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    Papa John's Says Customer Sentiment is Improving

  • The pizza chain cut its unit count in the third quarter as sales fell 9.8 percent.

    flickr: Elvert Barnes
    Papa John's North America same-store sales weren't as rough as some experts predicted.

    “Our attention now is on activating that sentiment to drive increased sales,” Papa John’s CEO Steve Ritchie said during a Tuesday afternoon conference call. That line of thinking is definite progress for the struggling pizza chain. North America same-store sales dropped 9.8 percent, year-over-year, in the third-quarter period that ended September 30. But as steep as the decline was, it actually surpassed company and analyst expectations. The cadence of Papa John’s struggles called for much worse—as much as 10.8 percent in some cases.

    When Papa John’s reported Q2 results, Ritchie said comps were down about 10.5 percent in July due to the outburst of negative media related to founder John Schnatter’s racial-slur incident, which surfaced July 11 and resulted in his departure as chairman.

    Sales stabilized, Ritchie said, proven by the 9.8 percent number and an improved outlook of negative 6.5–8.5 percent for the year—up from the previous guidance of negative 7–10 percent. “During the quarter, we took important actions to help repair our brand reputation, and we believe good progress has been made,” Ritchie said.

    As was also hinted previously, Papa John’s warned of “a number of store closures in the U.S.” In the third quarter, that number turned out to be 67 franchise units. With 16 openings, Papa John’s trimmed a net of 51 restaurants (one company-run store opened and one closed as well) to bring the franchised total to 2,709. Papa John’s refranchised 31 restaurants in Q3. There were 647 domestic company stores as of September 30 and 1,891 international for a total base of 5,247 locations.

    Year-to-date, Papa John’s has closed 146 North America franchises and opened 60 for a net loss of 86 units. It’s also refranchised 62 and shuttered five corporate restaurants against six openings. Along with 60 international closings (193 openings), Papa John’s has shuttered 211 restaurants and opened 259.

    In the third quarter, Papa John’s reported quarterly earnings of 20 cents per share compared to 60 cents a year ago. Revenues came in at $364.01 million versus the year-ago figure of $431.71 million.

    A reason for optimism?

    Papa John’s has reported four consecutive quarters of declining sales. Ritchie, however, said the comps report, even beating a very low bar, doesn’t tell the full story.

    In September, the company launched its “Voices” campaign. The ad direction was intended to spotlight the faces and stories behind the chain. A stark departure from the founder-led marketing that dominated Papa John’s spend for so long. “We had a strong positive response from internal and external stakeholders to the Voices campaign,” Ritchie said. “Employees and franchisees express their appreciation for shedding a light on the real values and people who make up our company. Customers also responded positively, which shows that the strategy to move in the new, more modern and inclusive marketing direction is the right one.”

    Ritchie said YouGov BrandIndex data showed consumer sentiment shift from largely negative to neutral or positive. This is a welcomed change in the wake of Schnatter’s July scandal where he admitted to using a racial slur in a May conference call. This was allegedly during a training exercise following November NFL comments criticizing the sports league for its handling of national anthem protests. Since, Schnatter has accused Papa John’s of misconduct, sued the company over documents to prove the mishandling of his departure, and continued to rail against management, including Ritchie. Papa John’s, meanwhile, has removed his image from marketing and tried to distance itself from Schnatter, a task that has proven exceptionally difficult.

    Ritchie said the Voices campaign helped Papa John’s hurdle some of the early challenges.

    “According to research conducted by Kantar Millward Brown, a leading marketing research firm, the messaging of the Voices campaign has been a key contributor of these perception moves. The Voices campaign drove a modest improvement in traffic, resulting in September comps that improved compared to the July and August results,” he said.

    The longer-term play

    Papa John’s business decelerated in 2017 before the precipitous drop in November and December. In fiscal 2017, North America same-store sales gained 1.4 percent in Q2, 1 percent in Q3, and then declined 3.9 percent in Q4. Then the cliff drop:

    • Q3: –9.8 percent
    • Q2: –6.1 percent
    • Q1: –5.3 percent

    “The predominant amount of the issues from a comp standpoint is certainly related to consumer sentiment issues related to the two trigger events, one from, of course, November [NFL comments] from last year and then, of course, earlier this year in July [racial slur],” Ritchie said.

    Even before these events, Papa John’s launched five operating priorities Ritchie said are “fundamental to supporting a strong foundation.”

    These include:

    • Making people a priority
    • Improving brand differentiation
    • Creating accessible value
    • Implementing technological advancements
    • Improving unit economics

    Papa John’s unveiled a new organizational structure in October that Ritchie said was designed to mold the company into a customer-centric growth organization. The shuffle included putting Mike Nettles, formerly SVP, chief information and digital officer, into a role as EVP, chief operating and growth officer, where he will oversee the newly dedicated roles. “We believe by putting the customer at the center of everything we do, including operations, technology, marketing, product and communications, we can leverage customer data to integrate and innovate across every consumer touch point,” Ritchie said.

    Is a sale near?

    Rumors of a potential sale continue to swirl. According to The Wall Street Journal, several potential buyers have expressed interest in acquiring Papa John’s. Activist shareholder Legion Partners Asset Management LLC and the California State Teachers’ Retirement System disclosed a 5.5 percent stake in the company last month. Legion, per The Wall Street Journal, has spoken with the company about adding board members with restaurant experience. Trian Fund Management LP was evaluating a takeover bid the company, according to reports. Roark Capital, Bain Capital, and CVC Capital Partners have been linked to talks, too.

    Then, in early November, a securities filing revealed that executives, including Ritchie, would receive bonuses if Papa John’s were indeed sold. He would receive a payment equal to 36 months salary as a severance if he were replaced following a deal. CFO Joseph Smith and Nettles would receive payments equal to 24 months of their base salary. Executives would receive prorated bonuses as well. The company also agreed to pay retention equity grants to the executives, which includes some stock. These equal three times Ritchie’s base salary and two times for Nettles and Smith. Ritchie earned a base salary of $820,377 last year.

    Company executives SVP or higher would receive severance equal to nine months of base salary if they are released following a sale.

    Ritchie said in Tuesday’s call that priority No. 1 for him is “to make sure that I'm retaining the top talent of this organization. And I think the compensation committee working with an independent compensation consultant has taken some very appropriate actions, benchmarking our business across our peer group and also looking at what best practices are done broadly throughout the industry and took some actions there to ensure that we're putting forth the right efforts to retain that talent.”

    “So there were some amendments to some of the components of those plans,” he added. “And we feel confident those actions put us at parity against the industry, which we certainly don't want to be disadvantaged, especially during the time where we've got—we're in a transformational stage for the brand.”

    What’s being done?

    Papa John’s is launching diversity, equality, and inclusion training this month for its 14,000 corporate employees. Ritchie said the program is expected to complete early 2019 and then expand to include franchisees.

    On the brand differentiation note, Ritchie said Q3 “was the start of our journey to make Papa John’s a revitalized modern brand.” This was first executed through an app download campaign and then through the Voices launch.

    “We're transitioning to operate like a brand management organization, utilizing customer segmentation to deliver a deeper understanding of our customers and their needs and to innovate around product, message and experience across consumer touch points,” Ritchie said.

    After a multi-channel Halloween marketing push, Papa John’s offered up an integrated campaign for its limited-time Double Cheeseburger Pizza. The company also elevated Paul Fabre to SVP of menu strategy and product innovation, where he will oversee product development, including menu management.

    “Another benefit of moving product and menu into the growth organization is that it provides a direct line to customer data that drives menu and product innovation to more customers to the brand. Value can also be delivered through channels,” Ritchie said.

    Papa John’s continues to establish new ordering partnerships, including Facebook Instant Ordering, Amazon Alexa, and DoorDash. It also rolled out Google Maps to improve delivery results.

    “These results are translating into successful outcomes as 99 percent of customer addresses are now being bound on the customer's first try with our online delivery address search,” Ritchie said. “Because Google Maps uses real-time traffic data, the estimated delivery time has improved. And we're seeing a significant up time and wait time satisfaction from our customers.”

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