Papa John’s, Starboard ‘Focused’ as Circus Quiets
Steve Ritchie, left, and Jeff Smith say they're ready to focus on the future.
Courtesy of Papa John's
It’s been eight months since Papa John’s founder John Schnatter resigned from his position as chairman, part of the fallout after he admitted to using the N-word in a preparatory conference call with media trainers.
Since then, Schnatter, who retains about 30 percent of the company shares, has been making a lot of noise as he attempted to regain control of the company he founded.
But the Papa John’s management team and its new partner, Starboard Value, are hoping things will quiet down now after a $200 million infusion and new board makeup puts the company on a real track forward.
“There is a lot of energy coming with the investment and the partners who are tied to that investment,” Papa John’s CEO Steve Ritchie told Franchise Times. “This process enabled us to find a terrific partner who brings new expertise and leadership to help drive the organization forward.”
The partner, Starboard, has track record of turning around national chains. The company took on Olive Garden and its parent company Darden in spectacular fashion, calling out the company on numerous topics in a dramatic, 300-page report covering everything from over-serving breadsticks to not salting the pasta water. Since getting involved with the company in 2014 and essentially taking over the board, shares in Darden rose by more than 140 percent. Regardless what one thinks about activist investors, Starboard and CEO Jeff Smith were very successful.
Smith said talks started months ago as Papa John’s entertained a number of “strategic alternatives.”
“We’ve been following the story for a while, speaking with company for several months now,” Smith said. “It’s an under-valued company, and what gets us really excited is that we believe it is the best pizza in the space. The combination of those things is an exciting place to be as an investor.”
He said he sees a lot of similarities between Papa John’s and Olive Garden.
“When we got involved in Olive Garden, it was a terrific brand and a great product, but it had lost its way and needed to improve the guest experience. It’s very similar here, for different reasons. We think Papa John’s has the best product in the space—which is a great place to start,” said Smith. “The company has a great brand. Better ingredients and better pizza is a terrific thing to stand for. With our quality, I think we have the advantage on the ingredient side with the consumer.”
Ritchie said the $200 million would support a number of initiatives, from creating a more diverse and inclusive culture, investments in technology on the consumer side and in the home office, and some work on product innovation. And it will help redirect consumer focus back on the quality of the pizza, not the homonymous founder.
“Papa John’s has a clean label story, which is very different from the rest of the category. For example, we have hand-tossed, never frozen dough made of just six ingredients,” said Ritchie. “The agreement gives us financial flexibility to support investments that reinforce our quality story and ‘better ingredients, better pizza’ market position.”
Smith said it’s not going to be easy, but he and Starboard aren’t just investing for a quick return.
“I think there’s a very clear message that we are finished with the review process, we’ve elected to go forward and do everything we can to improve the value of the company and the brand,” said Smith. “So our focus is on operating the company and supporting its long-term success. This isn’t going to be a quick fix; it’s going to take some time. But our focus is on doing the right thing for the company, the brand and the stakeholders. That’s what we’re focused on.”
Ritchie said the deal means the murky future is somewhat clearer, and the team can get back to the real work of growth and selling pizza.
“These strategic review processes take a lot of time, and can be a big distraction for the board and the management team. The big intangible benefit of this transaction is the ability to return our focus on the day-to-day business, people and pizza,” said Ritchie. “Getting the executive team back to being able to give 100 percent to people and pizza, that is one big step forward and in the right direction.”
While the new board prepares for its first official meeting and a February 26 earnings announcement, Schnatter still casts a pall on the business. Upon learning about the Starboard transaction, Schnatter proposed a deal “for total potential proceeds to the Issuer of up to $260 million,” according to a document filed with the Securities and Exchange Commission.
According to the same document, Schnatter withdrew his offer but may not go away quietly.
“In light of the Starboard transaction, Mr. Schnatter is withdrawing the Schnatter Proposal,” read the document. “Mr. Schnatter is also evaluating the legal remedies available to him in connection with the Issuer’s decision to enter into the Starboard Transaction.”
Both Ritchie and Smith chose not to directly address the Schnatter drama (good media training), saying only that the company has a strong foundation.
“John built a great company with a great brand and great products,” said Smith. “We want to return to that core of ‘better ingredients, better pizza’ and focus on initiatives that help improve performance, enhance relationships with stakeholders and drive growth.”
One can assume that all stakeholders hope Schnatter quietly enjoys the 12 percent sustained lift in share prices seen since the Starboard deal was announced, even as the company reported another steep decline in same-store sales through January.