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What’s Next for Papa John’s?

By Motley Fool Staff – Updated Apr 13, 2019 at 12:57PM

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The company has made a full break from its founder.

Papa John's (PZZA -2.30%) founder John Schnatter has withdrawn his lawsuit against the company bearing his name. He has also resigned from the board. He still, however, owns 26% of the company and could make an effort to buy it. Until that happens, or in case it doesn't, Papa John's management has to move forward without its founder and figure out what the brand needs to do to regain relevancy.

A full transcript follows the video.

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This video was recorded on March 12, 2019.

Nick Sciple: First off, we're going to talk about some news particularly in the restaurant and retail space. Later on, we're going to talk about JAB Holdings, rumors that they're going to spin off their coffee and restaurant chains into two separate IPOs.

But first, we have some news out of Papa John's Pizza. Papa John's has been in the news over the last year in a very public battle with their founder and largest shareholder, Papa John Schnatter. This past week, we got some news about that conflict between Papa John's and the Papa John. Dan, can you talk to us about what that news was?

Dan Kline: Papa John was suing his namesake company because he was somewhat forced out of his role as executive chairman and really forced out of day-to-day operations, along with things like, he was entitled to office space, he had certain levels of control. All of those things were kicked to the side. The company had adopted, let's call it a poison pill, to make sure that he wasn't the person that bought the company when, for a while, they were looking to be sold. Now they've taken $200 million from Starboard, and they're not so much on the market. To make this all awkward, Papa John was still on the board. Imagine, I'm sure you have someone like this in your family, someone who is suing everybody else but still comes to Thanksgiving.

Sciple: Right. It can make the relationship extra complicated. When you have a company whose name is synonymous with Papa John, it's in the name, and with him still being the largest shareholder, agitating for changes within the company, this is a significant development. Now, Papa John no longer being on the board, no longer has a formal relationship with the business outside of his share position.

Kline: That was the settlement. Papa John agreed to drop his lawsuit, resigned from the board. He will have a role in choosing the independent director that replaces him. They didn't quite spell it out, but I think they need to agree on whoever that person is. But, Papa John owns 26% of the company, and they have removed the poison pill. So, yes, he's gone, but if the stock continues to stumble, there's every chance he tries to buy it back and it becomes a battle, but at least a battle where he has recused himself from being on the board and voting on his own proposals.

Sciple: Right. This is going to be an interesting battle. Papa John's has struggled recently out of the controversy that Papa John himself may have contributed to. We've seen EPS trade down almost 50% in the past year. You mentioned to me before the show, same-store sales have declined 8.1% in the most recent quarter and 7.3% for the full year. As we see Papa John's maybe being back on the market for sale, maybe Papa John Schnatter playing a role in this, it's going to be some near-term news around that transaction. We have to question, what's going on with the brand?

Kline: I think the Papa John controversy just accelerated some of the brand problems. If you look, who are they competing with? They're competing with Domino's. They're competing with more expensive pizza that has moved into the better space that Papa John's is always trying to falsely stake out. Like, maybe it's better than Domino's or, I don't know, Ellio's frozen pizza. But they're facing a ton of competition. But what Domino's does exceptionally well is execute. You can get a Domino's pizza inexpensively, quickly, through a variety of different platforms. They have a really easy-to-use app, they're easy to call up and order from. Papa John's had not brought its technology about. They were relying on this, "Hey, we're better! Better pizza, better ingredients!"

What scares me is, the chairman of the board continues to say, "We want to focus on better pizza, better ingredients," though the CEO does talk about how they need to improve their app, they need to get their technology better. They need to make it as easy to get a Papa John's pizza as it is to get a Domino's pizza because you're not ordering either of those pizzas because they're good pizza, unless you're 11.

Sciple: Right. We were chatting about this before we started recording. I might get Austin Morgan to jump in and give us his thoughts on this. We've seen, in recent years, as you mentioned, Papa John's brand was built around the "better ingredients, better pizza" mentality. When we've had all these new places come in, local operators that are selling quality pizza, it's been very difficult for Papa John's to differentiate itself on quality. Meanwhile, we've seen Domino's and Pizza Hut and these others push toward the whole concept of convenience and low prices, which is going to attract customers that are buying from these large pizza chains.

Austin, when's the last time you ordered from Papa John's? How has your pizza-buying experience changed in recent years?

Austin Morgan: I think the only time I ever order Papa John's is when I'm having a bunch of people over and the Nats or Caps won by four, or whatever the deal is, to get that Caps 50, Nats 50, and I'm only paying half price. That's the only time I order Papa John's.

Sciple: Right! Because it's cheap! And when you're talking about these Papa John's and Domino's folks, throw Pizza Hut in there as well, it just seems they're all competing on the factor of convenience and price. It's really difficult to differentiate yourself from a quality perspective these days.

Dan, what do you think Papa John himself, Papa John Schnatter, leaving his formal role with the business, and these questions around the brand? What are your thoughts on Papa John's moving forward over the next couple of years?

Kline: I would rebrand. I don't think there's any positive equity in the Papa John's name. I think as long as you can move anyone who has your app into the new name, which is obviously easy enough to do, I would focus on execution and make that part of the name. Quick Pizza! Speedy Pizza! Or whatever. Because I don't believe a $5.99 pizza or $6.99 or whatever it is can be as good as all of these, 20-to-50-location, fast-casual, make-your-own-pizza. And in most cases, [insert town] House Of Pizza is better than Domino's or Papa John's, they're just not particularly good at delivery or execution or answering the phone. So everything about this has to be making the brand something that matters to consumers.

Domino's has shown that quality is not the key ingredient. You can't go below a certain level. Maybe they should promote, "Hey, we're going to redo our pizza recipe," much like Domino's did a few years ago. I would argue they made their pizza different, not necessarily better. Then, really try to get away from this Papa John's thing. I don't think the ads they're running now, where, to combat the controversy, they're just showing all the different owners and how diverse they are, I don't think that speaks to the average consumer who just remembered that they got Domino's because they could press a button and get Domino's. They didn't follow the business-page controversy of this.

Sciple: Right. It's definitely going to be an interesting story to continue to follow for investors. Resolving this conflict with Mr. Schnatter is maybe a break in the clouds, at least from what we've seen with it tarnishing the stock over the past year. However, there are some real questions, even notwithstanding all the issues around the Papa John, about whether the brand Papa John can position its pizza and its restaurants for success moving into the future. Definitely going to be something to continue to watch.

Kline: As a final thought, we talked about this yesterday when we were preparing the show -- one of the drags on Papa John's that doesn't get talked about is, they tend to, and this is anecdotal, be in lesser locations than Domino's is. As we have this retail space crunch, maybe they were in the OK plaza that had a couple of vacancies. Now that plaza is a chiropractor and a Papa John's. Whereas Domino's is in the plaza that has the CVS and the other thriving businesses. There might just be a whole retail shakeout where they have to look at their portfolio and maybe consider relocating some stores and investing. Domino's is redoing a lot of its stores, and they look a lot nicer. Papa John's has a pretty dated look, if you visit their stores.

Sciple: Right. It's a very competitive industry, pizza. For our listeners, we've painted the picture that way, particularly when it comes to Domino's. Like you said, they've made some really significant investments, bringing up-to-date on their technology and their locations, that Papa John's is going to have to match that. Something to continue to follow. This is a really important brand. I don't think it's a brand that's going to disappear overnight. However, there are some real questions here in the near term.

Check out the latest earnings call transcript for Papa John's.

Daniel B. Kline has no position in any of the stocks mentioned. Nick Sciple has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

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