In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the Papa John’s franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Papa John’s franchise, based on Item 7 of the company’s 2018 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Papa John’s franchise, based on Items 5 and 6 of the company’s 2018 FDD

• Section IV – Number of franchised and company-owned Papa John’s outlets at the start of the year and the end of the year for 2015, 2016, and 2017, based on Item 20 of the company’s 2018 FDD

• Section V – Presentation and analysis of Papa John’s financial performance representations, based on Item 19 of the company’s 2018 FDD, including information on the:

• 2017 average, median, high, and low sales for the 681 company-owned traditional Papa John’s restaurants that were open the entire year of 2017

• 2017 average sales for the 2,420 franchised traditional Papa John’s restaurants that were open the entire year of 2017

• 2017 average food costs, labor costs and taxes, manager’s labor and taxes, mileage, advertising, controllables, rent and common area maintenance, other non-controllables, training costs, store bonuses, and pre-tax cash flows for the 681 company-owned traditional Papa John’s restaurants that were open the entire year of 2017

Section I – Background Information

20 Things You Need to Know About the Papa John’s Franchise

Special Board Committee Approves Company Actions Against John H. Schnatter

1.  Papa John’s has been in the news since late 2017 following racially-charged statements from founder and former CEO John H. Schnatter. Since then, Papa John’s has taken action to remove Schnatter from running the company so that the brand can recover and move on.

2.  In early July 2018, Papa John’s announced that a special committee of the board of directors, consisting of all the independent directors, was formed to evaluate and take action with respect to all of the company’s relationships and arrangements with Schnatter. The special committee is being advised by independent outside legal counsel.

3.  At the time of the announcement, the special committee had already taken a number of important actions. The special committee approved and directed the company to terminate Schnatter’s Founder Agreement, which, among other things, defined his role in the company as advertising and brand spokesperson.

4.  Since Schnatter no longer has an active role in the management of the company’s business, the special committee also approved and directed the company to terminate a sublease agreement granting Schnatter the right to use certain office space at the company’s corporate headquarters in Louisville, Kentucky.

5.  As previously announced, Schnatter is no longer a spokesperson for the company or the brand. Papa John’s has specifically requested that Schnatter cease all media appearances, and not make any further statements to the media regarding the company, its business, or employees.

6.  The special committee also intends to oversee the external audit and investigation, which the company previously announced that it will conduct, of all the company’s existing processes, policies, and systems related to diversity and inclusion, supplier and vendor engagement, and Papa John’s culture.

Unveils New Organizational Structure

7.  In early October 2018, Papa John’s unveiled a new organizational structure in line with the company’s latest broad strategic changes. The company said that the moves will help “improve the experience that customers have with Papa John’s and accelerate growth.”

8.  The newly-dedicated roles and responsibilities around each consumer touch point will report to Mike Nettles. Formerly SVP, chief information and digital officer, Nettles is stepping into the position of executive vice president, chief operating officer, and chief growth officer.

9.  Steve Ritchie, president and CEO of Papa John’s, said, “Improving how we engage with our customers is core to the new operating priorities announced earlier this year. By aligning our leadership structure around the customer experience, our team’s diverse talents will be leveraged to drive enterprise-wide change and pioneer new innovations that accelerate the company’s growth.”

10.  Nettles joined Papa John’s in 2017. Since then, Nettles has developed a multi-year, customer-centric strategy to transform Papa John’s technology into an industry-leading platform. Under Nettle’s leadership, Papa John’s has established new ordering partnerships, including Facebook Instant Ordering, Amazon Alexa, and DoorDash. Before Papa John’s, Nettles was VP of enterprise architecture and IT strategy at Panera Bread.

11.  Ritchie added, “Since joining last year, Mike has significantly elevated the consumer experience across our digital and mobile platforms. His promotion and the other appointments announced today reflect the strong contributions these executives have made to Papa John’s and our belief that, in their new roles, they can propel our success even further.”

12.  The following appointments will report to Nettles, effective immediately:

• Justin Falciola was promoted to senior vice president, chief analytics and technology officer. Falciola most recently served as vice president, global enterprise architecture.
• Anne Fischer was promoted to senior vice president, customer experience. Fischer most recently served as vice president, product management.
• Paul Fabre was promoted to senior vice president, menu strategy and innovation. Fabre most recently served as vice president, R&D and quality assurance.
• Melissa Richards-Person was promoted to senior vice president, chief brand officer. Richards-Person most recently served as vice president, global brand strategy and consumer connections.

Announces Special Combo Deal to Support Wounded Warrior Project

13.  In mid-September 2018, Papa John’s stores in the Southeast U.S. teamed up with Wounded Warrior Project (WWP) to support injured veterans through sales of a special combo deal: 2 large 2-topping pizzas and a 2-liter Pepsi for $22.22. Between Sept. 11 and Nov. 12, Papa John’s will donate $2.22 for every WWP Combo sold at participating locations on papajohns.com.

14.  Gary Corless, chief development officer for WWP, said, “Warriors never pay a penny for our programs and services because they paid their dues on the battlefield. The generosity of our donors and partners like Papa John’s help ensure wounded veterans are able to achieve their highest ambitions.”

15.  According to Ray Turner, franchise business director at Papa John’s, “For the second consecutive year, Papa John’s restaurants in the Gulf Coast region are proud to support Wounded Warrior Project. We appreciate the great and valuable work they do on behalf of our nation’s wounded veterans.”

Company History

16.  Papa John’s was founded in 1984 by “Papa” John Schnatter in Jeffersonville, Indiana. As a teenager, Schnatter worked at a local pizza restaurant, which is what inspired him to start making and selling his own pizzas later. After college, Schnatter returned home and went to work at his father’s tavern, Mick’s Lounge, which was on the verge of bankruptcy. To help his father out, Schnatter sold his car and then converted the tavern’s broom closet into a makeshift pizza restaurant.

17.  After a year of selling pizzas out of Mick’s Lounge, Schnatter had enough money to open his own restaurant. The very first Papa John’s restaurant opened in 1985 and Schnatter started franchising the following year. By the beginning of the 1990s, Papa John’s had over 100 locations opened around the country. Throughout the rest of the decade, Papa John’s continued to grow and in 2001, Papa John’s became the first national pizza chain to offer online ordering.

18.  In 2010, Papa John’s became the official pizza sponsor of the NFL. This partnership lasted until early 2018, when the brand stepped down as the NFL’s sponsor following troubling behavior from Schnatter that started in late 2017. Schnatter had blamed the NFL players who protested the National Anthem in a stand against police violence against African Americans for Papa John’s declining pizza sales. Schnatter’s statement went viral and many alt-right and Neo-Nazi websites began “claiming” that Papa John’s supported their controversial views. Papa John’s came out and firmly stated that the company was against racism and hate groups.

19.  In late December 2017, Schnatter stepped down as CEO, a position he has held since he founded the company in 1984. Schnatter briefly stayed on as chairman, but once again found himself in the news after a story leaked that he had used a racial slur in a conference call. Following his latest misstep, Schnatter stepped down as chairman (but remains on the board) and Papa John’s announced that it would be removing Schnatter from all of the brand’s marketing. Since then, Papa John’s has been doing damage control and has tried its best to distance itself from Schnatter.

Entrepreneur’s Franchise 500

20.  Papa John’s ranked No. 16 on Entrepreneur’s 2018 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Papa John’s franchise costs, based on Item 7 of the company’s 2018 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Papa John’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2018 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2015

• Outlets at the Start of the Year:  2,564
• Outlets at the End of the Year:  2,583
• Net Change:  +19

2016

• Outlets at the Start of the Year:  2,583
• Outlets at the End of the Year:  2,629
• Net Change:  +46

2017

• Outlets at the Start of the Year:  2,629
• Outlets at the End of the Year:  2,606
• Net Change:  -23

Company-Owned

2015

• Outlets at the Start of the Year:  686
• Outlets at the End of the Year:  707
• Net Change:  +21

2016

• Outlets at the Start of the Year:  707
• Outlets at the End of the Year:  702
• Net Change:  -5

2017

• Outlets at the Start of the Year:  702
• Outlets at the End of the Year:  708
• Net Change:  +6

Section V – Financial Performance Representations (Item 19, 2018 FDD) and Analysis

• Presented below are average restaurant-level sales revenues of domestic franchised and company-owned Papa John’s restaurants for the company’s fiscal year ended December 31, 2017, along with average restaurant-level cash expenses for company-owned Papa John’s restaurants only.

• The following revenue and cash flow data is drawn from Papa John’s financial books and records, which are kept on a basis consistent with Generally Accepted Accounting Principles (“GAAP”) in the United States.

• All information is based on actual historical costs and results. Thus, there are no material assumptions associated with the data, other than the principles of GAAP.

• A number of factors may affect the comparability of the expense (or cash outflow) data, which is drawn solely from company-operated restaurants, to franchised restaurants and the data’s effectiveness as a guide or template for potential operating results of a franchised restaurant. The most significant of these factors are discussed in the following notes.

Full Year Only

• At the close of Papa John’s fiscal year, there were 3,454 total domestic (United States) Papa John’s restaurants, 708 of which were company-owned, including restaurants owned by franchisees in which Papa John’s has a majority interest (a total of 247 restaurants).

• However, the following data is drawn only from standard (or “traditional”) restaurants that were open the entire year of 2017 because including results from non-traditional restaurants and restaurants that were open only part of the year would skew the annual revenue and expense data.

• Therefore, the total number of restaurants included in the following data is 3,101, comprising 2,420 franchised restaurants and 681 company-owned restaurants.

Core Business Revenues

• The revenue figures for both franchised and company-owned restaurants include only sales of food and beverages arising in the ordinary course of retail operations. Non-recurring items, such as proceeds from the sale of used furniture or equipment, are not included.

Non-Cash Items

• The cash flow data does not include depreciation expense or any other non-cash items.

• Over time, worn-out or obsolete restaurant equipment will have to be replaced and leasehold improvements, signage, computer systems, and restaurant furnishings may have to be refurbished, remodeled, upgraded, or replaced. The following cash flow data does not include any reserves for funding any of these types of improvements or upgrades.

Royalty

• Company-owned restaurants do not pay a royalty. The expenses incurred by a franchised restaurant will include Papa John’s standard royalty.

Economies of Scale

• Because Papa John’s operates more than 600 company-owned restaurants, it is able to achieve certain economies of scale and operational efficiencies that may not be available to a franchisee operating one restaurant or a limited number of restaurants, as is the case for the typical franchisee.

Restaurant and Market Maturity

• Sales of a particular restaurant may be affected by how long the restaurant has been in operation and how successfully the surrounding market has been penetrated. Typically, sales “ramp up” as the restaurant and market develop. Greater penetration (the greater the number and concentration of restaurants) in a market also may affect performance.

• The following company-owned restaurant data represents averages for all of Papa John’s company-owned domestic restaurants, some of which are long-established in their location and some of which are relatively new. Most of the company-owned restaurants are in highly-developed and highly-penetrated markets.

Market Location

• Papa John’s company-owned restaurants are typically clustered in and around major metropolitan areas, such as Atlanta, St. Louis, and Nashville. Many franchised restaurants are operated in less densely-populated areas, with more limited access to advertising media.

Table 1 – Average Restaurant Revenues

Company-Owned Restaurants (681 Restaurants)