Papa John’s Considers Selling Company Restaurants To Spur Growth

The pizza chain, suddenly flush with cash, is planning investments in new locations and technology in a bid to keep its momentum.

By: Jonathan Maze|restaurantbusinessonline

Papa John’s apparently has a secret weapon in its bid to spur growth: Its nearly 600 company-owned restaurants.

As the Louisville, Ky.-based chain considers its options to spur development in what is the fourth largest pizza concept in the U.S., those locations could prove valuable assets. The company is considering selling some of those restaurants to would-be franchisees, who use the locations as a starting point from which it can develop additional restaurants.

“Nothing is set in stone,” CEO Rob Lynch said in an interview. “But it’s an opportunity for us that a lot of our competitors don’t have.”

He noted, for instance, that Domino’s typically requires new franchisees to operate a location for a year, while Pizza Hut is actively closing restaurants. Papa John’s could sell restaurants in some of the 10 markets where it owns the locations to new franchisees eager for a running start with the brand.

That could speed growth. “We’re uniquely positioned to be able to afford great franchisees,” Lynch said. “We have 600 units. We can peel some of them off, give them some scale to come into.”

Unit development is a huge part of the company’s business model, both internationally and domestically, Lynch said. With just over 3,100 U.S. locations, Papa John’s is the smallest of the four largest pizza chains domestically, 1,100 locations behind Little Caesars and half as many as Domino’s. The company sees considerable opportunity in reducing that gap, while picking up development internationally.

In addition to potential growth from new franchisees, Papa John’s itself plans to build new corporate locations next year, marking the first time in years that the company has developed new locations—the chain operates about the same number of company locations as it did a decade ago.

“It’s been a long time since we’ve had an active company restaurant development plan in place,” Lynch said.

The reason is relatively simple: Papa John’s sales strength has improved margins considerably, making new-unit development a profitable investment. “We’re making a lot of money on organic restaurant operations,” Lynch said. “There’s a lot of white space in the market. We’re generating a lot of cash right now.”

Papa John’s same-store sales have fully recovered from a two-year sales slump, thanks in part to the pandemic—same-store sales rose 24% last quarter. The company is also no longer having to rescue franchisees that were struggling during that time. The higher sales have helped the company generate strong profits—earnings per share was 35 cents in the third quarter ended Sept. 27, compared to a loss of 10 cents in the same period a year ago.

Free cash flow is also strong—the company has generated $134 million in free cash flow during the first nine months of 2020. Executives said on Thursday that its balance sheet is the strongest “in nearly three years.”

As such, the company has the funds to make some investments and begin returning cash to shareholders—it is buying back $75 million worth of stock. The new store development is one such investment. But executives promised other investments on Thursday, too, including technology to continue to drive new customers to the company’s restaurants.

“We’re looking at investments that will keep us out in front on the technology fronts,” Lynch said. “We’re at its core an e-commerce business. We’re going to make sure we continue to support that.”