Papa John's gets a big investor as sales continue to suffer

Struggling pizza chain says its promotions were ineffective

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A Papa John's International Inc. pepperoni pizza pie
A Papa John's International Inc. pepperoni pizza pie Credit: Luke Sharrett/Bloomberg

Papa John's International Inc.'s sales suffered as its promotions weren't strong enough, concerns that were largely shrugged off by investors who cheered the struggling pizza chain's big investment news.

Starboard Value LP invested $200 million in Papa John's and has the option to invest another $50 million. It also got seats on the company's board, including chairman. Meanwhile, Papa John's founder John Schnatter said he made a similar offer over the weekend that the company rejected.

Papa John's had been looking at financial proposals for months as it tries to reignite growth following its issues tied to Schnatter's behavior, which included the use of the N-word on a media training call last year.

Papa John's North America comparable sales fell 10.5 percent in January, 8.1 percent in the fourth quarter of 2018, and 7.3 percent for all of 2018, according to preliminary results the company released Monday.

"We believe the rapid deceleration in same-store sales in December and January necessitated the investment from Starboard," BTIG restaurants analyst Peter Saleh said in a research note.

Not surprisingly, Papa John's fared better in international markets, where the brand says it hasn't encountered the same kind of "consumer sentiment challenges" as it has back at home.

CEO Steve Ritchie, in a statement, called the results "disappointing," but said the company is confident in the brand's growth potential, particularly with Starboard's support. Ritchie also pointed to its "new, more modern creative advertising." The brand in September began showcasing numerous people who work at Papa John's as a way to distance itself from its many years of featuring Schnatter in many of its ads. The new work is by Endeavor Global Marketing.

Results in December and January came under pressure from the company converting to its new loyalty program "and ineffective promotions in the heightened competitive environment," Papa John's said in a statement.

Lately, the No. 4 U.S. pizza chain has started to put more emphasis on value. It has been running ads promoting two medium 1-topping pizzas for $6 each, and promoting its updated loyalty program that rewards more points per dollars spent as it tries to win back customers.

Over the weekend, Papa John's even piggybacked on Domino's points for any pizza promotion, suggesting people buy pizzas using Papa Rewards to get rewards from both chains.

Starboard's investment comes in the form of a purchase of convertible preferred stock. The main takeaway is Papa John's now has more money to repay debt and work on improvements in areas including its brand.

In Starboard, Papa John's gets the financial backing and insights from a team that in 2014 famously suggested Darden Restaurants serve fewer breadsticks and salt the pasta water at Olive Garden to help boost that chain's business.

"It's unclear what plans Starboard Value may have for Papa John's, but its most visible success story in the restaurant industry was creating value at Darden about five years ago through a combination of cost cutting, asset sales, and leadership changes," Stifel analyst Chris O'Cull said in a research note.

Starboard CEO Jeffrey Smith became Papa John's chairman, a role previously held by Olivia Kirtley after Schnatter left the post in July. Anthony Sanfilippo, former chairman and CEO of casino operator Pinnacle Entertainment Inc., also joined the board, as did Papa John's CEO Ritchie.

Shares of Papa John's were up 10.1 percent at $42.41 in afternoon trading. Schnatter remains a major shareholder, holding about 31 percent of the company's stock before Starboard's investment.

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