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Papa John’s Idea Proposal (PZZA)

Papa John’s Idea Proposal (PZZA)
 

Is Papa John’s seeing any sales increases as a result of its turnaround effort?

Report Available: October 31, 2019

 

Blueshift’s ongoing research found PZZA slowly emerging from the depths of its disastrous 2017 and 2018 caused by a sharp decline in sales and its founder and former CEO John Schnatter’s damaging comments and behavior. Progress has been measured, but sales are improving and the brand’s image under ambassador and board member Shaquille O’Neal is recovering. While this turnaround is expected to take time and it must fight against slowing industry sales trends, PZZA may be taking the right steps to get it back on track.

 

Observations

  1. PZZA’s Q2 results beat the Street’s expectations, but revenue continued to decline as the company executes its turnaround program to overcome damage inflicted on the brand by its former CEO. North American same store sales were down 5.7%, an improvement compared to the 6.9% decline experienced in Q1. It marked the third consecutive quarter of sequential improvement in comp sales. Total revenue was down 7.1% and net income declined 25% compared to the same period last year. PZZA said the Q2 results were “solid” and progress is being made, but there was still a lot of work to do. During the quarter, 33 PZZA locations closed in the U.S. Growth is expected to accelerate in the back half of 2019 as the full effect of the Shaquille O’Neal-led marketing program takes hold. PZZA raised the bottom end of its guidance for North America comp sales, with current comp sales expectations between negative 1% and negative 4% for the full year.
  2. PZZA released its first TV ads featuring Shaq in September. The campaign is called “Better Day” and shows Shaq rallying a crowd of PZZA employees at the company’s headquarters, making pizzas in a restaurant, sitting in a board meeting, and delivering pizza from a PZZA-logoed luxury bus. The spot is upbeat and captures Shaq’s enthusiasm for all things, moving the company’s emphasis past its previous reliance on its ousted CEO and forward to better days ahead for the company. The ads are airing during NFL and college football games, even if PZZA is no longer the official sponsor of the NFL, a role YUM’s Pizza Hut filled starting last season after the fallout from Schnatter’s criticism of the league. The commercials will also have a strong presence during this upcoming NBA season where regular season games tip-off Oct. 22. Shaq’s popularity comes from his gregarious personality but also his civic-minded good deeds. Shaq recently provided a home to an Atlanta woman whose 12-year old son was shot and paralyzed. He is furnishing the home and paying the rent for one year. Two other PZZA board members are also assisting with funds, something sure to shine more positive light on the company especially after the trials of the last few years of Schnatter’s tenure.
  3. PZZA is embracing delivery apps like DoorDash, GRUB, and UberEats, seeing third-party delivery partners as an opportunity to reach more customers and increase sales. The company inked a deal with DoorDash in March to deliver food from nearly 15,000 of its restaurants. PZZA is still pushing its own in-house delivery app which it contends is its fastest growing sales channel. This strategy is the opposite of its main rival DPZ, which recently said its delivery business was doing well and did not need the help of third-party apps.
  4. DPZ suffered a rare earnings miss as Q3 EPS missed by $0.04 and revenue came in below expectations. Comp sales for company-owned stores climbed 1.7% vs. 2.6% consensus while U.S. franchise stores increased sales 2.5% vs. 2.6% expectations. Revenue at company-owned stores fell 20% while royalties and fees from U.S. franchises grew 8.5%. DPZ expects its U.S. same-store sales to grow 2% to 5% in the next two to three years, down from previous guidance of 3% to 6% growth. Along with news that restaurant sales were weak in Q3, there are concerns about the effect this would have on PZZA’s second half performance and its recovery efforts.
  5. Blueshift’s July 31 report said PZZA’s faces a formidable challenge in reversing its sales decline and improving its brand image. Sources think it can be done; however, it is expected to take one to five years. PZZA’s turnaround initiatives, including franchise relief, increased marketing, technology improvements, and the inclusion of Shaq as the new spokesperson, are all welcome. Sources discussed these initiatives’ potential success with varying degrees of cautious optimism and skepticism. The expectation is that improvements will take a significant amount of time to reverse the negative trends. Franchise owners and store managers said sales ranged from being down 10% from their 2017 high to being up in the 2% to 5% range year to year. One source said any sales increase is due to higher prices, not an increase in customer transactions. A term used by many sources to describe franchise sales was “struggling.” One source said that 80% to 90% of franchisees are still profitable, while another said only 40% to 50% are profitable. A fourth said the average Papa John’s store grosses $700,000 to $800,000 with a 7% or 8% EBITDA.

 

What’s the latest regarding PZZA’s turnaround effort? What changes are sources noticing with PZZA’s brand image since July? How are sales trending since July? What effect is Shaq having as a brand ambassador? Does PZZA have a chance to reverse sales trends to the positive before the end of the year? How is the partnership with DoorDash?  To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Papa John’s franchise owners, Papa John’s store personnel, Competitor franchise owners, and Industry Specialists.  

 

Companies: Papa John’s (PZZA), Domino’s Pizza (DPZ), Yum Brands (YUM)

 

Research Begins: October 14, 2019

 

To see other ideas Blueshift Research is currently working on, please click here.

 

 

Blueshift Research’s sister company, Intro-act, has launched the Intro-act Scorecard, the C-suite’s standard, ongoing measure of corporate investor engagement.

 

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