Fri 1st Mar 2024 - Exclusive: Papa John’s to shut 50 UK company-owned stores Exclusive – Papa John’s to shut 50 UK company-owned stores: Papa John’s has revealed it is to shut 50 of its UK company-owned restaurants in the second quarter of 2024 but said it is making progress in its repositioning of the market and expects to improve profitability this year. The company, which operates 524 stores in the UK – 406 of which are run by franchises ­– established a corporate presence in 2023, acquiring 118 stores across June and July, but that portfolio will now be reduced to 68 restaurants. Speaking to investors following the company’s fourth-quarter results, chief executive Rob Lynch describes this group as underperforming stores that would not benefit from better operations, that are located in obsolete trade zones, and which face other challenges that aren’t easily mitigated to get them to profitability. Lynch stressed that not all of the problems are specific to Papa John’s. He noted the UK has dealt with significantly higher rates of inflation compared with the US and that the labour market has been just as problematic. He said the sites concerned accounted for two-thirds of the brand’s operating loss in the UK during the fourth quarter. Lynch added the company will continue to evaluate its portfolio – as well as franchise locations – including a focus on sales trends, overall profitability and lease and loan obligations. He admitted that through this process, more closures could occur. Lynch suggested that some company units could be refranchised as part of the process. He also indicates that franchise closures will likely come too. He said: “The UK has been something that has been a bit of a labour of love over the last 18 months. We believe in the long-term viability of that market, we have great franchisees who are running great operations. But we also have some stores that have not been operated as well. And so that’s both in the company portfolio that we took over as well as in the franchisee base at large. We are making progress on our repositioning efforts within the UK market and expect to improve in profitability during 2024. In 2023, we supported the transition of 61 underperforming UK franchised restaurants to other more proven UK franchisees. We have seen a significant improvement in the performance of these locations, with their fourth quarter comp sales finishing well ahead of the other restaurants within the UK market. In fact, the fourth quarter was the second consecutive quarter of positive comparable sales for our UK franchisees. If you’ll recall, in June, we announced the transition of 118 UK franchise restaurants to company ownership. As anticipated, these new company-owned UK restaurants were dilutive to 2023 adjusted operating income by approximately $9m, which takes into consideration the restaurant’s current year operating loss and the foregone prior year royalties. Similar to the other UK restaurants that transition to new owners, we are seeing sequential improvements in the performance of our company-owned restaurants. Together, our company-owned restaurants and franchise locations in the UK are reporting positive comparables to start 2024, and we continue to explore options to maximise the value and cash flow of our UK portfolio, ensuring alignment of the region and its performance with our long-term strategy. We have also made the decision to close approximately 50 underperforming company-owned restaurants in the second quarter of 2024. These restaurants accounted for roughly two thirds of our operating loss in the UK in the fourth quarter. We’ll continue to evaluate our remaining portfolio as well as our franchisee locations, focusing on sales trends, overall profitability and their lease and loan obligations. Through this process, additional strategic closures could occur as we look to drive improved profitability for our remaining stores, optimise trade zones and striking our franchisee base within this important market. It is not important for us to strategically own it. There are business models that we are exploring that would look very different than the model that we employ today. We have been very happy with our ownership there [in the UK]. Our teams who run the supply chain, do a great job and manage it very effectively and productively. So, we’re happy with that. But we’re exploring every strategic option. And if we have opportunities to create more productivity and drive more profitability with less risk, we will definitely explore those opportunities. The closure of these restaurants, I just want to make it clear, the closure of these 50 restaurants will be immediately accretive to our income. I mean usually when you close restaurants, it’s a bad thing. The royalty revenues go away or the Ebitda from the restaurants go away. These are all negative profit restaurants. And we don’t see them turning profitable in the foreseeable future. So, these restaurants need to close. They’re low volume. Obviously, if they’re unprofitable, they’re low-volume restaurants. So, the impact of the supply chain in the short term, we will not be as significant as closing a lot of profitable productive restaurants. The other thing I just want to make clear, we do anticipate sales transfer. So, by closing these restaurants, we actually make the other restaurants in the UK system, higher volume and more profitable. So, there is a benefit to the balance of the system. And some of that volume loss from closing these restaurants will be mitigated by that sales transfer to the restaurants that remain. In this dynamic global environment, our industry is facing challenges from the potential impact of geopolitical events. We are closely monitoring these situations and will maintain flexibility with our operations in those impacted regions. We are committed to our international transformational initiatives as we believe they best position us to realise our next phase of global growth and set our largest markets up for long-term success.” Papa John’s reported total revenue for the fourth quarter was $571m, up 9% from a year ago. The company said the increase was largely driven by the additional week of operations in 2023 and the consolidation of the UK restaurants. Adjusted operating income for the fourth quarter was $47m, up from $38m a year ago. This growth was partially offset by an approximate $5m year-on-year impact related to its UK acquisition when taking into consideration a fourth quarter 2023 operating loss and a fourth quarter 2022 franchise royalty fees. In January, Papa John’s said it could shut as many as 100 sites. That came after Propel revealed in October that Papa John’s UK & Ireland saw a 21.8% decline in like-for-like system sales in the year ended 25 December 2022. The company reported turnover for the period of £95,149,000 (2021: £102,339,000), as it said its performance was adversely impacted by largely prior year changes in the VAT rate on hot food. Papa John’s posted a pre-tax loss of £2,908,000 (2021: £6,704,000). The first Papa John’s UK restaurant opened in 1999 in Grays, Essex, and in 2013 it opened its 200th UK store. It closed 22 restaurants in 2023 but opened 15 new branches. Papa John’s features in the Premium Club Turnover & Profits Blue Book, the next edition of which will be released next Friday (8 March) and will feature 889 companies. Its turnover of £95,149,000 is the 103rd highest in the database. The Blue Book ranks companies by turnover, profit and profit conversion, listing directors’ earnings for the past five years. Companies can now have an unlimited number of people receive access to Premium Club for a year for £995 plus VAT – whether they are an operator or a supplier. The single subscription rate is £495 plus VAT for operators and £595 plus VAT for suppliers. Email kai.kirkman@propelinfo.com to upgrade your subscription.