Q2 2024 Earnings Summary
- International transformation initiatives in the UK are yielding positive results, with stores that are changing hands seeing high single-digit or low double-digit increases in comparable sales performance, and management expects international margins to return to historical levels, if not higher, in the second half of the year.
- Improving value perception through new value offerings such as the New York Style extra large pizza at $10.99 and $6.99 Papa Pairings is expected to drive transaction growth and improve sales trends over time. The company has seen value perception improve over the past 8 weeks and is testing value offers in company-owned restaurants to enhance frequency and repeat rates.
- Management is confident in the brand's unique positioning of "Better Ingredients, Better Pizza" with high-quality fresh ingredients, and plans to amplify this message as part of their overall campaign to differentiate in the category and drive future growth.
- North America comparable sales were down approximately 6% in the first four weeks of the third quarter, and the company anticipates comps to remain under pressure and be down mid-single digits throughout Q3, indicating ongoing challenges in driving sales growth.
- Despite efforts to improve value perception, the company's initiatives may take longer than expected to translate into transaction growth, suggesting potential challenges in reversing declining transaction trends.
- The company closed 43 underperforming company restaurants and refranchised 60 restaurants in the U.K., resulting in a shrinkage of the market size, which may reflect underlying issues in international operations and potential challenges in international growth.
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Value Strategy and Consumer Trends
Q: How will you drive sales amid value-focused consumers?
A: Todd Penegor explained that to drive sales amid value-focused consumers, they are improving value perception by featuring offerings like the New York Style pizza at $10.99 and Papa Pairings at $6.99. They aim to balance sales comps, transaction trends, and unit economics, and are excited to test new ideas to help the business in the long term. -
Digital and Loyalty Program Enhancements
Q: Will you adjust your loyalty program to boost frequency?
A: Todd Penegor acknowledged the opportunity to enhance the loyalty program by allowing customers to earn rewards quicker. Currently, earning $10 off requires spending $75, which takes about three visits since the average customer visits four times a year. They plan to adjust the program to drive higher frequency and immediate gratification. -
International Business Performance
Q: Can you discuss international performance, especially the UK?
A: Todd Penegor noted they are seeing strong gains in international markets, particularly in Latin America, and are improving performance in the UK. After refranchising 60 locations and closing 43 stores, comps are improving in the UK, with stores changing hands seeing high single-digit or low double-digit sales increases. They are now focusing on innovation and marketing to drive further growth. -
Development Costs and Unit Economics
Q: How are development costs trending?
A: Todd Penegor stated they are making progress in reducing development costs by improving architectural designs, procuring new deals with general contractors, and optimizing furniture and fixtures. Costs are coming down year-over-year, aligning more with industry norms, which improves unit economics and supports franchisee growth. -
Margin Outlook in International Markets
Q: How will international margins trend in the second half?
A: Ravi Thanawala explained that with only 13 company-owned restaurants remaining in the UK, they are returning to a traditional franchisor model. This shift will allow international margins to return to historical levels, if not slightly higher, in the second half of the year. -
Marketing Spend and Impact on Margins
Q: Did reducing local marketing spend affect margins and sales?
A: Ravi Thanawala confirmed that local marketing savings are part of restaurant margins. They rebalanced their media mix to focus more on national value offers like the $6.99 mix-and-match deal, which is at parity with competitors. They are testing different value offers to find the right balance between national and local marketing to drive transaction growth while maintaining unit economics. -
Brand Positioning and Differentiation
Q: Is the brand unique enough to gain market share?
A: Todd Penegor believes that starting from "better ingredients, better pizza" with high-quality fresh ingredients gives them a strong position. They plan to amplify their unique differences, ensure consistent execution, and balance the value-centric environment by highlighting that the best pizzas come from Papa John's. -
Domestic Development and Company-Owned Stores
Q: Will you build more company-owned stores?
A: Todd Penegor indicated they are re-evaluating their long-range outlook and capital allocation strategy. While there's a role in being a great brand steward by opening restaurants, they need time to work through their plans to ensure they're leading the system and creating confidence among franchisees. -
Impact of Promotions on Sales
Q: Did the $9.99 Cheeseburger promo meet expectations?
A: Ravi Thanawala noted that the cheeseburger promotion delivered healthy and accretive ticket sizes to the average ticket. While at an attractive $9.99 price point, customers often added to their orders, leading to sequential improvement on a two-year stack as they progressed through the quarter. -
Transaction Trends and Leaky Buckets
Q: Where are you seeing transaction declines?
A: Ravi Thanawala explained that while transactions involving two or more pizzas showed strong performance, they are losing transactions among consumers purchasing one pizza or only sides. They are adjusting their offerings to improve value perception and target these areas to regain transactions. -
Consumer Trends and Value Perception
Q: Is the value perception compared to peers or broader QSR?
A: Todd Penegor stated that their biggest challenge in value perception is relative to competitors within the pizza category. They need to ensure their relative value is strong, focusing on competing and winning in pizza first.
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