Papa John's International (PZZA) on Monday announced an agreement with activist hedge fund Starboard Value and and named Starboard's chief executive officer as its chairman.
STARBOARD AGREEMENT: Papa John's confirmed a Wall Street Journal report by Julia Jargon that said Starboard Value would make a $200M investment in the troubled pizza chain and that the investment firm's CEO, Jeffrey Smith, would become chairman. Under the terms of the agreement, Starboard also has the option to make an additional $50M investment through March 29. In connection with the deal, Papa John's is adding two new independent directors, including Smith, and Anthony Sanfilippo, the former chairman and CEO of Pinnacle Entertainment, which is now owned by Penn National Gaming (PENN). Papa John's President and CEO was also appointed to the board, it said. With the addition of the new directors, the Board will comprise nine directors, seven of whom are independent.
"Our agreement with Starboard concludes a comprehensive strategic review conducted over the past five months to better position Papa John's for growth, improve the company's financial performance and serve the best interests of our stakeholders. This transaction provides the company with financial resources and strong and experienced directors on the Board in order to position the company for success over the long term. We believe we have found terrific partners to advance Papa John’s strategy, especially given their record of reinvigorating and growing premier restaurant and consumer brand companies," said Olivia Kirtley, a member of the Special Committee and most recently Chairman of the Papa John's Board.
The Journal's Julie Jargon reported that Starboard sees more opportunities to invest in the Papa John's brand than cut costs.
PRELIMINARY FINANCIAL RESULTS: Papa John's also announced on Monday preliminary results for the three months and full year ended December 30, 2018 and comparable sales for the January 2019 period. For 2018, the company said it expects adjusted earnings per share to be near the low end of its prior $1.30-$1.60 view. Analysts currently expect the company to report FY18 EPS of $1.48. Papa John's now expects special charges of about $51M for the year, at the low end of its previous $50M-$60M view. For the full year, system-wide North America comparable sales decreased (7.3%), compared to the company's previous guidance of negative (6.5%) to negative (8.5%) and system-wide international comparable sales decreased (1.6%), compared to the company's previous guidance of negative (2%) to positive 1%. The company's global net unit growth was 2%, compared to the previous guidance of 0% to 3% for the year.
For the fourth quarter, Papa John's said it believes system-wide North America comparable sales decreased (8.1%) and system-wide International comparable sales decreased (2.6%).
For January 2019, the company said system-wide North America SSS fell (10.5%) and system-wide International comps were flat. The company noted that the disparity in North America and International comparable sales reflects the consumer sentiment challenges the brand has encountered in the U.S. In addition, it noted that the December and January sales were impacted by the conversion to the company's new loyalty program and ineffective promotions in the heightened competitive environment.
In a statement, Papa John's CEO Steve Ritchie said the results are "disappointing to all of us, but we have a strong foundation built on quality and are confident in the great growth potential for the brand, particularly with the support of our new partners."
WHAT'S NOTABLE: Reuters said on Friday that Papa John's was pursuing a sale of a stake in it itself after takeover bids from private equity firms did not meet its valuation expectations. Any deal would come amid a dispute over control between the chain and its founder John Schnatter, who owns roughly 30% of the company and retains a seat on the board. The pizza chain has suffered from declining comp sales for more than a year, which the company has attributed, in part, to controversies involving its founder and largest shareholder, Schnatter, as well as lost market share to rivals. Papa John’s plans to use approximately half of the investment proceeds from Starboard to repay debt and the other half to invest in the business, including to "remind consumers that its pizza is made with fresh dough and ingredients that are free of preservatives and artificial flavors," The WSJ's Jargon said.
Papa John's has been embroiled in controversy for over a year, when Schnatter was ousted after his controversial remarks about national anthem protests by NFL football players. Additional controversy came when Schnatter reportedly said the "N-word" on a media-training call in 2018, after which Schnatter stepped down as chairman and the company scrubbed Schnatter's name and face from its pizza boxes and advertising and adopted a poison pill to prevent him from gaining control of the company.
PRICE ACTION: In pre-market trading, shares of Papa John's are up 4.5%.
