The Day of Reckoning

Date: 8/19/2020
Author: Mr. X

papa johns pzza dominos dpz pizza hut investing coronavirus controversy pandemic investing nyse
(John Schnatter, Former CEO of Papa John’s)

 

Papa John is no longer with Papa John’s [PZZA]. You may know why.

In July 2018, founder John Schnatter used a racial slur in a role-playing exercise, ironically one designed to teach participants how to avoid using offensive language. With staggering speed, Mr. Schnatter resigned from the company and was booted from various honors and charitable positions. The company’s stock dropped to $48.33, at that point a 52-week low. Mr. Schnatter then sued his own former company. The stock dropped below $39 in August 2018, with the company missing sales targets on top of the public relations calamity.

In November 2019, Mr. Schnatter accused Papa John’s officials of having “used the black community and race as a way to steal the company.” “The day of reckoning will come,” he declared during an interview. He also claimed to be eating massive amounts of pizza and was sweating heavily. A meme was born. Considering the way 2020 has gone, many wondered if the pizzaman had become a dark prophet who knew something the rest of us didn’t.

Perhaps all this was unfair to Mr. Schnatter. It certainly sounds like a catastrophe for the company. However, Papa John’s (the company, if not the eponymous founder) has been thriving in recent months.

Starboard Value LP invested $250 million in February 2019 and its CEO, Jeffrey Smith, became chairman. Since then, the stock has soared. It rose steadily through most of 2019 and early 2020 before plummeting to less than $36 in March 2020 during the coronavirus panic. However, it quickly bounced back because delivery pizza is a business custom made for this environment. The stock has increased by more than 128 percent over the last year and almost 25 percent over the last three months.

Perhaps more importantly, the company is building for the long-term. Late last month, it announced it hired 20,000 workers and was about to hire 10,000 more to meet with soaring demand. Despite falling short of expectations earlier this month, it reported a dramatic improvement in second quarter earnings compared to last year, with $15.7 million net income compared to $4.9 million. It broke records in same-store sales last quarter and increased same-store sales more than 30 percent last month.

Some of this may have come about because of the change in management, but it’s also clear that Papa John’s benefitted from the pandemic. It made the structural changes precisely when it needed to and was able to take advantage of the opportunity. Currently, the stock is above $98.

Contrast this with the fate of Pizza Hut, for whom the day of reckoning has indeed come. About 300 Pizza Hut restaurants may close because franchisee NPC International declared bankruptcy. While this doesn’t mean the end of Pizza Hut, which is owned by Yum! [YUM], the chain has a much more difficult road ahead because it’s previously been known for in-store dining. YUM is down almost 19 percent over the past year and has only increased 10 percent over the last three months.

Of course, the titan in this field is Domino’s Pizza [DPZ]. DPZ is also hiring, expanding on its already spectacular growth. As far back as 2015, a DPZ executive described his firm as “an e-commerce company that sells pizza.” The results of this strategy speak for themselves. Over the last five years, DPZ has grown by more than 262 percent. 

PZZA is up just over 36 percent during that time. In 2010, when Patrick Doyle took over as CEO, DPZ’s stock was trading at $9. When he left in 2018, it was more than $250. Now, it’s more than $411.

DPZ has also gained during the pandemic. It’s up almost 75 percent over the last year. However, it rose just over 12.5 percent over the last three months, about half of what PZZA’s stock accomplished. PZZA simply has more room to grow.

Domino’s has a massive head start when it comes to digital marketing. Last year, it rewarded customers for ordering competitors’ pizzas, as long as they downloaded the Domino’s app and uploaded a picture. The novelty of the campaign provided massive earned media. The Domino’s app even had a way for you to order pizza without clicking, making impulse buys far easier.

Papa John’s is clearly trying to catch up. Its website is easy to use, it features a tracker that lets you know when your order is ready, and it has tried to overcome its public relations problems by highlighting its charitable contributions. While John Schnatter was once on the box, now you can order a “Shaq-a-Roni” pizza with Shaquille O’Neal displayed, and a dollar will be contributed to “The Papa John’s Foundation for Building Community.” In the UK, Papa John’s has bundled pizza orders so customers get double XP when they play “Call of Duty: Warzone” and “Modern Warfare.” Its loyalty program is also driving sales.

The downside is that Papa John’s tends to be more expensive than Dominos. It’s also struggling to distinguish its brand, a difficult task when the very name of the company is an ode to a man the corporation pretends no longer exists.

That said, Papa John’s has more growth potential and the delivery market may be big enough for both companies as demand soars and the Day of Reckoning arrives for dine-in restaurants. It’s hard to argue with results and this dramatic turnaround isn’t just due to the pandemic, but to the changes made in the company’s strategy, marketing, products and delivery services.

“Stay tuned,” warned Mr. Schnatter in his bizarre interview. Perhaps this mysterious oracle’s cryptic words didn’t foretell doom, but prosperity. If 2020 has shown us anything, it’s that nothing is certain. However, the portents for Papa John’s are good, and this stock has plenty of room to run.

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