Papa John’s CEO Rob Lynch can’t see why they’d close any restaurants in the foreseeable future.
There’s several reasons for his confidence. In Q2, which ended June 28, North American restaurants saw a record-breaking 28 percent lift in same-store sales. North American franchises soared 29.7 percent and company-run units increased 22.6 percent. The brand estimated that roughly half of that growth stemmed from its long-term turnaround strategy. The other came from favorable pandemic-related changes in customer behavior.
Q2 margins in North America were the highest the company has witnessed in several years. Revenue jumped from $399.6 million to $460.6 million.
In July, North American same-store sales grew more than 30 percent, despite rises in COVID cases across the U.S. Franchises upped 32.4 percent, while company-owned stores climbed 23.6 percent.
And directly to Lynch’s point about unit development, strong performance and profitability reduced closures of traditional North American franchises to the lowest rate in 10 years.
Papa John’s finished Q2 with 2,686 North American franchises, closing nine and opening nine. The chain also has 598 company-owned stores, with one shuttering in the quarter. Internationally, the brand has 2,063 stores after closing 55 and opening 25 in Q2.
For comparison, Papa John’s closed 128 North American locations in fiscal 2019 versus 79 opens. The year before, it shuttered 193 while debuting 89.
And here’s a glance at the dramatic same-store sales turnaround (North America):
- Q2 2016: 4.8 percent
- Q3 2016: 5.5 percent
- Q4 2016: 3.8 percent
- Q1 2017: 2 percent
- Q2 2017: 1.4 percent
- Q3 2017: 1 percent
- Q4 2017: -3.9 percent
- Q1 2018: -5.3 percent
- Q2 2018: –6.1 percent
- Q3 2018: –9.8 percent
- Q4 2018: –8.1 percent
- Q1 2019: –6.9 percent
- Q2 2019: –5.7 percent
- Q3 2019: 1 percent
- Q4 2019: 3.5 percent
- Q1 2020: 5.3 percent
- Q2 2020: 28 percent
Lynch said ramping up domestic and international unit growth is the next phase of Papa John’s comeback.
“Right now, we’re building the infrastructure to be able to support that,” Lynch said Thursday during the brand’s Q2 earnings call. “So we’re building best-in-class capabilities that frankly we didn’t have before in terms of how we think about the territories both domestically as well as internationally. There’s a ton of white space for us. We have half as many restaurants as our competitors in North America and way less than that internationally.”
“ … The margin structure is great, the revenues are great,” he continued. “We’re hiring team members. We’re finally getting to a point where restaurants are staffed, which takes the burden off of operators. So I foresee our closure rate being very low for the foreseeable future.”
Lynch said there’s a significant amount of excitement from current franchisees who have cash flow and capital to reinvest and also from large operators of other concepts who want to be a part of the pizza business.
The CEO added that future growth is within the company’s control, because “the economics make unbelievable sense.”
“When you look at $300,000 cost to open a Papa John’s pizza restaurant and the AUVs that we’re delivering right now and plan on sustaining moving forward, the return on investment capital is as good as anyone in the industry,” Lynch said. “And we haven’t told that story. We haven’t told it to the right people.”
THE COVID-19 ROAD FOR PAPA JOHN'S SO FAR
Lynch expects the international business to outpace North America in terms of unit growth, mainly because of the white space. As of June 28, the development pipeline includes approximately 1,100 restaurants—100 in North America and 1,000 internationally. The majority are scheduled to open in the next six years.
International units saw a record 14 percent growth in July. That came after an increase of 5.3 percent in Q2, including double-digit gains in the U.K. and South Korea.
Of the 2,063 international units, approximately 160 are temporarily closed quarter-to-date. Excluding those closed units, same-store sales would’ve lifted more than 17 percent in July.
Lynch said there are huge International markets that are untapped, such as Australia and Africa.
“We’re in half the countries of our competitors,” he noted. “And even in the countries that we’re in, like China, we have 200 restaurants. Our competitors have thousands. So huge amount of white space. It’s about us putting the resources in place to take advantage of that, and we’re making those investments right now so we’re prepared when we come out of this thing to really accelerate that growth.”
Barring unforeseen circumstances, Papa John’s is targeting a significant growth in units for 2021.
Lynch said the timeline of the increased effort is more dependent upon how the pandemic continues to impact development rather than the chain’s individual action plan.
“As this thing continues to linger, there will be a shakeout,” Lynch said. “There will be real estate that becomes available that wasn’t available before. And we want to be able to take advantage of that and leverage that opportunity in the near term. We are building right now. We are preparing right now. We are ramping up right now.”
Inside the stores, Papa John’s added more than three million new customers to its loyalty base and saw higher retention and repeat rates, with digital now mixing 70 percent.
Innovations like Papadias and Jalapeño Popper Rolls are driving higher tickets and traffic across dayparts. The items are accomplishing this without cannibalizing core products or adding operational complexity.
In July, the company launched the Shaq-a-Roni pizza in partnership with NBA legend Shaquille O’Neal, who is a franchisee and board member. The item—an extra-large pizza topped with extra cheese and extra pepperoni—is cut into Papa John’s largest slices ever. The company has sold more than 2 million Shaq-a-Roni pizzas so far. For each one sold through August 23, Papa John’s is donating $1 to the Papa John’s Foundation.
Lynch said the innovation strategy has minimized Papa John’s need to offer deep discounts, and as a result, it’s driving both sales and profitability.
“We have continued to test and build ideas out, and we have a whole closet full of great ideas that are essentially ready to go and hit the market,” Lynch said. “We’ll roll those out as we see fit.”
Papa John’s has seen a double-digit increase in transactions, but Lynch said restaurants have not only handled it, but improved customer service metrics. That was likely aided by the hiring of more than 20,000 employees in Q2. The chain is targeting another 10,000 in Q3.
A couple of quarters ago, there were 12.5 million customers in the loyalty program, and now the brand is approaching 16 million. Lynch said that base hasn’t been fully leveraged, but the company is now starting to tap into that potential.
In other words, he believes Papa John’s is built to maintain the influx of customers, which will in turn lead to more growth.
“They’re not coming because of Corona and then going back,” Lynch said. “I think there’s a tail to the behavior that drove them here. I think we’re taking better care of them than they expected, and our food quality is better than they may have had with some of the other pizza companies. And so they’re starting to see, hey this is a brand, this is a company that I want to buy from—not just while I’m in quarantine. This is ongoing. I think there will be stickiness.”