Papa John’s Announces Strategic Investment after Disappointing Financial Results

Papa John’s International, Inc. has announced that it has entered into a securities purchase agreement with Starboard Value LP, pursuant to which Starboard is making a USD200m strategic investment in the company with the option to make an additional USD50m investment through March 29, this year.

The company plans to use approximately half of the proceeds of the investment to repay debt, with the remaining proceeds providing financial flexibility that enables Papa John’s to invest capital to further advance its five strategic priorities of People, Brand, Value/Product, Technology and Unit Economics. The company will take a disciplined approach to capital allocation, ensuring that investments in these five areas are directed to its highest return initiatives, with clear parameters and analytics in place to measure and track performance and execution.

In connection with the investment, the Papa John’s board of directors is expanding to include two new independent directors, including Jeffrey C. Smith, chief executive officer of starboard, who has been appointed chairman of the Papa John’s Board, and Anthony M. Sanfilippo, former chairman and chief executive officer of Pinnacle Entertainment, Inc. These directors bring substantial experience in the restaurant, retail and hospitality industries, with skill sets spanning operational turnarounds, corporate finance and corporate governance. In addition, Papa John’s president and CEO Steve Ritchie has been appointed to the board. With the addition of the new directors, the board will comprise nine directors, seven of whom are independent.

“Our agreement with Starboard concludes a comprehensive strategic review conducted over the past five months to better position Papa John’s for growth, improve the company’s financial performance and serve the best interests of our stakeholders. This transaction provides the company with financial resources and strong and experienced directors on the board in order to position the company for success over the long term. We believe we have found terrific partners to advance Papa John’s strategy, especially given their record of reinvigorating and growing premier restaurant and consumer brand companies,” said Olivia Kirtley, a member of the Special Committee and most recently chairman of the Papa John’s Board. She says that Starboard’s investment represented a strong vote of confidence in Papa John’s.

On the other hand, Papa John’s also announced preliminary, unaudited selected financial results for the three months and full year ended December 30, 2018 and comparable sales for the period December 31, 2018 to January 31, 2019.

For the 2018 periods, the result registered by Papa John’s were not positive. System-wide North America comparable sales decreased (8.1%) for the fourth quarter, while for the full year, system-wide North America comparable sales decreased (7.3%), compared to the company’s previous guidance of negative (6.5%) to negative (8.5%).

System-wide International comparable sales decreased (2.6%) for the fourth quarter. For the full year, system-wide international comparable sales decreased (1.6%), compared to the company’s previous guidance of negative (2%) to positive 1%.

The company’s global net unit growth was 2.0%, compared to the previous guidance of 0% to 3% for the year.

For period December 31, 2018 to January 31, 2019, system-wide North America comparable sales decreased (10.5%); while system-wide International comparable sales were flat.

The company noted that the disparity in North America and International comparable sales reflects the consumer sentiment challenges the brand has encountered in the U.S. In addition, the December and January sales were impacted by the conversion to the company’s new loyalty program and ineffective promotions in the heightened competitive environment.

“These results are disappointing to all of us, but we have a strong foundation built on quality and are confident in the great growth potential for the brand, particularly with the support of our new partners. Our agreement provides new expertise and additional financial resources to invest in areas that we believe are important to our customers and the opportunities ahead. Quality and how our product brings people together will be front and center in our efforts. Our recently launched Philly Cheesesteak pizza, a new line of handcrafted specialty pizzas, premium ingredients, menu variety, and new, more modern creative advertising that emphasizes people and quality products are a few actions underway,” continued Ritchie.