case analysis project - papa johns

Papa John’s International Inc.

Course J401 | Section 21414C 40 – C 49

Team Leader:Mariana Freitas

Team Members:Peyton Balazs

Autumn GordonSimran Saini

Ashton Wagler

April 14, 2016

Team 2

In this presentation, Team 2 will present a final analysis on Papa John’s International, Inc. We will begin with an overview of the mission and values of Papa John’s, the board of directors, and a brief recap from the Case IQ presentation.

Firstly, Team 2 will focus on Papa John’s growth strategy along with an updated SWOT analysis, marketing strategy, and technology strategy. We will then present an overview of the pizza industry and discuss Papa John’s main competitors. We will then cover the franchise component, domestic and international expansion, and an analysis on the U.K. and China market. Lastly, we will conduct a financial analysis on the company.

To conclude, Team 2 will highlight system-wide risk factors and risks specific to Papa John’s, as well as provide recommendations from analysts and our group members.

Please contact us via e-mail with any questions or concerns regarding our presentation

Mariana Freitas [email protected] Balazs [email protected] | Autumn Gordon [email protected]

Simran Saini [email protected] | Ashton Wagler [email protected]

EXECUTIVE SUMMARY


TABLE OF CONTENTS


Company Overview.........................................................................................................................................

Company Facts.................................................................................................................................

Mission and Values..........................................................................................................................

Board of Directors............................................................................................................................Case IQ Recap...................................................................................................................................................Papa John’s Strategy 2013-2015......................................................................................................................

Growth Strategy................................................................................................................................

SWOT Analysis.................................................................................................................................

Marketing Strategy...........................................................................................................................

Papa Rewards...................................................................................................................................Technology Strategy.........................................................................................................................

POS System FOCUS........................................................................................................................The Pizza Industry 2013-2015........................................................................................................................

The Pizza Industry...........................................................................................................................

Competitors......................................................................................................................................Papa John’s Global Expansion 2013-2015....................................................................................................

Franchise vs. Corporate...................................................................................................................

International Locations....................................................................................................................

Global Units Openings....................................................................................................................

International Markets......................................................................................................................

China Market....................................................................................................................................

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TABLE OF CONTENTS


Financial Analysis 2013-2015.........................................................................................................................

Stock Analysis..................................................................................................................................

Revenues...........................................................................................................................................Debt and

Margins............................................................................................................................Free Cash

Flow….............................................................................................................................

Growth..............................................................................................................................................Risk Factors, Looking Forward, and Recommendation...........................................................................

Risk Factors......................................................................................................................................

2016 Guidance..................................................................................................................................

Analyst Recommendation..............................................................................................................

Team 2 Recommendation...............................................................................................................

Questions...........................................................................................................................................References..........................................................................................................................................................Work Papers......................................................................................................................................................

Attendance........................................................................................................................................Meeting

Minutes..............................................................................................................................

Timesheets.........................................................................................................................................

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COMPANY OVERVIEW

COMPANY FACTS

Beginning: Jeffersonville, Indiana

Headquartered: Louisville, Kentucky

Financial Year End: December

Employees as of December 27, 2015: 22,350

Market Cap: $2.14B as of April 13, 2016

Ticker Symbol: PZZA

Exchange: NASDAQ


First Papa John’s Restaurant in Jeffersonville, IN

Source: Yahoo! Finance, Bloomberg Terminal

Source: Papa John’s Website

MISSION & VALUES CustomersPapa John’s will create superior brand loyalty, i.e. “raving fans”, through (a) authentic, superior-quality products, (b) legendary customer service and (c) exceptional community service.

Team MembersPeople are our most important asset. Papa John’s will provide clear, consistent, strategic leadership and career opportunities for Team Members who (a) exhibit passion toward their work, (b) uphold our Core Values, (c) take pride of ownership in building the long-term value of the Papa John’s brand and (d) have ethical business practices.

FranchiseesWe will work as a team with our franchisees to create continued opportunity for outstanding financial returns to those franchisees who (a) adhere to Papa John’s proven Core Values and systems, (b) exhibit passion in running their businesses and (c) take pride of ownership in building the long-term value of the Papa John’s brand.

ShareholdersWe will produce superior long-term value for our shareholders.

P.A.P.AAccountability

Attitude

Constant Improvemen

t

Focus

Superiority


Norborne P. Cole Jr. Chair of the Compensation Committee | Appointed in 2003

Christopher L. Coleman Audit Committee & Corporate Governance and Nominating Committee | Appointed in 2012

Olivia F. Kirtley Chair of the Audit Committee & Compensation Committee |Appointed in 2003

Source: 2014 Annual Report

BOARD OF DIRECTORS

John Schnatter Founder, Chairman & Chief Executive Officer | Appointed in 1984


Laurette T. Koellner Audit Committee & Corporate Governance and Nominating Committee | Appointed in 2014

Sonya E. Medina Corporate Governance & Nominating Committee | Appointed in 2015

Mark S. Shapiro Audit Committee | Corporate Governance and Nominating Committee | Appointed in 2011

W. Kent Taylor Compensation Committee | Appointed in 2011


BOARD OF DIRECTORS



CASE IQ RECAP

Founder John Schnatter

History 1984-2013

Marketing and Advertising

Industry• Market Share• Industry

Trends

Competition• Direct• Indirect

Strategy• Five

Components• SWOT Analysis

Franchises• Requirements• Modifications

Porter’s Five Forces

Source: Team 2 Case IQ PresentationPapa John's | Final Case Analysis | 12


PAPA JOHN’S STRATEGY 2013-2015

GROWTH STRATEGY

6 Year Plan

2013 Plan: Open 1,200 net units

globally by 2018 (180 to 210 net

global unit openings a year)

• #1 in the 2015 American Customer Satisfaction

• Leader in the pizza category and #2 in total of all QSR in customer experience in the Temkin Experience Rating

Customer Satisfaction

Maintain Premium Pricing • Clean Label

Initiative • Quality Guarantee• Papa’s Lighter

Choices menu offerings and Online Nutrition Calculator

• Summer 2016: First national pizza chain to use poultry raised without human or animal antibiotics, as well as fed with a 100% vegetarian diet

The runway for Papa John’s is much

longer compared to its competitors, as

it is the youngest of the top four

chains

Quality Focused

Reduce “pass-throughs” and reimbursements in the form of discounts, and invest that in marketing to build the brand and to create a stronger emotional connection with customers

Source: 2013 Q1 & Q4 Earnings Call, 2015 Q1, Q3 & Q4 Earnings CallPapa John's | Final Case Analysis | 14

SWOT ANALYSIS

Source: Papa John’s Website, 2014 & 2015 10K, Franchise Help Holdings LLC, Statista, Fast Food Menu Prices, BLS, Tampa Bay Times, 2015 Nielsen Global Health and Wellness Survey, United States Department of Agriculture

Strengths• Community Oriented – Contributed more than $1 million toward disaster recovery and relief since 2012. Also donated approximately $1.3 million to the JA Program

• Better Quality – Ranked #1 in customer satisfaction by American Customer Satisfaction Index for 13/15 years

• Marketing Techniques – Official sponsor of over 350 professional and collegiate sports teams

• Efficient Operating System – Implementation of FOCUS Opportunities

• Franchising – Signed agreements to open approximately 1,000 international franchise units over the next six years

• Social Media Advertising – Only 16% of people in the United States place orders online

• Projected Industry Growth – Expected growth of 3.06% by 2020 in the United States

Weaknesses

Threats

• Limited Menu – Does not offer options such as sandwiches, salads, or pasta, compared to other industry leaders

• Higher Price – Approximately $1-2 above other industry leaders

• Dine-In Options – “Few” locations because it reduces operating costs

• Delivery Driving Service – Fatalities in Driver/Sales occupation occur at a rate of 24.3%, approximately seven times more than overall workplace average

• High Competition – Moved from third-largest pizza chain to fourth place

• Health Awareness – 2015 Nielsen Survey indicated 69% of consumers are eating healthier

• Price of Ingredients – Food prices increased 2.9% in 2015

SWOT

Analysis


• Local Level- Target consumers within the

delivery area of the restaurant - Community orientated activities

within schools, sports venues, and other organizations

- Special promotions

• National Level- Television, print, direct mail,

digital, mobile marketing, and social media

- “Co-op” – Individual Papa John’s may be obliged to contribute percentage of sales towards market-wide advertising campaign

MARKETING STRATEGY


• Papa John’s Marketing Fund

• International Level- Focus: people who live or work

within a small radius of a Papa John’s restaurant

- Radio, television, mobile-marketing, print materials, and digital marketing

- Local promotions to raise awareness: community events, sporting events, and school programs

Source: 2015 Annual Report, 2014 Q1 Earnings Call

• Official Pizza Sponsor of the NFL - 41% polled named Papa John’s

most active sponsorship of NFL (2013)

• Peyton Manning - 62% named him face of the NFL

(2013)- Owner of 27 Papa John’s

Franchises- Market Cap was $900 M in 2012

(Manning), now $2.14 B

• J.J. Watt - New spokesman for Papa John’s- All Pro defensive player,

considered one of the most prominent faces of the NFL

• Specials and Promotions- “Double Cheeseburger Pizza”- Official pizza of the MLB (April 3,

2016)Source: 2013 and 2015 Q4 Earnings Calls, 2015 Annual Report, PapaJohns.com/Investor Relations


MARKETING STRATEGY

• Four step loyalty program that allows Papa John’s customers to earn discounts based on their amount of spending- Example: large 2-topping pizza – 20

points; garlic knots – 10 points

Source: 2016 Company Presenation, PapaJohns.com, 2015 Annual Report Papa John's | Final Case Analysis | 18

• Increases loyalty in a value-driven category

- Papa Rewards surpasses other major brands as favorite dining/QSR loyalty program in Bond Brand Loyalty Report

• “Papa Card”1. Sign up online for Papa

Rewards

2. Place order online

3. Earn 1 point with

every $5 you spend

4. Redeem your points for

Papa John’s products

PAPA REWARDS

• Highest digital sales mix in category- Mobile represents over 50% of total digital

sales

• Highest rating according to The Search Agency Report “The Mobile Experience Scorecard – Restaurants and Catering”

• iOS app upgrade (Feb 24, 2015)- Current iOS version: 969 Customer Reviews

with an average rating of greater than 4 out of 5 stars

• Fully responsive web design to improve the customer online/mobile experience

- Ability to change size and aspect ratio based upon individual screen size

• e-Commerce- Pay Share (April 2015)

Source: 2015 Annual Report, 2016 Company Presentation, 2013 Q4 Earnings Call, iTunes StorePapa John's | Final Case Analysis | 19

TECHNOLOGY STRATEGY

• New point-of-sale system (FOCUS)

• Implementation: 2015, in all North American traditional restaurants

- Lowered income before taxes by $1.8 M

- Increased Other Sales by $8.9 M primarily due to FOCUS equipment being sold to franchisees

Papa John's | Final Case Analysis | 20Source: 2015 First Quarter Results, 2015 Q1 Earnings Call, 2015 Annual Report

• Expected to improve labor costs over time

- Quicker employee training

• Touch screen technology- Improve in-store customer

experience- Drive speed and order accuracy

POS SYSTEM FOCUS


THE PIZZA INDUSTRY2013-2015

THE PIZZA INDUSTRY

6.5% 7.9%14.8%

9.9%20.2%

40.9%

Market Share Percentage of Sales Pizza Industry - 2014

Papa John's Little CaesarsPizza Hut Domino'sOther Chains Independent Chains

Papa John’s ↑0.5% Domino’s ↓0.1% Little Caesars ↑3.2% Pizza Hut ↑3.3% Other Chains ↑0.6% Independent Chains

↓7.3%

Percentage Change in Market Share Since 2013

Source: Thompson, Crafting and Executing Strategy: The Quest for Competitive Advantage (20th Ed.), 2016, Business Insights, Yahoo! Finance

33.65

6.832.14

Market Cap in BillionsBig Four in the Pizza Industry

2015

Yum! BrandsDomino's Papa John's

Note: Little Caesars is privately held


• Overview of the Pizza Industry- Worldwide sales for 2012 and 2017

(projected) were $42.8 B and $49.5 B, respectively

- Estimate worldwide sales for 2015 were $46.7 B (CAGR 2.95%)

- Worldwide establishments in 2012 and 2017 (projected) were 74,400 and 86,493, respectively

- Estimate worldwide establishments for 2015 were 81,441 (CAGR 3.06%)

COMPETITORS

Source: Thompson, Crafting and Executing Strategy: The Quest for Competitive Advantage (20th Ed.), 2016, Pizza Hut 2015 Report, Pizza Hut Website, Domino’s 2015 Annual Report, Little Caesars Website

• Growth strategy is increasing net openings outside of the U.S. • Want to sharpen brand position by concentrating on product customization,

transparency, and leading innovation/engagement through technology • Planning to split into Yum! China and Yum! by the end of 2016• 2015 Year End Store Count: 16,063

• Growth strategy is dependent on global expansion• Transforming all locations by the end of 2017 to increase hospitality in locations • Leader in technology with apps in many different operating systems• Convenient store locations and efficient supply chain • 2015 Year End Store Count: 12,530

• “Highest-Rated Chain – Value for the Money” based on a nationwide survey of quick-service restaurant consumers conducted by Sandelman & Associates, 2007-2014

• Innovation - recognized pioneer in pizza industry, such as the "two pizzas for the price of one" deal

Commonalities: All the major players in the pizza industry are focused on franchising, expanding internationally, and utilizing technology


PAPA JOHN’S GLOBAL EXPANSION 2013-2015


• Owning corporate restaurants helps franchises implement Papa John’s best practices and strategies

• Outperformance of company stores relative to the franchises

- Corporate stores are in more tenured and penetrated markets

• Papa John’s is in the process of weeding out the franchisees that are not engaged

- Higher store closures in 2015Source: 2013 Q1 Earnings Call, 2015 Q3 & Q4 Earnings Call

FRANCHISE vs. CORPORATE


Company-owned

Franchised

North America

665 2,621

International

58 1,084

Company-owned

Franchised

North America

707 2,681

International

45 1,460

Worldwide Net Units as of December 27, 2015

Worldwide Net Units as of December 29, 2013

Source: Papa John’s 2016 Company Presentation

INTERNATIONAL LOCATIONS

Papa John's | Final Case Analysis | 26Papa John’s global presence and net units in each country as of December 27, 2015

• As of 2013: 4,200 units in 34 countries and plan is to open 1,200 net units in the next 6 years

• Opened a total of 730 net units from 2013 to 2015

• The plan was to open approximately 200 net units a year, therefore, Papa John’s exceeded their goal by 21.7% in the past 3 years

• Projection for 2016: to open 180 to 210 net units worldwide

Q1 34

Q2 55

Q3 44

Q4 132

Q1 12

Q2 47

Q3 50

Q4 126

Q1 36

Q2 35

Q3 52

Q4 107

201320142015

Units Opened per Quarter 2013-2015

Net units opened in North America and Internationally from 2011 to 2015

Source: Papa John’s 2016 Company Presentation, 2013 Q1 Earnings Call, 2015 Q4 Earnings Call

GLOBAL UNITS OPENINGS


INTERNATIONAL MARKETS

Source: Market Line, 2015 Q3 Earnings Call

U.K. 319 franchises

China 45 company-owned and 199 franchises

Why the U.K. and China? The U.K. and China are the two international markets with the highest number of Papa John’s restaurant units. After conducting research, Team 2 constructed an analysis chart with possible reasons to why these two markets are favorable to Papa John’s.

• GDP growth from $2.40 trillion to $2.58 trillion*

• Unemployment rate decreased from 7.92% to 5.70%*

• Corporate tax reduction to 20% as of April 1, 2015 • Stable governance system ensures that there is remarkable consistency in its policies

• The country scores high in business, labor, trade, investment and financial freedom

• According to Market Line, it ranks 17th in “getting credit”, meaning companies face fewer hurdles in terms of meeting working capital and long-term capital requirements

• GDP growth from $4.87 trillion to $5.6 trillion*

• Middle class and consuming class potentially growing to 600 million over the next 5 to 6 years

• According to S&P, the government initiatives to reduce corruption, measures to enhance business environment and liberalize the financial sector, will boost the economy

• As of June 2015, China’s central bank cut the benchmark interest rate 4 times since Nov. 2014. The recent interest rate cut by 25 basis points in June 2015 was to support the development of the economy

Papa John's | Final Case Analysis | 28*From 2013 to 2015

CHINA MARKET

Source: 2014 Q2 & Q3 Earnings Call, 2015 Q4 Earnings Call

• Why is China the only International market that has corporate-owned units?

- China is a different market than any market in the world, therefore, Papa John’s must approach it differently

- By owning corporate restaurants in China, franchisees can better understand how to implement Papa John’s best practices and strategies

• 2014: Partnership deal where Papa John’s is the official pizza sponsor of the Guoan Football Club in Beijing

• 2014: OSI incident in China held back growth

• 2015: Long-term plan is to close the company-owned in China and let another qualified franchisee take over operations

Strategic Model

Incorporate Menu

Branding Aspects

Marketing Changes

Model Design



FINANCIAL ANALYSIS2013-2015

Source: Bloomberg Terminal, http://ir.papajohns.com/calculator.cfm

STOCK ANALYSIS

• IPO on June 8, 1993 traded at $2.90 a share and netted $12 M

• Stock Splits: - 3-for-2 (two in 1996) - 2-for-1 (2005 and 2013)

• If you had invested $1,000 at the time of the IPO, by April 8, 2016, the value would be $24,920.98

Papa John’s IPO to current stock price (04/10/2016)Papa John's | Final Case Analysis | 31

REVENUES

• 2015 revenue of $1.6 B, a 2.5% increase compared to 2014 (increase of 4.2% for North America and 6.9% internationally)

• Only brand that has had 12 consecutive years of even or positive sales

• CAGR from 2011 to 2015 of 7.68%

Revenues from 2011 to 2015 for Domestic Company-Owned Restaurants, Domestic Commissaries, Domestic Franchising, and International Restaurants

Source: Bloomberg Terminal, 2015 Q4 Earnings Call Papa John's | Final Case Analysis | 32

Source: Bloomberg Terminal, 2015 Annual Report

• Debt-to-Equity: 506.24%- 2015 net debt was $256

M, an 11% increase- Significant increase in

investments in technology, marketing, and international markets

• Profit Margin: 5.92% & Gross Margin: 32.4%- Profit margin and gross

margin are very erratic due to the volatile environment (i.e. commodity prices, restaurant level bonuses, competitors pricing)Total Debt to Total Equity, Profit Margin, and Gross Margin from 2011

to 2015

DEBT & MARGINS



Free Cash Flow from 2011 to 2015

FREE CASH FLOW


• Capital primarily used for:- Development,

acquisition, renovation and maintenance of restaurants

- Development, renovation and maintenance of commissary print and promotions facilities and equipment

- Enhancement of corporate systems and facilities

• CAGR 14.06% from 2011 to 2015


• ROCE: 130.7%

• Dividends: 32.7%- Initial payout 2013- Annual Dividend

$0.70

• SGR: 87.8%- Increased retained

earnings 54% in 2015

ROCE, Dividends Payout Ratio, and SGR from 2011 to 2015

GROWTH



RISK FACTORS, LOOKING FORWARD, & RECOMMENDATIONS


• Increase in commodity prices- Competitive strength is quality- Refuse to compromise to save

money- Cheese is largest food cost

• Foreign currency risk - Negative impact of $2.7 million in

2015- Pressurizes franchisees’ cash flows

• John Schnatter- No employment agreement- No “key man” life insurance- Major component in promotions- Owns 27% of common stock

• Lawsuits

RISK FACTORS


Source: 2015 Q4 Earnings Call

2016 Annual Meeting of Shareholders Thursday, April 28, 2016 – 11:00 AM ET

International growth opportunities 5 years out: Brazil, South Africa, Australia and countries throughout Western Europe

Consolidated revenues growth of 4% to 6% and 180 to 210 net global unit openings, substantially all of which are expected to open in the final three quarters of the year

North America full-year comparable sales growth of 2% to 4% and International full-year comparable sales growth of 5% to 7%

Anticipate opening their 5,000th store globally Summer 2016

2016 GUIDANCE


Source: Bloomberg Terminal

ANALYST RECOMMENDATIONAccording to the Bloomberg Terminal as of April 8, 2016, 4 out of 7 analysts from the

firms listed below recommend to buy Papa John’s stock

Analyst recommendations from the Bloomberg Terminal Papa John's | Final Case Analysis | 39

TEAM 2 RECOMMENDATION


As a group, Team 2 reached a consolidated conclusion that we would buy Papa John’s stock. Papa John’s has a great potential for growth, as they are constantly investing in the company. They have developed innovative ways to run the business and expand into new markets. They also strongly believe in quality, so customers and investors can rely on carefully-inspected and prepared food. Although Papa John’s may be growing slower than their competitors, they focus on their long-term strategy and refuse to compromise their quality in order to compete on pricing. These qualities forecast long-term success and a profitable investment.

“When it comes to quality there is absolutely no compromise, no compromise ever” – J. Schnatter

QUESTIONS?

Source: 2015 Q3 Earnings Call Papa John's | Final Case Analysis | 41


REFERENCES

RECOMMENDATIONS

• 2015 First Quarter Results• 2015 Nielsen Global Health and Wellness

Survey• http://ir.papajohns.com/calculator.cfm• Bloomberg Terminal• Bureau of Labor Statistics• Business Insights• Domino’s 2015 Annual Report• Fast Food Menu Prices• Franchise Help Holdings LLC• Little Caesars Website • Market Line• Papa John’s 2014 & 2015 Annual Report• Papa John’s 2016 Company Presentation• Papa John’s 2013, 2014, & 2015 Earnings

Calls• Papa John’s Website• Pizza Hut 2014, 2015 Report • Pizza Hut Website• Statista• Tampa Bay Times Papa John's | Final Case Analysis | 43

• Thompson, Crafting and Executing Strategy: The Quest for Competitive Advantage (20th Ed.), 2016

• United States Department of Agriculture

• Yahoo! Finance


WORKPAPERS


ATTENDANCE

Attendance – March 29th, 2016Team 2: Papa John's International, Inc.: Its Strategy in the Pizza Restaurant Industry

J401 - Section 21414Location: Library

Team Leader Signature: _____________________________________________________

Members Signature

Peyton Balazs

Autumn Gordon

Mariana Freitas

Simran Saini

Ashton Wagler

Attendance – March 31st, 2016Team 2: Papa John's International, Inc.: Its Strategy in the Pizza Restaurant Industry



Members Signature

Peyton Balazs

Autumn Gordon

Mariana Freitas

Simran Saini

Ashton Wagler

Attendance – April 7th, 2016Team 2: Papa John's International, Inc.: Its Strategy in the Pizza Restaurant Industry



Members Signature

Peyton Balazs

Autumn Gordon

Mariana Freitas

Simran Saini

Ashton Wagler




Members Signature

Peyton Balazs

Autumn Gordon

Mariana Freitas

Simran Saini

Ashton Wagler


MEETING MINUTES

MINUTESTeam Meeting

BUS J401 BS2007March 29th, 20163:00PM-4:00PM

1. Met with group 30 Minutes• Discussed Case 2 and topics to focus on2. Met with Professor Steele for advice and feedback 30 Minutes


MINUTESTeam Meeting

BUS J401 BS2007March 31st, 2016

3PM-4:30PM 1. Met with group 1hr 30 minutes• Split up tasks• Read over research done by team members so far• Elaborated a strategy in order to move forward


MINUTESTeam Meeting

BUS J401 BS2007April 7th, 20163PM-4:00PM

1.Met with group 60 minutes• Reviewed PowerPoint• Made changes to PowerPoint


MINUTESTeam Meeting

BUS J401 BS2007April 11th, 20164:30PM-5:30PM

1. Met with group and Nestor to review PowerPoint 60 minutes• Took notes on where to make changes• Went over PowerPoint with Nestor• Fixed the order of the slides


MINUTESTeam Meeting

BUS J401 BS2007April 13th, 20163:00PM-5:30PM

1. Met with group 2hr 30 minutes• Final review of the PowerPoint• Met with Nestor for a Final review• Met with librarian Katherine Macy

• Attempted to find information on the worldwide pizza industry • Practiced presentation


MINUTESTeam Meeting

BUS J401 BS2007April 14th, 2016

9:00AM-10:15AM 1. Met with group for final practice 1hr 15 minutes



TIMESHEETS

case analysis project - papa johns

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