic and optimistic aren’t mutually exclusive.

    “We have been focused not on any deceleration,” Lynch said during the brand’s Q3 earnings call. “In fact, we’re very happy, very pleased with the continued growth of our business. We have been focused on the foundation. We’ve been focused on the investments we’re making and the quality of our core products. We’ve been focused on the investments we’re making in the innovation that’s going to continue bring in new customers and continue to drive frequency. And we’ve focused on getting more productive, both corporately with our G&A as well as at the restaurant level through some of the investments we’ve made in our infrastructure.”

    To Lynch’s point, Papa John’s has leveraged its historic sales growth to push the company forward. From a corporate level, the chain is opening a new headquarters in Atlanta that’s expected to create G&A efficiencies. Inside stores, the brand has invested in a call center and third-party delivery drivers to improve throughput and a new dough cutter to reduce pizza-making time by 40 seconds. On the menu, Papa John’s has driven average ticket and transaction growth through the roll out of Shaq-a-roni Pizza, return of Double Cheeseburger Pizza, and continued innovation of the Papadias lineup.

    The results are promising. The 22 percent rise in global restaurant sales in Q3 yielded a 10-fold increase in adjusted operating income despite higher commodity prices and investments in safety measures. The chain also produced $134 million in free cash flow and ended with net debt of $210 million, down $140 million from the year-ago period.

    Additionally, Q3 was the final quarter of the company’s We Win Together franchise support program, an $80 million investment that has left franchisees in a better financial position. The ending of the initiative—which included $55 million over the past four quarters—will allow Papa John’s to boost its earnings and cash flow growth.

    “This business is transforming right now,” Lynch said. “After a year and a half of helping franchisees get through some tough times, we’re now ready to invest the capital back into our business. And we have a lot of opportunities to do that through both new store development as well as technology investment as well as investments in productivity in our restaurants. We’re right now vetting out a whole litany of opportunities to drive operating income growth and accelerate operating income growth.”

    “Even with those investments, we still anticipate having a lot of cash from operations and a lot of cash on the balance sheet, so we’re looking at ways we can deploy that capital in the most efficient and productive way and how we can make sure we’re driving shareholder returns as we do that,” he continued.

    As Papa John’s laps its higher than usual sales volumes in 2021, Lynch said the key to matching financial gains and AUV will be retaining new customers. The restaurant appears to be on track for that goal as eight million new guests have joined the brand across all channels since the beginning of the year.

    Lynch said many new consumers are coming through the loyalty program and have higher frequency and average ticket than guests prior to the pandemic. Seventy percent of orders are now digital and mobile ordering is the chain’s fastest growing channel. Sales from third-party delivery partners have increased from 2 percent to 6 percent in the past six months.

    “That’s gives us a lot of confidence that they can come in, they are enjoying their experience, and they’re coming back,” Lynch said. “It’s not a one-and-done scenario for the most part. So we think the stickiness of those customers will help us support these AUVs moving forward. … Without taking pricing, we’re increasing our ticket averages through innovation, and that, coupled with the new customers' stickiness, gives us a lot of confidence that we’re going to be able to maintain these types of AUVs moving forward.”

    Papa John’s ended Q3 with 597 domestic company-owned stores, 2,689 franchises in North America and 2,074 international units. Those numbers are expected to rise greatly as the company turns toward ramping up development, especially in international markets such as China, the Middle East, Russia, and South America. In the U.S., the brand recently signed its largest North American franchise deal in more than 20 years with a 49-unit deal in Philadelphia.

    Lynch said there’s excitement both internally and externally and plenty of white space for Papa John’s. He added that the restaurant has decreased incentives because it’s simply not needed anymore—profitability is the convincing point now. The timing of development will just depend on the flow of COVID, which has reached dangerous levels nationwide recently.

    “The flip side of that is it’s going to continue to provide additional tailwinds for our business above and beyond our organic growth,” Lynch said. “So we are ready. We are prepared. We have the infrastructure in place. We’ve already had a lot of the conversations with the franchisees who want to open up these markets and continue to grow these markets. It really is a macro economic situation that’s impeding the development. As soon as these governments and these markets are ready, we will be ready to go and build restaurants.”

    Lynch said he knows there’s many questions surrounding the impact of COVID on Papa John’s business and how long it will last, but he emphasized that the chain’s momentum started before the pandemic arrived.

    After achieving positive comp sales in North America and Internationally for five and six straight quarters, respectively, Lynch said Papa John’s is firmly on a growth trajectory. He noted that he expects the underlying factors that have contributed to the performance to benefit the brand in the long-term.

    “We are further forward and much better prepared than we ever thought we would’ve been heading into 2021,” Lynch said. “We’ve built the foundation that’s going to continue to drive this business. Our winning strategy and our momentum are going to continue for the foreseeable future, and the foundation is going to deliver long-term results.”