Papa Johns’ blueprint under CEO Todd Penegor has several targets, from a return to core strength focus to data leverage to tech stack investments to reemphasizing a value proposition that grayed in recent years. But one added, perhaps less headlined effort is the evolution of the country’s fourth-largest pizza chain’s operator base, including refranchising select markets. The brand said during its ICR Conference presentation in Orlando doing so would create an entry point for new and existing partners and help develop underpenetrated strategic DMAs.

Papa Johns in Q3 refranchised 13 restaurants in Wisconsin, and, Penegor said, was actively evaluating an appropriate mix of company ownership versus franchised. “… refranchising really has to come with, how do you put restaurants in the right hands of operators that are growth minded, thinking about investing into the future, want to reimage storefronts, want to sign new development commitments, and are really partners of the brand to continue to drive all of us forward into the future?” he said.

MORE: How Papa Johns Plans to Strengthen its Relationship with Franchisees and Drive Growth

Papa Johns had 3,454 North America locations as of September 29 (end of Q3). Of those, 2,917 were franchised and 537 company run. Internationally, Papa Johns tallied 2,454 locations—split 2,441 franchised and 13 corporate, thanks to U.K. market efforts.

The company grew by a total net of 122 stores in Q4. North America lifted by 60 driven by 63 new openings, and international 62 with 83 new openings. For the year, North America appreciated net expansion of 81 on 112 openings and international 43 on 198 openings (all alongside respective closures).

Domino’s, as a comparative point, had 6,639 U.S. franchised locations as of September 8 next to 291 company stores. Pizza Hut counted 6,537 locations at the end of Q3, all but seven of which were franchised restaurants.

“So as we’re going through all of our strategic initiatives, we are looking actively at what’s the right level of company ownership, what’s the role of refranchising, and how does that help stimulate even more growth for our system as we scale up franchisees that are growth minded and bring some new folks into the system to make sure we got some new growth minded franchisees that want to be part of the Papa Johns journey in the future,” Penegor said in Q3.

BTIG analyst Peter Saleh shared, over the past couple of months, and since Papa Johns’ Investor Day in mid-December, there’s been curiosity among investors around refranchising and how it might affect Papa Johns short- and long-term. Historically, he said, refranchising at this magnitude can prove messy, uneven, and “usually doesn’t result in a positive outcome for shares until the efforts are near completion.”

Saleh feels refranchising could allow Papa Johns to repurchase upward of about 15 percent of outstanding shares, at current price, with only modestly impacted EBITDA and leverage.

“In our view,” he wrote in a note, “the level of share repurchase is not meaningful enough to warrant such a dramatic business model change, but we do believe that select refranchising is possible if coupled with development agreements from new franchisees.”

BTIG’s analysis, which included assumptions on sale proceeds, share price repurchase, and no tax on proceeds, suggested Papa Johns might raise “several hundred million dollars” from the sale of most of its corporate-owned stores in the U.S., using the funds to repurchase roughly 15 percent of the outstanding float. This base case assumes Papa Johns collects about $500,000 per store in proceeds, in line with build costs for new units, and implies about 5X on EBITDA when adjusting for G&A and royalty burden for franchisees. To note, company stores at Papa Johns tend to outperform franchises with average-unit volumes near $1.3 million compared to $1 million

“We believe this is reasonable, maybe slightly conversative,” he said. “But is anchored by recent large scale refranchising efforts which generated about $305,000 per location [this was the case in a Q2 Texas initiative].”

The benefits of refranchising, in addition to Penegor’s more holistic, growth-minded redirect, would center on reduced G&A, lower future maintenance CapEx, and, as touted, share repurchase. Also, the brand would benefit, Saleh said, from a higher royalty income stream, as well as the commissary profit and digital service fee.

“Ultimately, for this exercise to be fruitful, we believe Papa Johns would need to command a higher trading multiple,” he added, “due to the improved asset-light nature of the business and more predictable cash flow. In our view, the trading multiple would expand only if the pace of unit development and same-store sales accelerated post refranchising.”

As Saleh and BTIG worked through the math, it became apparent adjusted EBITDA would trend modestly lower than $212 million (2024 estimate) to about $186 million should management opt to sell 400 locations—a plan that would reduce company ownership from 15 percent or so today to 4 percent. This carries a low double-digit decline (12 percent) in EBITDA off 2024 levels, and less than BTIG initially anticipated.

Currently, the chain operates with about 3.4X of leverage, Saleh added. So the sale of every 100 stores would increase leverage by 0.1X, with an estimated leverage of 3.9X if the number were to get to 400 restaurants. Given the 96 percent franchise mix, post change, Saleh feels Papa Johns could support a modestly higher leverage ratio.

Would refranchising 300–400 stores reduce franchisee appetite for new unit development as operators absorb corporate locations? Saleh said it’s possible, and this level of refranchising “would take several years” to complete and negatively impact the domestic pipeline for new units over that stretch. He also expects the sale price per store to go down as the number of Papa Johns for sale increases.

On the flip side, Saleh said, the sale of these restaurants would also be in conjunction with development agreements, increasing commitments for growth in the future.

BTIG’s analysis projects Papa Johns sells most of its 500-plus corporate-owned stores (retaining about 125). Similar to other franchised brands, management would hold some skin in the game to test and learn, especially as it works through tech upgrades and other innovation plans. It’s likely, Saleh said, corporate would keep the best-performing restaurants.

Refranchising, aforementioned, carries the plus of lowering G&A and maintenance CapEx (now on franchisees’ shoulders) and provide proceeds to pay down debt or repurchase shares.

But as noted, refranchising is only one potential piece of the Papa Johns jigsaw under Penegor, the former Wendy’s head who replaced Rob Lynch (now with Shake Shack) in August.

It’s a six-part recipe, broadly speaking: focus on core product and innovation; amplify marketing (with a focus on rerouting to a strong presence in key regional and local markets with operators); transform international; invest in technology; evolve the franchisee base; and differentiate customer experience.

With technology front, creating a smooth and repeatable customer experience was one of Papa Johns’ lead points at ICR. It’s working to simplify products, operations, and processes, while moving toward an omnichannel experience “with product team mentality.”

This includes investing in data integrity and a tech stack, as well as prioritizing cross-functional work on data analysis to support order growth and margin improvement. It will lead, the company said, to targeted marketing campaigns through an evolution of loyalty enhancements and, in the end, foster a system that’s more reliable and worthy of customer trust. All the while, making sure its seamless and efficient across channels and that it safeguards customer data.

In Q3, Papa Johns said Brand Health results showed an increase in customers who found the app and website easy to use. The chain enhanced its website homepage to realign with user experience patterns and to act as “customers’ personal dashboard[s].” Papa Rewards point progress and offers got pushed into more prominent positioning.

About a fourth of active loyalty program members, as of Q3, had not yet reached a reward due to the current thresholds, Papa Johns shared. So it reduced the mark on November 18 from 75 points for $10 Papa Dough to 15 points for $2. Getting customers to Papa Dough faster, it said, provided immediate gratification and resulted in higher transactions and frequency improvements.

The interface, more generally, has a new address and count header, visual photo and video promo cards, new fonts, colors, and styles in line with the branding, and, following a previous evolution, has elevated local value offers and deals alongside actionable navigation.

The company spent Q4 resetting its loyalty approach to promote a repeat visit model that gets diners to their second and third purchases quicker.

Papa Johns under previous leadership also increased national advertising and made local optional (part of a Back to Better 2.0 plan unveiled in early 2024). When it did so, Papa Johns’ co-ops went away. Penegor said at ICR this created a “big mess” for a regional business that couldn’t bring its franchisee community together. That changed.

Yet as management shared in recent quarterly calls, it’s going to take some time for the arrow to turn. Q4 North America comps decreased 4 percent year-over-year, with transactions and average ticket each dropping 2 percent. North America franchised restaurant same-store sales were down 4 percent while company-owned units slid 6 percent. North America comps fell 6 percent in Q3, 4 percent in Q2, and 2 percent in Q1. Although on a full-year basis, North America same-store sales were up 1 percent compared to 2023, driven by a 3 percent lift in corporate store comps.

Fast Food, Finance, Franchising, Pizza, Story, Papa Johns