Former Wendy’s CEO Todd Penegor has been with Papa Johns for all of about a week. But it’s clear the task ahead for the burger chain’s former longtime leader, who saw Wendy’s cross 7,000 units and achieve 12 straight years of same-store sales growth, is going to include multiple hills to climb.
Papa Johns Q2 same-store sales declined 3.6 percent (negative 4.2 percent for domestic corporate units and negative 3.4 percent for franchises), which marked the weakest result for the company in five years. The sales gap between Papa Johns and Domino’s widened by 100 basis points, per BTIG, from 740 in Q1 to 840, and Pizza Hut U.S. is coming off a negative 1 percent Q2 result, “suggesting incremental share loss,” analyst Peter Saleh said.
Q2 pizza results
- Papa Johns: –3.6 percent
- Pizza Hut U.S.: –1 percent
- Domino’s: 4.8 percent
And thus far in Q3, Papa Johns said its same-store sales were running negative 6 percent and are expected to finish down mid-single digits before improving in Q4. Restaurant margins were a silver lining, however, rising 210 basis points year-over-year to 20.3 percent, thanks to about $2 million of reduced local advertising. Adjusted earnings per share of 61 cents met Wall Street forecasts and lower G&A helped offset those weaker sales.
BTIG analyst Peter Saleh expects Penegor to dive into a busy slate. Among the early aims will be a focus on improving cash-on-cash returns for franchisees, tweaking Papa Johns’ loyalty program to drive frequency, and further emphasizing the carryout business. Saleh feels reducing development costs toward industry averages should be priority No. 1, “as without that, unit growth is not impossible.”
Without providing specifics, Papa Johns did note Thursday the company made progress on that particular front. Earlier in 2024, costs were averaging about $630,000. A similar format at Domino’s, for perspective, is roughly $425,000. “This was the widest cost differential that we can remember,” Saleh said, “and really weighed on economic returns for franchisees. We are hopeful that Papa Johns can get build costs back in line with peers; when coupled with the existing incentive programs, this should spur future development.”
As for what’s sagging sales, CFO Ravi Thanawala, who served as interim CEO since Rob Lynch’s (now with Shake Shack) March departure, echoed much of what’s been said by restaurant leaders during this summer earnings season: guests are pulling back spend and refocusing on value.
The challenge there for Papa Johns, though, is the brand hasn’t really positioned itself that way. Early during inflationary shock, the fact Papa Johns lived at a premium tier actually insulated it to a degree. Going from, say, $11.99 to $13.99, didn’t feel as stark to guests as jumping from $7.99 to $10.99.
However, these days, Thanawala said, consumers have become more deliberate in managing their overall ticket and have shown a preference for brands that offer compelling value. “While we know we offer an attractive value for our customers, our marketing and innovation to these efforts have primarily focused on premium product offerings at premium price points,” he said.
The Q2 comps decline was driven by lower transactions as growth in Papa Johns’ aggregator channel was offset by a drop in its organic delivery, Thanawala explained. The channel hit generated a 100-basis point or so headwind to comps.
Sales were “solid” with customers buying two or more pizzas. Yet Papa Johns reported lower traffic in lower-ticket items.
To put the dynamic in plain terms, Papa Johns’ value perception hasn’t held up amid current landscape, Thanawala said. In Q2, it began shifting approach and investment to change that.
The brand worked to become more intentionally value-focused without placing pressure on store-level profitability and unbalancing that latter strength. Thanawala said the blueprint unpacks in three opportunities.
Firstly, returning to value perception, Papa Johns wants to showcase its “Better Pizza, Better Ingredients” model at “appropriately valued price points,” Thanawala said, which should improve transaction trends.
In one example, the chain brought back its Cheeseburger Pizza as an LTO for $9.99. It’s a sharp departure from past years when Papa Johns was introducing and innovating around Epic Stuffed Crust for $13.99.
It also made an immediate switch toward promoting $6.99 Papa Pairings (two or more items at the price point, with a variety of choices, like Papadias, a medium one-topping pizza, boneless wings, etc.), and launched an extra large New York Style option for $10.99, which was a more competitive price point than last year as well.
Thanawala said in the past eight weeks, Papa Johns saw its value perception improve. “This gives us confidence that if we maintain an appropriate balance of value offerings and premium products, it will lead to improved sales trends over time,” he said.
“We know that driving trial of our product is critical to winning consumers’ wallets in the future,” Thanawala added. “At our company-owned restaurants, we are also testing various value offers in certain markets to analyze the repeat rates … potential basket starters, and larger basket motivators.”
The other lever for Papa Johns will surround digital and loyalty growth. Thanawala said most of the chain’s sales in Q2 flowed through digital, with nearly a third arriving via apps where customers tend to purchase more often. In July, Papa Johns rolled an update that improved call-to action and navigation, and features better imagery and displays. BTIG pointed out Penegor was also considering reducing the rewards threshold to allow for faster redemption (now at about 3X visits).
Something that’s going to key into all these perception efforts is Papa Johns’ marketing. The chain in Q2 tossed a new brand platform into the space—“Better Get You Some”—that celebrates the love for pizza with visuals, soundtracks, and a multimedia experience inspired by hip-hop, expressionist art, and cultural touchstones. Influencers, or “anecdotal ambassadorship,” as the brand calls it, along with user-generated content, is a central component of the outreach. It was incubated in North America but has spread internationally.
The concept was built off research that showed 65 percent of consumers were driven to order pizza when a craving strikes.
Thanawala said Papa Johns witnessed quarter-over-quarter improvement in aided brand awareness since launch, as well as higher intent to purchase. Couple the new platform with value messaging, he added, and Papa Johns hopes to convert intention into sales in Q3.
Thanawala expects incremental investments to test marketing messages could place near-term pressure on company-owned restaurant-level margins. But the insights gained will benefit the entire system over time.
Penegor added Papa Johns will continue to work on its national framework, but plans to also zero in more locally to ensure the consumer understands there is “great value time and again.”
He said the company made some shifts late Q1 into Q2 to place a big bet on the national piece, which came at the expense of local advertising. “And at a time where we’ve focused a little bit more on our premium quality messaging it was a great plan, but was probably at the wrong time for the consumer environment with all the shift [and] didn’t have enough focus on value with the shift,” Penegor said.
Essentially, Papa Johns didn’t quite have the pressure needed on the local angle to compete with regional differences in terms of value messaging. “So it’s one for me to continue to look at as we move forward,” he said—a national message that’s efficient and effective supplemented and complemented with ground-level marketing that’s adaptable.
“Our brand and core product remain in demand and the highly competitive pizza category,” Penegor said. “But we know there’s more work to be done to realize the full potential of the Papa Johns brand.
“What we’re really focused in on is making sure we are taking actions that improve repeat rate, which is another code word for long-term gains and frequency to making sure that we’re finding a really healthy balance of getting consumers into our [first-party channel, buying the products that differentiate us,” Thanawala added.
The high-level task will be, Penegor said, simply to get folks to show up more often at Papa Johns. If the chain can drive transactions, it can ultimately influence activity across the menu. On some level, this barbell angle is something Wendy’s pushed into the spotlight during Penegor’s time by flowing out deals at entry points—4 for $4—and then having platforms offer a path up the ladder that Wendy’s could innovate against, like the Biggie Bag or Made to Crave lineup. “We’re just getting sharper how we actually do that effectively in this consumer cycle,” Thanawala said of playing on both ends of the barbell.
Papa Johns overall reported 31 net unit closures in Q2 thanks mainly to 43 company-run stores in the U.K. shutting down. The company has refranchised 60 stores in the challenged market, leaving it currently with 13 corporate locations.
Thanawala said gross North America openings are on track to be 15–20 percent higher than last year. And “many” new restaurants that have opened in the past two years are producing AUVs at or higher than the system average of $1.2 million. The new-unit AUVs are “significantly higher” than the stores that are closing.
Through the first six months of the year, Papa Johns has opened 31 restaurants and closed 17, resulting in 14 net new North America venues. That brings the count to 3,447. Papa Johns expects to open more than 100 in fiscal 2024, but the closure figure could be slightly higher than originally anticipated. The total net figure this year should range between 45–65.
Internationally, Papa Johns opened 79 restaurants on a gross basis across the first half of the year, offset by 116 closures, to get the larger figure to 2,436. The full-year number will likely fall in the 100–140 new international restaurant range.
“I think we’ve got all the tools in the toolbox to really amplify and talk about our unique differences,” Penegor said. “[The] team’s doing a great job executing that day in and day out at the restaurant level. We’ll always have work to do to be even more consistent execution day in and day out. But the elements are there. I think we’re just going to have to figure out how we make sure we amplify that message as part of our overall campaign moving forward on both nationally and locally, but balancing it in the context of we’re a very value-centric value for the money environment today. And that doesn’t mean just price. That means making sure folks understand that the best features in the business come from Papa Johns.”
