What Papa John's Revealed at the Jefferies Winter Consumer Summit

Online ordering, international growth, and quality equipment could work in Papa John's favor.

Feb 3, 2014 at 3:03PM

Investment firm Jefferies recently hosted a conference that many consumer-oriented companies attended, including major international pizza chain Papa John's (NASDAQ:PZZA). The pizza chain discussed how it plans to keep growing, and peers Domino's (NYSE:DPZ) and Pizza Hut of Yum! Brands (NYSE:YUM) have implemented similar strategies. Growth opportunities for the pizza chains could also lead to opportunities for an industrial company that makes an important piece of equipment for their restaurants.

Digital sales
Online ordering works very well for pizza restaurants that can afford to invest in their ordering systems. As Papa John's explains, diners who order online not only buy more expensive pizzas more frequently, they also become more loyal to the pizza chain that offers online ordering. In its presentation, the pizza chain said that 45% of its orders now come through its online system. Pizza Hut also saw recent success with online orders, as the company reported record-breaking online sales for the first two Fridays of January.

The pizza chains have seen success because online ordering makes complicated pizza orders much more convenient. Customizing a pizza takes time, and describing a complex custom order can be embarrassing. A diner who orders online will not have to worry about explaining a complicated order over the phone or while waiting in line. The rise of online ordering could help all three major pizza brands gain market share. Smaller pizza chains may lack the resources to invest in high-quality pizza-ordering apps, especially abroad.

International sales
Papa John's sees its opportunities abroad as "The Growth Engine of Papa John's." Developed markets already contain large numbers of restaurants, including storefronts of other pizza chains -- this makes a strategy that focuses on emerging markets very compelling for Papa John's. In its presentation, the pizza chain provided an up-to-date map that listed its restaurant locations. The chain has franchised restaurants in several countries in Central and South America, especially along the western coast of South America; however, it has avoided Brazil and Argentina, which may indicate strong competition there. The nations where Papa John's has the most restaurants abroad as of September 2013 are the United Kingdom at 228, China at 189, Korea at 77, Mexico at 60, and Russia at 56. These figures show an international footprint that spans multiple continents.

Even with more than 1,000 restaurants abroad, Papa John's could still have room to add more -- peers Domino's and Pizza Hut have much larger international presences of their own. In its third-quarter earnings release, Domino's said it had more than 10,500 stores; this figure includes more than 5,000 stores abroad, located in 70-plus nations. Domino's also receives more revenue from its international operations than it collects from domestic restaurants; the figures for the third quarter of 2013 were $935 million and $849 million, respectively.

For Yum! Brands, pizza sales have helped address a major weakness; although its KFC concept had a terrible 2013 in China, its Pizza Hut Casual Dining concept has achieved much better results in the nation. The latter concept reported 7% same-store sales growth in November. Yum! plans to add 1,850 restaurants abroad in 2014; this figure exceeds Papa John's total international store count, although the figure includes new KFC locations as well.

Pizza chains still think highly of Middleby
Papa John's also used its Jefferies presentation to explain how it recruits new franchise owners. A franchise owner who signs up with the company will also get two ovens manufactured by Middleby (NASDAQ:MIDD). Middleby's inclusion as a selling point for new franchise owners shows that Papa John's, as well as potential franchisees, have very good opinions of the company. This oven manufacturer can also comfort investors who can't decide which pizza chain has the best expansion prospects -- with a very strong brand in ovens, Middleby can benefit if any pizza chain adds new locations. The pizza chains' international expansion plans for 2014 look very positive for this manufacturer.

Foolish takeaway
Online ordering and Middleby ovens help all three pizza chains, so these factors make the sector's overall prospects look better, but they don't indicate that one chain offers a better opportunity than the other two. The decision here comes down to emerging markets. Papa John's placement strategy could pay off big but it also carries risks, especially with the taper in effect. An investor who remains confident in the long-term growth prospects of emerging markets should still look into this chain, as this presentation makes it clear that Papa John's still sees many opportunities abroad.

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Eric Novinson has no position in any stocks mentioned. The Motley Fool recommends Middleby. The Motley Fool owns shares of Middleby and Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

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