Papa John's Fortifies Franchise Relations to Revive Sales

Zacks Equity Research

Papa John’s International, Inc. PZZA announced a program under which it is increasing intended investments in marketing and brand building. The company will also provide the previously planned financial assistance to its domestic franchisees, whose franchise agreement will end in 2020. Beginning the third quarter of 2019, it will invest an additional $80 million for the long-term support of its brand and franchisees.

This program is supported by the company’s elected Franchise Advisory Council (FAC). Through the program, Papa John's further plans to strengthen partnership with its franchisees and provide them with investment resources as was promised in the agreement. The company will assist domestic franchisees in forms of lower royalties, royalty-based service incentives and targeted relief. It is also arranging funds for its franchises to implement marketing and reimaging initiatives.

The company aims to contribute to the National Marketing Fund to intensify the brand’s position and activate its new ambassador, Shaquille O’Neal. Notably, O’ Neal recently made an investment of roughly $840,000 in nine of Papa John’s restaurants in Atlanta.

The above-mentioned move is evidence of the company’s efforts to revive the long-standing declining sales trend and restore the brand image. Unlike other pizza chains, Papa John’s has been under a negative light for quite a long time, owing to the denouncement of its ex-CEO on grounds of racial slur.

Subsequently, the company’s shares have lost 10.4% in the past year against the industry’s 26.8% rally.

 

Focus on Franchise Relations

Papa John’s is deeply committed to develop and maintain strong franchise system. It is also looking for increasing franchise relations to eliminate barriers to expansion in existing international markets and identify market opportunities. Over the next several years, the company plans to increase international units, a large portion of which will be franchised.

We believe, re-franchising a large chunk of its system reduces the company’s capital requirements, and facilitates earnings per share growth and ROE expansion. Alongside, free cash flow continues to grow, allowing reinvestment for increasing brand recognition and shareholder return.

Other Brand Revival Efforts

For quite some time now, Papa John’s have been undertaking measures that would help it restore the brand. The company extended its board to appoint Jeffrey C. Smith, CEO of Starboard, and Anthony M. Sanfilippo, former chairman and CEO of Pinnacle Entertainment, as new directors. Additionally, Papa John’s president and CEO, Steve Ritchie, has been appointed to the board.

The company is also partnering and exploring new avenues to drive investment. Early this year, it entered a securities purchase contract with Starboard Value LP and affiliates. Further, the company is said to have sought assistance from Bank of America Corporation BAC on potential buyout interests. Further, rumors had it that Restaurant Brands QSR might team up with the investment capital firm 3G Capital to buy Papa John’s.

Our Take

We believe that with the above-mentioned moves, this pizza chain stands a chance to revive sales. In 2018, the company’s total revenues declined 11.8% year over year. Further, strong franchise relation and expansion will enable Papa John’s to fend off intense competition from the likes of Domino’s DPZ.

Papa John’s currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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