With record sales and strong profits that show little sign of slowing down, Papa John’s is now turning to unit growth in a bid to take advantage of its momentum as well as expected opportunities in the real estate market.
The Louisville, Ky.-based chain said on Thursday that its same-store sales in North America jumped a record 28% in the second quarter ended June 30, and then accelerated from there to an estimated 30.3% in July.
The results helped the chain improve cash flow by more than 640% in the quarter, while franchisees enjoyed the strongest profit margins they’ve seen in “several years,” CEO Rob Lynch said on Thursday. Only three traditional locations closed in the quarter, the lowest rate the company has seen in a decade.
It’s a stunning change for a chain that a year ago was struggling with bad sales and rapidly closing stores. And it’s given the company confidence that it can start pushing more aggressively to build new locations.
“Development is probably my No. 1 priority right now,” Lynch said on the company’s second-quarter earnings call. “We built a very strong foundation on our commercial business in North America. The next phase in our turnaround is getting development ramped up again.”
“There’s a ton of white space for us,” he added. “We have half the stores as our competitors in North America and less than that internationally. We feel like there is a huge development opportunity here.”
Papa John’s executives said that about half the sales results come from the chain's own efforts, with the other half coming from a pandemic that has led to a surge in demand for delivery and takeout food.
The company’s own efforts have included the introduction of new sandwiches, Papadias, and then the launch in June of the Extra-Large Shaq-a-Roni pizza, which has extra cheese and extra pepperoni and was developed with board member Shaquille O’Neal. Papa John’s has sold more than 2 million of the pies.
It is also working with third-party delivery partners, a step that rival Domino’s has refused to take. So far, at least according to Papa John’s, the move has paid dividends. Sales through those channels doubled during the second quarter and now represent about 5% of sales, executives said.
The aggregators help the company meet demand during peak hours. The sales are “highly incremental and profitable to our business,” Lynch said. “We win by providing customers with better pizza wherever they are and however they choose to order.”
Executives are confident they can keep their sales. They noted that they added 3 million new digital customers during the period and that these customers have higher retention and repeat rates. And they also note that customer service scores have soared during the pandemic.
“These customers that are coming in, we’re keeping them,” Lynch said. “We’re taking better care of them than they expected.”
The improvement is driving profits both for the company and its franchisees. Papa John’s generated $67 million in free cash flow during the quarter, compared with just $9 million in the same period a year ago.
And that has the chain thinking about development to add units to its nearly 3,300 U.S. locations and 5,300 worldwide units.
While development has slowed during the pandemic, a result executives attribute to a slowdown in permitting processes, they believe the real-estate market will turn favorable enough to add new units. Growing restaurant closures are expected to make numerous sites available in the coming months and years.
Lynch said that the company has been contacted by “many large, sophisticated owners of other restaurants who want to get in the pizza business.”
And he said there’s no reason why Papa John’s closure rate can’t continue to be this low for some time, especially given the company’s belief that social distancing will remain the norm for some time.
“I don’t understand why anyone would close a Papa John’s right now,” Lynch said. “I could see our closure rate being very low for the foreseeable future.”