Papa John's Inks Contract With Starwood, Appoints Directors

Shares of Papa John’s International, Inc. (NASDAQ:PZZA) has surged 9% at close on Feb 4, following the company’s announcement of entering a securities purchase contract with Starboard Value LP and affiliates. Starboard is making a $200-million investment in Papa John’s, with the option of making an additional investment of $50 million through Mar 29, 2019.

In conjunction with signing the agreement, the company extended its board to appoint Jeffrey C. Smith, CEO of Starboard, and Anthony M. Sanfilippo, former Chairman and CEO of Pinnacle Entertainment as new directors. Additionally, Papa John’s president and CEO Steve Ritchie has been appointed to the board. The company’s board will now have nine directors, seven of whom are independent. Papa John’s also announced preliminary unaudited comps results for fourth-quarter 2018.

All the above moves were Papa John’s way of retorting declining sales trend and coming out of the spotlight of negative publicity after its ex-CEO, John Schnatter was publicly denounced for making a racist comment. The company is also said to have sought assistance from Bank of America Corporation (NYSE:BAC) in August on potential buyout interests. Recently, rumors had it that Restaurant Brands (NYSE:QSR) might team up with the former CEO and investment capital firm 3G Capital buy Papa John’s.

Notably, a look at Papa John’s price trend reveals that the stock had an unimpressive run on the bourses in the past year. Shares of the company lost 27.3% against the industry’s collective growth of 11.5% during the same time frame.

Details of Deal With Starboard

Under the agreement, Starboard is buying $200 million of Papa John’s newly designated Series B convertible preferred stock, with the option to purchase additional shares worth up to $50 million later through March.

The conversion price will be based on 22.5% premium to the 10-day volume weighted average trading price of Papa John’s common stock, ending Feb 15, 2019. Starboard’s initial $200-million investment would equate to approximately 11% to 15% of Papa John’s outstanding common stock on an as-converted basis. The agreement also includes a lock-up facility under which Starboard may not transfer its shares for a year after closing.

Preliminary Q4 Results

For the fourth quarter of 2018, system-wide North America comps declined 8.1% year over year and system-wide International comps fell 2.6%.

For 2018, system-wide North America comps declined 7.3% year over year (slightly lower than the mid-point of the company’s previously guided -6.5% to -8.5%) and system-wide International comps fell 1.6% compared with the company’s previous guidance of -2% to 1%. Global net unit growth was 2% compared with the previous guidance of flat to up 3% for the year.

Adjusted earnings per share in the year are near the lower end of the company’s provided $1.30 to $1.60. The Zacks Consensus Estimate for the same is pegged at $1.47, slightly above the mid-point of the guided range.

In January, system-wide comps for North America declined 10.5% year over year and system-wide International comps remained flat.

Bottom Line

The preliminary results show the company’s current scenario. Dismal comps performance over the past couple of quarters has been a major concern for Papa John’s. In the third quarter, comps at domestic company-owned restaurants declined 13.2% against 1.7% comps growth in the year-ago period. Comps at franchised restaurants in North America fell 8.6% against comps growth of 0.7% in the prior-year quarter. Comps at system-wide North American franchised restaurants decreased 9.8% in contrast to 1% comps growth in the year-earlier quarter. Comps at system-wide international restaurants were down 3.3% as opposed to comps growth of 5.3% in the prior-year quarter.

Apart from the bleak top-line performance, the company’s earnings have also declined in the past few quarters due to weak operating results. Stiff competition from pizza chains like Domino’s (NYSE:DPZ) is also a major concern.

The above-mentioned moves are in line with Papa John’s consistent efforts in framing strategies that would revive its brand image and bolster growth. To this end, the company undertook an assistance program for the U.S. and Canada franchisees. Under the assistance program, it planned on reducing royalties, food-service pricing and online fees throughout the current year. Further, the company has been arranging funds for its franchises to implement marketing and reimaging initiatives.

Papa John’s currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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