PAPA JOHNS INTERNATIONAL INC Q1 FY2025 earnings call

• Core product and innovation: Leveraged barbell strategy with premium and value offerings, e.g., Epic Stuffed Crust Pizza at $13.99 and $6.99 Papa pairings. Reviewed and removed underperforming SKUs, started oven calibration for product consistency to enable future innovation.
• Marketing message: Launched Meet the Makers campaign highlighting craftsmanship, saw improvement in value perception. Invested ~$7 million in incremental marketing in Q1, planned to evolve brand campaign focusing on high-quality ingredients. Saw gains in customer awareness and consideration.
• Technology infrastructure: Partnered with Google Cloud for enhanced ordering, delivery, and personalization. Saw gains in app conversion rates and repeat purchases via CRM capabilities.
• Customer experience: Lowered loyalty program redemption threshold, added 1 million loyalty members. Conducted mystery shop to identify delivery experience improvement opportunities, with actions in place to address them.
• Franchisee partnership: Evaluated refranchising select company-owned restaurants, focused on improving supply chain costs to enhance franchisee economics.

Global system-wide restaurant sales for the first quarter were $1.22 billion, up 1% in constant currency. North America comparable sales decreased 2.7% in Q1 but improved sequentially each month since implementing value proposition work in Q2 2024. International comparable sales increased 3% year-over-year. Company-owned restaurants revenue decreased $17 million in Q1, primarily due to a $12 million decline at international company-owned restaurants (from closing/refranchising 105 formerly company-owned restaurants in the U.K.) and a $5 million decline at domestic company-owned restaurants. Commissary revenues increased $11 million, reflecting higher commodity prices and a margin rate increase. Advertising fund revenues increased $7 million. Consolidated adjusted EBITDA was approximately $50 million, down from $61 million a year ago. Domestic company-owned restaurant segment EBITDA margins declined ~550 basis points, affected by lower average ticket, marketing investments, higher food costs (especially cheese and proteins), and labor inflation. North America Commissary segment adjusted EBITDA margins were 7.3%, up ~50 basis points from the prior year.

System-wide sales expected to increase 2%-5% in 2025. North America comparable sales projected to be flat to up 2% in 2025, with Q2 expected to show sequential improvement. Consolidated adjusted EBITDA anticipated between $200 million and $220 million in 2025. Expect to open 85-115 gross new restaurants in North America and 180-200 gross new restaurants internationally in 2025. Capital expenditures expected to be between $75 million and $85 million in 2025.

• Challenged macroeconomic environment impacting consumer spending and demand. - Potential supply chain cost fluctuations affecting franchisee margins. - International market dynamics and geopolitical risks influencing restaurant openings and closures.

Q: As it relates to demand trends, how is Papa John's viewing the consumer environment?

A: Todd Penegor noted consumer confidence is challenged amid economic and market volatility, but sequential improvements in traffic, improved value perception, and innovation efforts are driving positive trends, with expectations of continued improvement as the year unfolds.

Q: Where has Papa John's made the most progress within its initiatives?

A: Todd Penegor highlighted progress in technology transformation, particularly with the Google Cloud partnership and CRM capabilities, as well as storytelling around pizza craftsmanship and the quality message around high-quality ingredients.

Q: Thoughts on the QSR pizza category traffic?

A: Ravi Thanawala stated Papa John's is well-positioned to take transaction share despite the category being somewhat challenged, with the loyalty program driving retention and the Google partnership aiding in enhancing the customer experience to drive growth.

Q: Expectations for franchisee margin economics?

A: Todd Penegor and Ravi Thanawala discussed supply chain optimization to improve franchisee margins, with refranchising and targeting high-market-share markets as drivers to enhance franchisee profitability.

Q: Timing and impact of the higher-quality ingredients campaign?

A: Todd Penegor said the campaign will evolve to focus on high-quality ingredients, with the potential for the consumer to reward the brand over time as the brand executes well at the restaurant level.

Q: Details on oven calibration?

A: Todd Penegor explained oven calibration started in Q1 to improve product consistency, with benefits expected in mid-2025, enabling future product innovation across the menu.

Q: Feedback from the secret shopper study?

A: Ravi Thanawala and Todd Penegor mentioned carryout and enhanced digital platforms perform well relative to peers, but there are opportunities to improve the delivery experience, with actions in place to address these and create better customer experiences.