After Papa Johns had seemingly taken the top performing pizza chain spot from the indomitable Domino’s this year, the company reported negative sales and revenue for the third quarter ended Sept. 25, 2022, following 12 straight quarters of outperformance. Comparatively, Papa Johns’ competitors, Pizza Hut and Domino’s both reported positive same-store sales growth, of 1% and 2% respectively, despite the staffing challenges the restaurant industry continues to face.
So, what’s to blame for the same-store sales slowdown of -1% and revenue decrease of $2 million? The challenging macroeconomic climate might have contributed to the less-than-ideal financial results in a more roundabout way. Papa Johns has always differentiated itself among its competitors as the premium pizza brand, with more of a focus on overall value than discounting. But with inflation and the uncertainty of a possible recession on the horizon, customers are spending less on restaurants and takeout.
“We’ve stated that we think about value differently than our competitors and don’t do a big 40-50% off national promotion,” CEO Rob Lynch said during Thursday’s earnings call. This is why they introduced Papa Pairings as a discount this quarter, which requires you to buy two items for $6.99 and is not a blanket discount.
“We position ourselves as a premium player but if you’re in qsr and don’t have a value strategy, you can’t win,” Lynch added. “I think that value strategy continues to evolve with customer sentiment. Across the pizza segment, we’ve seen a decline in transactions and we need to make sure we do our best to meet their needs.”
Besides balancing value and premium quality with customer demands for discounting, the other major part of Papa Johns strategy has been growth and development, as right now they’re still the 3rd largest pizza chain in the country in terms of units. That strategy recently, however, has posed a challenge because real estate permitting is still behind even two and half years after the pandemic began. Lynch is confident, however, in the company’s 6-8% development outlook moving forward, particularly in international markets.
“From 2017-2019 we actually had net negative restaurant openings, which changed in 2020,” Lynch said. “Globally, our domestic development is something we continue to focus on, but right now it’s a tough time to open restaurants, which may continue into 2023.”
Moving forward, Papa Johns is focused on driving labor efficiency and menu innovation to turn short wait times and positive guest experiences into repeat visits. While during the peak of the pandemic, the Louisville-based pizza chain struggled with store hours, the executive team is hoping to continue turning that around moving forward.
“We have a lot of demand but we’re now coming out of the pandemic and we’re shifting our focus toward managing our people efficiently,” Lynch said. “Our customer service kpis are going up with these initiatives, which leads to improved loyalty and that is the best way to improve unit economics.”
Even though Papa Johns played a losing game this quarter in terms of growth, the pizza chain is still ahead on menu innovation and has even inspired competitors to launch copycat items -- like the Pizza Hut Melts, which have been compared to the Papadias. Papa Johns intends to continue hitting menu innovation hard next year, with Lynch hinting at new pizza and non-pizza items to be rolled out in the first couple of quarters of 2023.
For the third quarter of 2022, total company revenues fell by less than 1% to $511 million. Net income slid $29.3 million or $0.79 per share the same quarter last year to $8.3 million or $0.23 per share this quarter.
Papa Johns opened 18 net new stores last quarter, bolstered again by international growth, for a total of 5,589 restaurants systemwide.
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