Papa John's: Excellent Business Model

| About: Papa John's (PZZA)

Papa John's International, Inc. (PZZA) is one of the best pizza companies in the world. The company has high growth prospects due to its inherent competitive advantages, as well as its excellent management. The company should continue to grow at home, and in the international markets. The stock of the company is fairly priced, however, the balance sheet leaves a lot to be desired.


Papa John's is a pizza delivery and carryout restaurant. Papa John's restaurants offer high-quality pizzas along with breadsticks, and other side items. Papa John's is the world's third-largest pizza company, after Pizza Hut (NYSE:YUM) and Domino's (NYSE:DPZ). Papa John's has successfully distinguished itself from the other two companies with its more natural ingredients. Due to its highly successful and growing business, it was recently ranked as one of the fastest-growing franchises in Entrepreneur magazine's 2009 "Franchise 500."

Competitive Advantage

Papa John's pizzas are known for their higher-quality toppings, and the high-quality presentation. The company's ingredients are healthier than the competition's. For instance, the meats used by Papa John's do not contain fillers. On the other hand, the meats used by Domino's do. Also, Papa John's traditional crust pizza is prepared using fresh dough, which is never frozen.

Due to Papa John's commitment to high quality, it earned the top spot in customer satisfaction among national pizza chains in 2013. Papa John's has earned the highest ranking for the 12th time in the past 14 years.


Due to Papa John's distinguishable product, expansion in newer markets is much easier. The company expects to open 230 to 260 units in 2013. Of these, more than half are expected to be opened outside the U.S. The country with the most number of restaurants outside the U.S. is China. The company had 180 stores in China at the end of 2012, but has plans to open many more. In India, the company had a mere 29 stores at the end of 2012, with potential for high growth.


The biggest reason for Papa John's success is its high quality management. John Schnatter, the founder, has laid a good foundation by creating a better product. Early on, he identified the choices made by customers when ordering pizzas, and incorporated them. For instance, he emphasizes higher-quality ingredients despite their higher price. His focus is on building a strong brand, instead of making short-term gains through the sale of average products. His focus on higher-quality ingredients, and more tasteful pizzas has helped the company grow into a billion dollar enterprise. In his own words, "We just believed early on that if we take care of our people and take care of our product and we do the right thing and run a good, clean business, where it's a win-win [for everyone], we could build a successful enterprise."

The biggest reason why John Schnatter is a huge asset for the company is his love of the product. John frequently appears on television shows to demonstrate his affinity for the company.

Balance Sheet

The current ratio at the company is unimpressive, at 1.14. The company clearly pays less emphasis on keeping extra cash reserves for tough times. However, this may be due to the relatively safe nature of the business. For instance, earnings of the business did not suffer during the 2008 recession.

The debt on the balance sheet seems extremely high. The long-term debt over the last 5 years (2008-2012) has been reduced from $130 million at the end of 2008 to $88 million at the end of 2012.

Long-term debt figures 2008-2012.

However, the equity portion of the balance sheet has remained stagnant, despite increasing profits. This is due to continuing stock buybacks. The treasury stock has increased from $245 million at the end of 2009, to $458 million at the end of 2012. This has caused the equity portion of the total assets to fall from .46 in 2009 to .41 in 2012. Although the figure seems normal, continued buybacks, funded by debt, can make the leverage ratios higher and increase risk.

Stock Price

The stock of the company is relatively expensive. The current P/E ratio is 24.37. However, the price seems justified when viewed against the excellent fundamentals of the company. Papa John's has the potential to be the biggest pizza maker in the world. Since it is yet to open a substantial number of stores in the emerging countries, there is huge potential for the company to keep growing at double-digit rates for the foreseeable future.


Papa John's benefits from a well crafted business model. The company's greatest advantage is its higher-quality food. The company lays extra emphasis on freshness and better taste. In addition, the management of the company is world class. The company enjoys stable growth in and outside the U.S.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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