Don't call it a C-suite purge, but Papa John's (PZZA 5.21%) continues to clean out its executive offices from prior management holdovers as its new CEO looks to rebuild the company. And while the pizzeria's third-quarter results were a mixed bag for the executive, there were a number of positive developments that hold out hope for a turnaround.
Sales grew 4.8% to $403.7 million, beating Wall Street's estimates, as Papa John's recorded a 1% gain in same-store sales for the quarter, the first time in two years that comparable sales rose year over year. Earnings, however, fell just short of expectations, with per-share profits of $0.21 missing the consensus outlook of $0.23 per share. Still, that was ahead of the $0.19 per-share profit it generated a year ago.
CEO Rob Lynch, who joined Papa John's from Arby's two months ago, seems to have been given a good foothold to start the restaurant operator's return to growth.
Image source: Getty Images.
Quick payoff
The gains weren't expected to happen so soon. Papa John's had prepared to help its franchisees' financial position with an $80 million infusion of royalty payment relief that would extend through all of 2020, though half of the money was going to be spent in the third and fourth quarters of this year. It spent $14 million on relief this quarter.
The same-store sales growth also was unexpected and has allowed the restaurant to narrow its forecast for full-year comps from a range of a 1% to 4% decline to now expecting a 1.5% to 3.5% decline.
The results give Papa John's some hope that when the end of next year rolls around its franchisees and restaurants will be strong enough and profitable enough for it to not have to renew the payments into the following year.
More work to come
Perhaps as part of that, Papa John's has also reined in its store expansion plans. Although the pizzeria has over 5,300 restaurants worldwide, it believed it needed to open as many as 100 to 150 new stores each year. That wouldn't put Papa John's on par with rival Domino's (DPZ 2.72%), which has a "fortressing" strategy of opening hundreds of new restaurants, even if they're located near an existing one, but it was aggressive nonetheless. Now Papa John's is scaling it back some, committing to opening just 85 to 115 new stores a year.
So while things are hopeful, Papa John's is not there yet, and it could be argued that the bar was so low that getting over it shouldn't be so hard. Lynch admits as much, telling analysts, "Papa John's needs to get back to what made the brand great." That will come by reiterating its message of being different from other pizza shops because its better ingredients make for a better pizza.
But that's mostly platitudes, because other pizzerias are doing the same. Yum! Brands' (YUM 3.37%) Pizza Hut committed to improving the ingredients used in its pies three years ago, removing preservatives from the meats and cheeses that it uses. Papa John's will need to rely upon more than just slogans to differentiate itself.
C-suite shuffle
It may be why more executives are leaving the front office. Although Papa John's already has a new CEO, chief marketing officer, and restaurant operations head, a lot of chair shuffling just occurred.
The pizzeria's senior VP and chief of restaurant operations was made the new COO of North America, and it got a new COO for international, too. The CMO that was just hired in March was let go, and a new chief commercial and marketing officer was appointed. Papa John's CFO also announced he was leaving at the end of the fiscal year.
It's clear CEO Lynch wants to put his mark on the business; he says he's committed to allowing previously stifled menu innovation to occur. "We must embrace innovation from the ground up, not discourage it from the top down," he said. Underscoring that, Papa John's introduced a garlic Parmesan crust pizza, which Lynch says is the first time the pizzeria has changed its dough recipe.
That kind of new thinking separates the restaurant from its recent tumultuous past and suggests these first tangible improvements in performance could lead to a quick turnaround for the Papa John's brand.
