Papa John’s Pizza
Update
Introduction
• Papa John’s is a relatively small growth
company that fits the investment policy
statement like a glove.
• The company has a superior product and
more focused strategy than its competition.
• The company has been reporting positive
financial results since its inception, yet is
currently undervalued.
Recent Stock Info
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Last Trade:
52 Week High:
52 Week Low:$19
P/E Ratio:
Beta:
Market Cap:
Purchase Price
$26.06
$44.5
15.59
.95
$630.8M
$26.56
Background
• Papa John’s has operations in 47 states, the
District of Columbia, and five international
markets such as Mexico and Puerto Rico.
• At present, there were 2,345 Papa John’s
restaurants in operation; of these, 573 were
company owned.
• Through the acquisition of Perfect Pizza Holdings
Limited in the U.K., Papa John’s increased its
international presence by an additional 206 stores,
12 of which are company owned.
How Papa John’s Makes Money
• Roughly 50% of all Papa John’s revenue comes
from sales of menu items at company owned
restaurants.
• About 6% of revenues come from franchise
royalties, franchise fees, and development fees.
• 40% of Papa John’s revenues come through
commissary sales to both company and franchised
stores.
• The remaining revenues come from equipment
and other sales.
The Secret to Their Success
• Papa John’s has experienced phenomenal success by doing
what they do best: Making Pizza.
• The only items Papa John’s offers on its menu are pizza,
bread sticks and cheese sticks.
• The company prides itself on the use of only the finest
ingredients including fresh dough (not frozen), 100% real
cheese, and canned, vine-ripened tomato sauce (not
concentrate).
• The company only offers carry-out and delivery service,
allowing the focus of each store to be solely concentrated
on making their products.
Pizza Hut…. REJECTED!!!
• On August 12, 1998, Papa John’s was sued by its largest
competitor, Pizza Hut, Inc.
• Pizza Hut claimed that the slogan “Better Ingredients.
Better Pizza.” constitutes false and deceptive advertising, a
violation of the Lanham Trademark Act.
• Pizza Hut lost the suit in September.
Where Does the Papa Go From
Here?
• Papa John’s is a growth company, and it plans on
living up to its classification.
• The company plans to open 35 more company
restaurants this year and acquire from 60 from
existing franchisees.
• Additionally, the company expects franchisees to
open nearly 375 restaurants new restaurants this
year.
• Domestic market expansion is planned for the upper
Northeast Coast, West Coast and Rocky Mountain
regions.
• The company also plans on further penetration of
existing markets in the U.S.
• Internationally, Papa John’s is focused on Mexico,
Puerto Rico, Venezuela, Costa Rica, Guatemala, Saudi
Arabia, Canada, Iceland and the United Kingdom.
• Regarding expansion in the U.K., restaurants may be
opened under the name of either Papa John’s or Perfect
Pizza, but within three years all of the Perfect Pizzas
will converted to Papa John’s stores.
Change in Debt Structure
• Broad approved 225 million dollars for
stock repurchase program
• Went from virtually 0 long term debt to 119
million dollars
• Bank loan with 3 year collar between
LIBOR + 85 basis and prime
• We are not concerned because the company
has over 80 million dollars in FCF
Balance Sheet Assets
Cash and cash equivalents
Accounts receivable
Inventories
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Investments
Net property and equipment
Notes receivable from franchisees
Intangibles
Other assets
Total assets
06/25/00 12/26/99
$14,866
$3,698
18,792
21,415
11,049
10,637
5,433
7,378
3,278
2,977
53,418
46,105
5,397
22,086
245,770 227,813
16,687
11,743
52,119
47,669
16,441
16,635
$389,832 $372,051
Balance Sheet L & OE
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Current portion of debt
Total current liabilities
Unearned franchise and development fees
Long-term debt, net of current portion
Deferred income taxes
Other long-term liabilities
Stockholders' equity:
Preferred stock
Common stock
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Treasury stock
Total stockholders' equity
Total liabilities and stockholders' equity
06/25/00
$19,718
39,686
1,778
61,182
6,896
119,710
3,164
2,326
-305
190,853
(530)
159,009
(153,083)
196,554
$389,832
12/26/99
$24,947
38,516
5,308
68,771
6,222
925
2,109
1,891
-305
189,920
(390)
134,492
(32,194)
292,133
$372,051
DCF
• Conservative long term 8% growth rate
• Pro forma income statements
• Updated WACC to include new debt
structure
• Value of firm per share of $40.85