COVID-19 necessitated change throughout Papa John’s organization. But it was a much-needed shock. The country’s fourth-largest pizza chain spent roughly two years waging public and ugly battles with founder and former CEO/chairman John Schnatter. Controversy over his comments regarding the NFL and race, and the ensuing back-and-forth, hit Papa John’s bottom line, sank unit economics, and led to closures across the system, with corporate dipping into aid for franchisees. In North America, 128 locations shuttered (123 franchises) in fiscal 2019 versus 79 opens. A year earlier, Papa John’s closed 186 North America franchises and seven corporate stores, shuttering a total of 193 units while opening 89.

Papa John’s sales drop of 12 percent in fiscal 2018 also marked its first annual decline since 2009, as figures fell to $1.57 billion.

Same-store sales trends (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


Before COVID-19, in August, Papa John’s brought on brand marketing expert and former Arby’s president Rob Lynch as CEO. Three consecutive quarters of comps growth followed thanks to increased revenues, fewer closures, streamlined management, and a focus on product innovation.

Yet the coronavirus landscape really provided the springboard for Papa John’s.

“The events of the past few months have accelerated Papa John’s transformation into an innovation-driven organization, contributing to our strong business momentum today,” Lynch said Monday in a business update.


A focus on innovation, he added, enabled initiatives like “no contact delivery” and lunch-focused Papadias. The brand also brought in more than 20,000 new employees during the pandemic and deployed some of its outperformance to its charitable arm, the Papa John’s Foundation. NBA legend Shaquille O’Neal even has his own branded pizza now. “While we still have much work to do, we are building the kind of company that is positioned for outstanding performance in the future,” Lynch said.

Papa John’s provided preliminary results for June and Q2 to date (three months ended June 28).

Five weeks ended June 28 (same-store sales, year-over-year)

  • Domestic company-owned stores: 18.5 percent
  • North America franchises: 26.3 percent
  • Systemwide North America: 24.4 percent
  • Systemwide international: 6 percent


Second quarter

  • Domestic company-owned stores: 22.6 percent
  • North America franchises: 29.6 percent
  • Systemwide North America: 28 percent
  • Systemwide international: 5.3 percent


The results arrived on the heels of back-to-back record-setting months. Papa John’s skyrocketed its North America comps 33.5 percent in May, which eclipsed its company high of 27 percent in April.

The COVID-19 stretch, in North America, looks like this:

  • April: 27 percent
  • May: 33.5 percent
  • June: 24.4 percent


Papa John’s international closures improved, too. Of its 2,100 or so units, the number declined to about 225, the company said. They’re mostly in Europe and Latin America. The U.K. is open for delivery only. In North America, nearly all traditional restaurants are open and fully operational. Some in non-traditional spots, like universities and stadiums, are closed. Papa John’s said the venues are not material to its revenues and operating results.

In May, the international closure figure was about 320.

Why the turnaround could just be getting started

BTIG analyst Peter Saleh wrote Monday in a note that Papa John’s has several levers still to pull. Notably, it has yet to fully benefit from menu innovation, expanded digital reach, and accelerating unit development.

In those robust April and May months, Saleh estimated average check contributed 15 percent of Papa John’s growth, including 7–10 percent from menu innovation. The balance stemmed from loyalty and third-party delivery expansion. Saleh believes stay-at-home orders added about 10 percent to April sales, implying run-rate sustainable comps in the upper-teens.

“We note that higher sales translate into a larger marketing budget and vice versa, creating a flywheel effect on sales,” he added. “Additionally, we note that our thesis on margins is playing out, with restaurant-level margins expanding 230 basis points in 1Q20, and we expect a similar, if not stronger, trajectory in 2Q20 given sales leverage from the strong comp trends.”

Papa John’s earlier announced franchisee assistance program runs through the end of Q2 2020, after which the company’s earnings and free cash flow profile should improve materially, Saleh said.

The brand planned to spend in the neighborhood of $80 million to support operators through royalty reductions and national marketing contributions, including $15 million or so that has yet to be doled out. Given elevated same-store sales in recent months and resulting margin expansion, Saleh said, franchisee health is surely in better shape than it was six to 12 months ago, meaning assistance wouldn’t need to be expanded. If true, G&A would see considerable declines from prior levels, he said.

Additionally, becoming financially fit will likely result in a return to share repurchase for Papa John’s. The combination of double-digital same-store sales gains coupled with about 400 basis points of restaurant-level margin expansion over the past three quarters could generate significant EBITDA and free cash flow, Saleh said. Before its PR crisis, from 2010–2018, Papa John’s reduced its shares outstanding by an average of 5.8 percent annually. “Additionally, we would not be surprised to see franchisee unit growth accelerate in the years ahead given the unit economic gains cited above, further aiding the cash flow picture,” he said.

Saleh is taking a simplistic view to Papa John’s Wall Street price, believing earnings per share will run parallel to better stock performance.

He thinks Papa John’s has the chance to double EPS with its current asset base from a previous 2020 estimate of $1.39, driven by a return to historical average-unit volumes, higher royalty rate, and lower G&A. Earnings in 2017 were $2.67. Saleh said the figure is well within reach, even excluding the benefit of new unit development, menu innovation, and commissary margin expansion.

He shared the following earnings scenario:


(in millions)

  • Total sales: $1,783
  • Restaurant Level Margin: 18.6 percent
  • Domestic Commissary Margin: 6.3 percent
  • G&A Expense: $151
  • Operating margin: 8.5 percent
  • Interest expense: $11
  • Tax rate: 29.1 percent
  • Share count: 36.5
  • EPS: $2.67


2020 (estimate)

  • Total sales: $1,760
  • Restaurant Level Margin: 21.1 percent
  • Domestic Commissary Margin: 7.3 percent
  • G&A Expense: $188
  • Operating margin: 5.5 percent
  • Interest expense: $17
  • Tax rate: 22 percent
  • Share count: 32.4
  • EPS: $1.39


2021 (estimate)

  • Total sales: $1,760
  • Restaurant Level Margin: 21.1 percent
  • Domestic Commissary Margin: 7.5 percent
  • G&A Expense: $191
  • Operating margin: 6.8 percent
  • Interest expense: $17
  • Tax rate: 22 percent
  • Share count: 32.6
  • EPS: $2.08


Restaurant counts


  • Company: 708
  • Franchise: 2,733
  • North America system: 3,441
  • International: 1,723
  • Global: 5,169
  • North America system sales: $3,050
  • Global system sales: $3,794


2020 (estimate)

  • Company: 599
  • Franchise: 2,696
  • North America system: 3,295
  • International: 2,203
  • Global: 5,498
  • North America system sales: $3,015
  • Global system sales: $3,964


Saleh said Papa John’s is on track to regain almost all of its lost sales from the past two years in 2020, which would bring the concept near sales parity with 2017.

Over this time, Papa John’s system sales mix shifted to a more franchised model as the chain refranchised more than 100 company units and added north of 300 net global franchised venues. The result will lead to higher operating margins, not lower. Saleh estimates 2020 operating margins to be 5.5 percent, or 300 basis points lower than fiscal 2017. And there are opportunities to dramatically improve the figure in 2021 and beyond through menu innovation, more efficient advertising, and cost reduction.

“We estimate that since 2017, restaurant-level margin has improved by 250 basis points, domestic commissary margin has risen 100 basis points, the tax rate is down 700 basis points, and the share count declined 11 percent, which should lead to higher EPS,” Saleh said.

Higher expenses, though, from legal and advisory items, turnaround efforts, and marketing fund contributions offset these drivers. They measured to about $1.03 of EPS loss and interest expense of 14 cents. Papa John’s can regain this gap as its comeback continues.

Before negative publicity struck in Q3 2018, Papa John’s G&A averaged roughly $40 million per quarter, or $15 million lower than it has been over the past seven periods. If it declines in the coming year onward, returning to historic levels, Papa John’s EPS will tick back up, and the positive trajectory will only accelerate.

Fast Food, Pizza, Story, Papa Johns