Papa John's International, Inc. (NASDAQ:PZZA) Q2 2020 Earnings Conference Call August 6, 2020 8:00 AM ET
Company Participants
Steven Coke - Interim Principal Financial & Accounting Officer and VP, IR & Strategy Planning
Robert Lynch - President, CEO & Director
Conference Call Participants
Peter Saleh - BTIG
Alexander Slagle - Jefferies
Christopher O'Cull - Stifel, Nicolaus & Company
Brian Bittner - Oppenheimer
Lauren Silberman - Crédit Suisse
Alton Stump - Longbow Research
Brett Levy - MKM Partners
Frederick Wightman - Wolfe Research
Operator
Welcome to Papa John's Second Quarter 2020 Conference Call and Webcast. My name is Sylvia, and I'll be operator for today's call. [Operator Instructions].
I will now turn the call over to Steve Coke, Vice President of Investor Relations and Strategy. Steve, you may begin.
Steven Coke
Thank you, and good morning. Joining me on the call today is President and CEO, Rob Lynch. Rob and I will have comments about our business and provide a financial update. After the prepared remarks, we will be available for Q&A. Our discussion today will contain forward-looking statements involving risks that could cause the actual results to differ materially from these statements. Forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings.
Please refer to our earnings release in the Investor Relations section of our website for a reconciliation of non-GAAP financial measures and details about temporary franchise support discussed on this call. [Operator Instructions].
Now I'd like to turn the call over to Rob Lynch for his comments. Rob?
Robert Lynch
Thank you, Steve, and good morning, everyone. I'd like to begin by saying that I hope everyone on this call and their loved ones are healthy and safe. And by thanking those who are on the front lines of this pandemic working so hard across the globe to get us through this unprecedented situation. In Q2, we have all had to persevere through extremely challenging circumstances. Throughout the pandemic, we have worked to do our part by staying committed to delivering safe, high-quality food. We have put the safety and support of all Papa John's team members and customers at the forefront of our efforts, and we have been able to help our communities in their time of need. As sweeping process called for social change in the United States, we have worked to lead that change within our company, and have rapidly advanced our efforts begun over 18 months ago towards creating a company and a culture that values diversity, equity and inclusion for all.
We've lived our core values, including people first, everyone belongs and do the right thing. Those statements mean more now than ever. We recognize how trying these times are for many of our colleagues and neighbors. We at Papa John's are committed to being a force for positive change as we pursue our core purpose of bringing the world together by delivering better pizza. While these times are certainly challenging and unprecedented, Papa John's delivered outstanding performance in the second quarter. As we reported this morning, North America same-store comparable sales rose a record 28% last quarter, reflecting the hard work and dedication of our team members and franchisees in service to the millions of new and returning Papa John's customers who have relied on us to safely deliver high-quality food to their homes throughout the pandemic. We estimate that roughly half of last quarter's comp sales growth can be credited to long-term sustainable impact of our strategy, and the remainder reflecting favorable pandemic-related changes in customer behavior, which also present long-term growth opportunities. The great responsibility and opportunity for us during this pandemic has been to serve millions of customers, new and current, who have turned to us to safely deliver delicious food.
During the second quarter, we've added over 3 million new customers over digital channels alone. We also saw higher retention and repeat rates among this segment, which suggests that not only are new customers coming to Papa John's, they are returning. We saw similar dynamics internationally, where comparable sales rose 5.3%, the result of strong double-digit gains in markets like the U.K. and Korea, where delivery-based businesses continue to support their communities offset by temporary government-mandated closures in other markets. Of our approximately 2,100 international franchise stores at quarter end, approximately 225 were temporarily closed as a result of COVID-19, mostly in parts of Europe and Latin America.
Excluding the impact of those temporary closures, international comp sales would have been up over 13% in the second quarter. Q2 adjusted earnings per share tripled from $0.16 to $0.48, driven by top line growth and accelerated by operating leverage. Strong earnings year-to-date have generated $67 million in free cash flow, compared to just $9 million over that same period last year, and we have reduced our net debt by almost $80 million from a year ago. As we reported this morning, July sales indicate that our strong momentum continues into the third quarter. Domestic comparable sales were up over 30% in July in North America, an acceleration in our growth compared to June. International comp sales were up 14%, a record for our international business. Excluding temporary closures, international comp sales would have been up 17%. As of today, we have approximately 160 stores temporarily closed in our international markets. Clearly, strong sales drivers from Q2 have remained intact. We are leveraging our loyalty platform and one-to-one marketing capabilities to ensure that we keep these customers long after the pandemic subsides.
As I said, these strong results are an outcome of 2 things. The first, the benefit that we are deriving from the changing dynamics in the restaurant industry driven by the pandemic; and second, the positive impact of the progress that we have made against our strategic priorities established in Q4 of 2019. As we discussed last quarter, those 5 strategic priorities are: one, building a culture that is focused on diversity, inclusion and winning; two, improving unit economics; three, reestablishing the superiority of our products through commercial innovation; four, building a technology infrastructure that supports our business platforms; and lastly, expanding our footprint domestically and internationally.
I'd like to begin by talking about the progress that we have made in building a diverse and inclusive culture that is focused on winning. Our ability to connect Papa John's values with how the country, our customers and our employees are feeling right now has helped improve sentiment for the brand. Communications has played a big role here. Our campaigns for no-contact delivery in March and April, recognizing our frontline workers and customers in May, and for the Shaq-a-Roni in July have all leaned into Papa John's core values. We have seen significant positive impact on consumer sentiment towards our brand as a result. At this time of great need for many of our neighbors, we have increased our investments through the Papa John's Foundation into nonprofit organizations that serve our communities. We've provided millions of free slices of pizza to health care workers, first responders and organizations on the front lines of this crisis. We've also launched our first fundraiser for the Papa John's Foundation for building community, which I will talk about more in a minute.
To address our surging need for team members, we launched a national recruiting campaign and have hired over 20,000 new restaurant employees, many of whom had lost jobs because of the pandemic. Last week, we extended our earlier campaign and have set a goal of hiring another 10,000 restaurant team members over the next few months to help us meet sustained customer demand. We also announced that we have made our best-in-class college tuition program, Dough & Degrees, even stronger with 2 new university partners. All eligible team members and their immediate family members have access to an affordable online college education which is even more important with the economic strengths many are feeling right now and the uncertainty around returning to in-person school in the fall.
I now would like to turn to the progress that we have made in our restaurants and the impact that we are having on unit economics across our system. As we have previously discussed, our top priority has always been the health and safety of our team members and customers, especially now given the uncertainties associated with COVID-19. From the beginning of the pandemic, we have taken decisive actions to protect our team members and customers. We enhanced already rigorous hygiene and food safety protocols, we provided special bonuses and incentives for many of our frontline employees, and we increased our health and wellness benefits for all team members and their families. We also quickly reengineered our ordering and delivery processes and technology to seamlessly integrate no contact delivery into our channels and customer experience. No-contact delivery has been a huge success with customers and team members. We have secured our supply chain, reviewing our sourcing relationships and protecting the health and safety of our team members at our quality control centers to ensure that there are no disruptions to our business or ability to serve our customers. As a result of these actions and the perseverance of our team members and franchisees, Papa John's record sales dynamics are transforming the profitability of our corporate stores and our franchisee stores. And in turn, have further strengthened our long-term outlook for store growth. Continuing first quarter's positive trend and despite record high cheese prices, second quarter North America unit profits and margins were the highest that we have seen in several years. Strong unit economics will be the foundation for strong development moving forward.
Next, I'd like to address how successful innovation has reestablished the superiority of Papa John's products over the past 3 quarters, contributing to accelerating positive sales comps. Across the company and our system, we are very excited about the marketing product and e-commerce progress that we have made and the commensurate impact that our innovation mindset is having on our business.
Our menu innovations, including Garlic Parmesan Crust, toasted handheld Papadias and Jalapeno Popper Rolls continue to be popular and successful with customers and our bottom line. These new products all build on Papa John's signature crust and better ingredients, better pizza brand positioning to drive higher ticket and traffic across dayparts without cannibalizing core premium products, or adding costs or significant operational complexity to our stores. This innovation strategy has helped to minimize our need to offer deep discounts to give customers incentive to order from us. And as a result, it's driving both sales and profitability. The product innovation pipelines continued into the third quarter. Last month, we launched our new Shaq-a-Roni pizza in collaboration with Shaquille O'Neal, Papa John's Board member and restaurant owner. The Shaq-a-Roni is an extra-large pizza made with our signature dough top of extra cheese and extra pepperoni to the edges and cut into Papa John's largest slices ever. As part of the launch, we are donating $1 from every Shaq-a-Roni sold through August 23 to the Papa John's Foundation for building community, which benefits COVID-19 relief efforts and organizations like the United Negro College Fund and Boys & Girls Clubs of America that support communities working together for equitable opportunities for all. The Shaq-a-Roni has had a huge start, already selling over 2 million pieces and raising more than $2 million to support our communities. Clearly, this reflects the appeal and quality of the product as well as a positive message and advertising campaign that really resonates with consumers in the current environment. We look forward to investing the funds raised from our foundation back into our communities to continue to support COVID relief in the fight against racial injustice.
As you know, technology is a big part of everything that we do. Part of our competitive advantage in the restaurant marketplace is that we are an e-commerce business. Approximately 70% of our orders are placed on digital channels, and mobile ordering is our fastest growing platform. The capability -- this capability positions us well for the foreseeable future as customer ordering and consumption behavior continues to be affected by the pandemic, possibly with long-term impact. In addition, our progress on the utilization of our loyalty and one-to-one marketing platforms is accelerating our growth. But how we leverage technology does not stop at our front door. We have built strong relationships with external technology companies that allow us to meet the needs of more customers than we could alone. Papa John's robust partnerships with 3 of the 4 top delivery aggregators already in place before the pandemic have further enabled us to meet surging customer demand, especially during peak times when our delivery teams are working at full capacity. In fact, the percentage of our transactions delivered by aggregators was up more than 100% in Q2 versus Q1. These transactions are highly incremental and profitable to our business. As we have said repeatedly, Papa John's strategy is to win by providing our customers with better pizza wherever they are and however they choose to order.
Lastly, I'd like to discuss our new store development, another focus area for our long-term growth. With permitting suspended by most local governments during the pandemic, new store openings paused as expected during the quarter. However, strong sales and profitability reduced closures of traditional North America franchises to the lowest rate we have seen in 10 years. After managing through significant challenges in 2018 and 2019, and Papa John's domestic franchisees are in a stronger position today than they have ever been. Strong sales and improving margins provide a strong foundation to our new development strategy in the U.S. and internationally. Even before this quarter, Papa John's offered franchise investors one of the fastest paybacks in our industry. This compelling investment opportunity is now even more compelling given 3 significant changing dynamics in our industry. The first, our e-commerce and delivery model be -- is set up to succeed in an environment where our communities are apprehensive about sit-down dining. The second, the expected availability of many attractive retail real estate opportunities in the months ahead also provides room for expansion that may not have been available just 6 months ago. And lastly, our company's transformation is creating a brand that we can all be proud of, both prospective franchisees and top-performing team members. To take advantage of this opportunity, we have ramped up our development efforts with new leadership and resources to drive our franchisee success. We are focused on delivering significant unit growth moving forward.
I'd now like to turn the call over to Steve Coke to provide more color on our Q2 results before I deliver our closing comments. Steve?
Steven Coke
Thank you, Rob. I'm going to start today by walking you through our year-over-year earnings, followed by some highlights from our second quarter operating results. In the second quarter, we reported earnings per diluted share on a GAAP basis of $0.48 compared to $0.15 a year ago. Excluding a $0.01 impact from special charges in the prior year, adjusted earnings per diluted share rose from $0.16 year ago to $0.48 this year. The $0.32 year-over-year increase reflects a $0.37 positive benefit from improved operating results, primarily driven by our record North America comparable sales. This was slightly offset by a $0.05 negative impact from the allocation of undistributed earnings to participating securities, primarily the Series B preferred shareholders. Undistributed earnings are defined as net income less dividends paid. The allocation of these earnings is determined by the percentage of total outstanding shares that the participating securities would represent on an as converted basis.
In prior quarters, there were no undistributed earnings to allocate to these participating securities. However, based on the company's performance in the second quarter, undistributed earnings were available for the quarter-to-date and year-to-date earnings per share calculations. We also provided $5.1 million or approximately $0.12 per share in scheduled royalty relief as temporary franchise support under the formal We Win Together program. This compares to $5 million, also approximately $0.12 per share provided in the second quarter of 2019, which was comprised of both incremental marketing fund investments and royalty relief. This temporary franchise support provided under We Win Together will conclude in the third quarter with $10 million in incremental marketing investments and to a much lesser extent, royalty relief. After the formal release concludes in the third quarter, we do not expect to provide additional temporary franchise support under the We Win Together program in the fourth quarter or next year. This anticipated spending compares to the $37 million we spent in the last 2 quarters of 2019.
Moving now to more detailed operating results. In the second quarter of 2020, pretax income on a GAAP basis was $26.9 million compared to $10 million for the corresponding quarter in 2019. As Rob described, consolidated second quarter revenues rose 15.3% or $61 million. Excluding the impact of refranchising 46 domestic restaurants and a quality control center in Mexico in 2019, consolidated revenues increased approximately 18.3% or $71.1 million. The increase was largely due to positive comparable sales in North America, which drove higher sales for domestic company-owned restaurants, North America franchise royalties and North America commissary revenues.
Now for our business unit results for the second quarter. Domestic company-owned restaurants pretax income increased $9.2 million primarily from positive comparable sales of 22.6% and operating leverage, partially offset by higher labor and bonuses. North America commissaries pretax income increased $800,000 and primarily driven by higher profits from higher volumes. North America franchising pretax income was $4.3 million higher, driven by a 29.7% increase in comparable sales partially offset by higher royalty relief under the temporary franchise support program. International pretax income decreased $800,000, primarily due to targeted royalty support provided to certain franchisees and the unfavorable impact of foreign exchange rates. These decreases were partially offset by lower travel costs due to COVID-19 restrictions and higher royalty revenues and U.K. commissary income from increased units and higher comparable sales. All others pretax income increased $3.2 million, primarily due to higher online revenues related to strong North America comparable sales. Unallocated corporate expenses decreased $1.1 million, primarily due to a $2.5 million incremental marketing fund investment in the prior-year quarter included in temporary franchise support, savings from the cancellation of our Annual Operators Conference and reduced travel as a result of COVID-19 as well as lower professional and consulting fees and lower interest costs. These decreases were partially offset by higher projected management incentive cost. Income tax expense was $5 million for the second quarter of 2020, for an effective tax rate of 18.4%.
Now turning to cash. Our free cash flow, which is a non-GAAP measure that we define as cash flow from operations less capital expenditures and dividends paid to preferred shareholders, was approximately $67 million in the first half of 2020 as compared to $9 million a year ago. The $58 million increase was primarily due to higher net income as well as favorable changes in working capital items, including the timing of payments associated with our marketing fund. The company has a secured term loan facility with an outstanding balance of $350 million. The outstanding debt is 100% fixed with swaps at favorable interest rates. With a low fixed rate and current leverage ratio of 2.9x EBITDA, we continue to believe maintaining our cash balance during this uncertain environment is appropriate. Additionally, borrowings of up to an additional $400 million are available under a secured revolving credit facility should we need it. Both facilities mature in August 2022.
We paid a cash dividend of $10.7 million to our common and preferred shareholders during the second quarter of 2020. Subsequent to the second quarter, on July 31, 2020, our Board of Directors declared third quarter cash dividends of approximately $10.8 million to be paid to common and preferred shareholders. The third quarter common stock cash dividends will be $0.225 per common share.
Lastly, during the second quarter, we opened 9 restaurants in North America and closed 10 restaurants for a net reduction of 1 restaurant. As Rob noted, while new restaurant openings have been slow during the pandemic, last quarter's North America closures included only 3 traditional restaurants, which was the lowest rate we have seen in a decade. Internationally, we opened 25 restaurants and closed 55 restaurants, for a net reduction of 30 restaurants. The majority of international closures were associated with a strategic franchise realignment in a single market. We expect to reopen most of these restaurants under a new franchisee. These changes in our unit count exclude any temporary closures as a result of the COVID-19 pandemic. I'll now turn the call back over to Rob for some final comments. Rob?
Robert Lynch
Thanks, Steve. Finally, to summarize and wrap up. In a very difficult environment for many businesses, especially in the restaurant industry, Papa John's has showed tremendous strength in the second quarter. And as we disclosed, this has continued into July. Our transformation and the values and purpose upon which it is based, have enabled us to respond to an unprecedented situation, protecting the safety of our team members and customers while keeping our doors open and continuing to serve our communities. Our new products and marketing continue to perform very strongly. Our innovation pipeline continues to produce great ideas that bring in new customers, engage our current customers and deliver results. Our franchisees, owners of small local businesses are realizing unprecedented profitability that will allow them to invest in growth as well. And through it all, we are building an organization that we can all be proud of. Like everybody, we wish for the end of the pandemic, a speedy economic recovery and a return to normal for all of us. But given the ongoing challenges and uncertainty related to COVID -19, we expect that social distancing, both voluntary and enforced, will continue to drive consumers toward delivery and carry out base businesses like ours for the foreseeable future. We will continue to put the health and safety of our team members and customers at the forefront as we continue to serve our communities. We will also continue to optimize our workstreams in response to the ever-evolving changes in the business conditions and in customer needs, but we will always stay true to our values and purpose which have been our guidepost as we have navigated these uncertain times. We remain focused on our long-term goals, confident that our actions today are creating a foundation for a strong brand and profitable growth long after the pandemic subsides.
I'd like to thank our shareholders and everyone on this call for their interest in our company and their continued support. With that, I'll turn the call over to the operator for Q&A. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions]. And our first question comes from Peter Saleh from BTIG.
Peter Saleh
Congrats on the quarter and the results. I just wanted to ask, Rob, on the -- I think you said on the call, you guys ramped up -- you're ramping up development efforts. Can you elaborate a little bit on that? I know the closure rate was rather low in the quarter. And any reason that closure rate can't continue going forward?
Robert Lynch
Peter, yes, development is probably my #1 priority right now. I feel like we've built a very strong foundation on from our -- on our commercial business in North America. We've got great innovation, great marketing support. The next phase of the turnaround of this company is getting development ramped up and going again. To that end, earlier this year, we hired a new Chief Development Officer. We previously had not had a Chief Development Officer. We brought her in to really get a best-in-class infrastructure built to facilitate development moving forward, and we've put some very aggressive goals in place for ourselves heading into next year and beyond. So right now, we're building the infrastructure to be able to support that. So we're building best-in-class capabilities that, frankly, we didn't have before in terms of how we think about the territories, both domestically as well as internationally. And there's a ton of white space for us. We've got half as many restaurants as our competitors in North America and way less than that internationally. We operate in 47 countries internationally, which is about half of our top 2 competitors. So we feel like there is a huge development opportunity here. We have a significant amount of excitement, both with our current franchisees who have cash flow at this point and capital that they want to reinvest in the growth of this business. We're also being contacted from -- by many large sophisticated owners of other concepts both domestically and internationally, who want to be a part of the pizza business as it's proven to be very successful during these challenging times. And a lot of people believe that our model, which is unique in the marketplace that is an e commerce, already built out e-commerce and delivery model is something that they want to build into their platforms. So development is a huge focus for us. We see a huge amount of opportunity. In terms of closures, I don't see why anyone would close the Papa John's for the foreseeable future. The margin structure is great. The revenues are great. We're hiring team members. We're finally getting to a point where our restaurants, our staff, which takes the burden off of the operators. So I foresee our closure rate being very low for the foreseeable future.
Peter Saleh
And then can you just talk about the advertising budget? I know coming into this year, nobody really expected these types of comps. And so, therefore, I'm sure your ad budget has kind of ballooned. How do you plan to spend, I guess, the incremental ad dollars that you have in your pocket now versus the initial plan? And is there any opportunity to roll some of that into '21 if you don't seem to need it in this year?
Robert Lynch
That's a great question. When I came into this business, obviously, my background in marketing, one of the concerns that I had was we had -- this We Win Together program, which is a great program, helping our franchisees through the challenging situation that they were facing. And about half of that support was in the form of marketing spread out over 2019 and 2020. And so as we look at 2021, my concern was that our marketing budget would decline relatively precipitously, given that if we were ending that level of support, these sales have mitigated that issue. Our comp sales this year, as you know, our marketing budgets are a function of our sales growth, our net sales. And so as our sales have gone up, it's still the marketing bucket for us. And yes, we have the flexibility and capability to move funding of marketing funds from 1 year to the next. So we are currently exploring the -- what the best strategy is to do that. Had a call about it yesterday. So absolutely, we will make sure that we continue that momentum to close 2020 strong. But we're absolutely looking at the opportunity to make sure that we get off to a fast start in 2021 leveraging our marketing dollars most productively.
Operator
Your next question comes from Alex Slagle from Jefferies.
Alexander Slagle
I see the business doing so well and you guys making an impact. On the -- and thinking about the digital platform and the data analytics and the consumer-facing technology, where do you see the next opportunity for the brand to raise the bar to the next level? And if there's any low-hanging fruit that you'd call out at this point?
Robert Lynch
Great question. You know as we mentioned, we've brought in, in the last 3 months, over 3 million new customers over our digital channels. And one of our top priorities is making sure that those customers stick. We want to make sure that we take care of them from an operating standpoint and give them the best service possible and make sure that we're serving them the best products that we can in a timely manner. But we're also working very hard to make sure that our digital platforms are the easiest and most functional platforms to order our products from and that they provide the best customers experience possible. So people will keep coming back.
Our loyalty program, as we mentioned last quarter, we revamped it in 2019. We're starting to see the dividends in 2020 with higher ticket averages as we are better able to target incentives more appropriately to the right customers. And our one-to-one marketing capabilities, leveraging all of that data and our loyalty programs are really starting to take off. So we're making big investments into our loyalty and one-to-one marketing capabilities and -- right now so that we can make sure that these customers that are coming in driving a lot of this transaction growth that we're seeing are going to stick around and then we take care of them. So from a commercial standpoint, that -- those are our big investments. From a -- and in addition to that, we're also optimizing how we work with the aggregators. They've become a little over 5% of our business at this point. I think you all are aware of their growth during the pandemic. And we've grown with them. We're probably one of the largest suppliers on their platforms because we're a delivery business that we create trips for them. So we're working with them to make sure that we can continue to deliver great customer service through their platforms and that we create a long-term model that supports both of our businesses where we can both be profitable and continue to take care of our customers. So between our loyalty program and the aggregators, that's where a lot of our technology focus is up against.
Alexander Slagle
That's helpful. If you can help us think through core G&A growth, excluding all the special charges last couple of years, as you look back to 2017 or so, it was closer to $150 million, $160 million. But fast forward today, you own fewer restaurants in the U.S. and international, sold some commissaries. And -- but at the same time, you're investing to rebuild the business, prepare for an acceleration in growth. So if you could just help us balance these thoughts and level set on how we should think about G&A going forward? Perhaps if you have a view on target G&A as a percentage of system sales?
Robert Lynch
Yes. I mean, this year, going into 2020, it was the first year where we had actually build a plan that decreased G&A in the last 3 years. So we are very focused on G&A. We are hyper-focused on being as productive as possible. This is going to be a little bit of a unique year in terms of absolute G&A because as our sales and profits continue to rise, we will see a change from last year where we had very minimal management incentives to this year where we will have a relatively significant management incentive program payout. So our G&A will be a little bit skewed this year. By that, our focus and our targets are to continue to reduce G&A year in and year out. And we were making a lot of progress towards that. These unique dynamics are going to change that a little bit this year.
Operator
Our following question comes from Chris O'Cull from Stifel.
Christopher O'Cull
Rob, can you elaborate on how the company has been able to disaggregate the comp performance between the pandemic and company-specific initiatives?
Robert Lynch
Yes. I mean, as you know, Chris, we were tracking at about 7.5% in the first quarter prior to the onset of the pandemic and we actually dipped down for the first 2 weeks. And then we -- as people pantry loaded and kind of locked themselves down. Then we started coming out of that, and we saw, obviously, an increase in sales, and we saw our comps go up dramatically. So we have continued to track that progress. We continue to look at the consistent drivers of our business, like our innovation pipeline, what the mix on those products looks like, what the incrementality, we believe can be attributed to those products. We're also looking at the competitive environment. If you look at the releases of some of the other larger -- large national pizza delivery companies, they're tracking in at 15% range on their delivery piece of the business. And prior to the pandemic, both of our competitors were in the kind of flat to 1% growth spot. So we're looking at how much they've grown as a result of the pandemic, which is pretty consistent, and then we look at how much we've grown. And so we look at the things that we've done uniquely that are contributing a lot of opportunity for a lot of growth for us. So our partnership with the aggregators, which is a unique decision we made to partner with the large major aggregators. We think we're benefiting from that. We will continue to benefit from that versus the rest of the industry as long as the strategy remains intact. Our innovation and the incrementality that we're able to assess based on, we have all the purchase data across all of our digital channels. We can understand how incremental that is. We're seeing our size per order go up dramatically since we launched Papadias. That has nothing to do with the pandemic. That has to do with our strategy. Shaq-a-Roni, an extra-large pizza that we're selling and donating $1 to charity, we don't typically sell a lot of extra-large pizzas. This is a unique innovation that is now mixing higher than we anticipated and is generating a lot of repeat business for us. So those types of things where we can track and measure specific explicit actions that we have taken that are different than kind of the general growth of the marketplace is how we discern between the pandemic impact versus the impact of our strategic priorities.
Christopher O'Cull
That's helpful. And then do you expect the marketing fund to be up year-over-year in '21 without the company making a contribution to the national ad fund?
Robert Lynch
Yes. We do.
Christopher O'Cull
Great. And then once you have the infrastructure in place, what do you think are going to be the greatest challenges the company needs to overcome in order to restart or see franchise development accelerate?
Robert Lynch
Part of it's on us, Chris, and that's exciting because we control our own destiny. We haven't had some of the capabilities that are critical for best-in-class development around some of the new technologies around drawing up trade areas and mapping capabilities. We haven't had some of the infrastructure to really support franchisees. A lot of our franchisees over the last 4 or 5 years have been individual franchisees with 1 or 2 units. We have not had an infrastructure in place to go out and really build our proposition for the larger, more sophisticated, better capitalized franchisees that already own and operate in other concepts. We have a huge opportunity there, and we're focused on it, and there's a lot of interest. So it really is something that's within our control because the economics make unbelievable sense. I mean when you look at the $300,000 cost to open a Papa John's Pizza Restaurant, and the eight kind of AUVs that we are delivering right now that we plan on sustaining moving forward, the return on invested capital is as good as anyone in the industry. And we haven't told that story. And we haven't told it to the right people. And so we are making sure that we are ready to come out of this situation and domestically, and have partners in place that want to invest their capital in our brand, and we're going to have the resources in place to support that. Internationally, we have huge geographies that have not been opened, and we don't have any restaurants in Australia, a huge QSR in pizza market. We don't have any restaurants in Africa. We don't have any -- we are in half the countries of our competitors. And even in the countries that we're in, like China, we have 200 restaurants. Our competitors have thousands. So huge amount of white space. It's about us putting the resources in place to take advantage of that, and we are making those investments right now, so we're prepared when we come out of this thing to really accelerate that growth.
Operator
Our next question comes from Brian Bittner from Oppenheimer.
Brian Bittner
Rob and Steve. This outlook for improving unit growth is definitely a new important theme at Papa John's and you just touched on it a bit with Chris' question. But when do you, from a timeline perspective, really expect to see new unit openings start to really positively impact the growth of the business? I mean, is it going to be right on the other side of this virus? Is it going to be by the end of this year? Just some color around the insights you have on the timing of this new unit growth theme?
Robert Lynch
Brian, good to hear from you. Barring unforeseen circumstances, and that used to be a pop out that these days is completely relevant. Barring unforeseen circumstances, we are targeting a significant growth in units in 2021. So we are building the infrastructure right now. We are working to make up for lost ground that we're losing right now given the challenging dynamics around getting restaurants build. But we think there's going to be a big opportunity. We haven't necessarily seen the shakeout from the pandemic yet on the real estate market. I think as this thing continues to linger there will be a shakeout. There will be real estate that becomes available that wasn't available before. And we want to think -- we want to be able to take advantage of that and leverage that opportunity in the near term. So like I said, we are building right now. We are preparing right now. We are ramping up right now. How long that is going to take before it really gets up and running, it's probably more dependent upon how the pandemic continues to impact development more so than our individual action plan.
Brian Bittner
And my follow-up just July same-store sales obviously accelerating from June. You know it's happening at a time when we're seeing sales improved for more traditional restaurants, I guess, meaning the pandemic becoming less of a drag in July for traditional restaurants? So you've been able to actually improve the momentum at a time where, I guess, logic would say the positive impacts from the pandemic are becoming less for your business. So does that mean some of the core underlying drivers of your business are actually really accelerating. And you're kind of seeing the pandemics impact lessen as we move into July? Or how would you frame that up?
Robert Lynch
Yes. I think that you're right. I mean, as I mentioned, our goal right now is to maintain the customers that we have picked up over the last 3 months to keep those folks coming back to Papa John's. So far, so good. As I mentioned, our repeat rates are improving. Our customer service scores are through the roof. I mean, I guess I have to give credit to our operating teams, both the company as well as franchisees. We've seen a double-digit increase in transactions in our business. And our restaurants not only handled that seamlessly, they actually improved customer service metrics. So we are built to be able to handle these increases. And -- but if we don't maintain those customers, if we don't keep them, then it's kind of a one-and-done thing. And I think that's what a lot of the modeling has is that, hey, there's the impact of coronavirus, everyone is locked down and can't go to other restaurants. But what needs to be modeled, and what needs to be baked into our -- the forward-looking vision for this business is these customers that are coming in, we're keeping them. They didn't come in because of Corona, and then they're going back. I think there's a tail for the behavior that drove them here. And then I think we're taking better care of them than they expected. And our food quality is better than they may have had with some of the other pizza companies. And so they're starting to see that, hey, this is a brand. This is a company that I want to buy from, not just while I'm kind of in quarantine, but ongoing. So I think there will be stickiness. And we can exacerbate that and increase that with the work that we're doing on our loyalty program and our one-to-one marketing platform. I mentioned it back in Q4 and at the end of Q1 that we weren't -- we had so much untapped opportunity. We had about call it, 12.5 million names in our loyalty program back then. We have 6 -- we're approaching 16 million today. And so that's -- I talked about that hasn't been fully leveraged. We had all these great people with purchase behavior and understanding around them, we hadn't tapped into that yet. We're tapping into that now, and we're just kind of just getting started. There's a huge opportunity to maintain these customers and drive increased frequency ongoing with leveraging that loyalty program. So I think we're going to see this tail for us continue on for quite some time.
Operator
Our following question comes from Lauren Silberman from Crédit Suisse.
Lauren Silberman
Congratulations on a great quarter. You were talking about appetite for new unit growth from both new and existing franchisees. So with that, to what extent could refranchising play a role in accelerating new unit growth, particularly in North America? And to what extent do you expect new unit growth to come from new versus existing franchisees?
Robert Lynch
Well, we are in a great situation with that. We own almost 20% of the restaurants domestically, which does give us an asset base to seed new franchisees with new unit growth. Lauren, as you know, in this industry, big players don't want to come in and start from zero. They want to come in and have a base of operations that they can spread their overheads across and then start building. So we are in active talks with large franchisees right now about that opportunity. So it's definitely an advantage for us having as many restaurants as we have. That being said, I would also tell you that the ROIC on these things is so great right now, that we're also thinking there could be unit growth from us. We are in a better capital situation with very low levels of debt, lots of cash flow right now. We're Exploring how we're going to leverage that cash flow. We want to make sure that it's invested in a way that maximizes shareholder return. And right now, building some restaurants in some of these markets may not be necessarily the worst thing to do either. So we are exploring all opportunities, both refranchising to see ongoing significant growth in unit development, but also potentially investing some of our own capital into some of these markets, which will build out these markets and potentially make them even more appealing for refranchising. And so when you talk about the balance between current franchisees and new franchisees, one of the outages with this system in the last 5 years has been very low levels of development with current franchisees. One of the biggest motivators for current franchisees to develop is new franchisees. So I think that we will see a pretty good balance moving forward from both new franchisees as well as our current franchisees.
Lauren Silberman
Great. And then how can we think about the composition of unit growth over even next year and over the next 3 years between North America and international?
Robert Lynch
International is probably going to outpace domestic for the foreseeable future just because there is so much white space left. We have so many geographies that are still underdeveloped. And we have -- we do have a model internationally where we have master franchisees that are well capitalized on other concepts, and are set out to develop. The domestic franchisee base and the domestic development, we need to do some work there. And part of that work is kind of the mapping that I talked to you about, making sure that we have the appropriate trade areas set up, and we have set our current franchisees up with opportunities to go and build. So I would see that ongoing, our international development is still a bigger contributor to our total development, but the ratios will change and domestic will become a bigger part, just that international will continue to be the driver.
Lauren Silberman
Great. And then just as it relates to your delivery versus carryout business, can you give any color on the relative performance in the quarter and into July? And then how do we think about that relative profitability of each channel, maybe delivery through your own system, through aggregators and then carryout? Are they all reasonably at parity?
Robert Lynch
It's interesting we haven't seen as much of a pickup in the delivery business as we may have thought. Our ratios have not changed that much. I think that speaks to customers despite the onset of contact -- no contact-delivery, people still feel, believe it or not, coming out of their house in their own car, getting the food and putting it in their own car and taking it home, it's still something that people want. So our ratios have not changed that much. Obviously, our carryout business is a bit more profitable. But it's not as much more profitable, I think, as is talked about because you've got to have -- in our business, you have to have to deliver drivers on hand. So the labor is there whether someone's coming to pick it up, and the variable cost associated with the delivery is covered from the delivery fee. So we don't really look at carryout and delivery that differently from a profitability standpoint. And frankly, we don't look at the aggregator model that differently from a profitability standpoint either because of the terms that we've negotiated with them and how the cost structure with that channel stacks up against our delivery channel. So all of them right now are very productive, very efficient. These models, as you know, QSR, the volume solves a lot of illness. We have to have delivery drivers there to support potential demand. And right now, the demand is coming through. So we're making the most use of that labor investment. So we're very happy with the margin expansion that we've seen.
Operator
Our following question comes from Alton Stump from Longbow Research.
Alton Stump
Congrats Rob and Steve, I mean great results. So I just wanted to ask 2 questions. First off, kind of going back to Brian's question about the July comp accelerating, which certainly is a surprise, given the market dynamics, how much of that do you think was due to Shaq-a-Roni, that was obviously the big new product in July. And kind of to that point, how much of that incremental uptick in July was due to average ticket versus traffic?
Robert Lynch
So great question. What we don't -- we haven't really talked about that much is that in June, we had no media. We had no national media. That was part of our plan heading into the year as the pandemic hit. April, we didn't -- it wasn't efficient for us to go out and buy spot media to support the business growth. So June sales are -- and the change in the rate of sales is at least in part, driven by the fact that we turned off the national media that we have felt has been so successful for us in Q1. And so as we went back into July, with Shaq -- the launch of Shaq-a-Roni, we hit full force with a great product that had a lot of PR excitement by leveraging the Shaq component of it, fully supported with a large amount of national media support and tailored to a very relevant -- with a lot of relevancy to the current situation where we added the charitable component of the program. So I think Shaq-a-Roni is -- it's more than just a new product innovation. It's really the incarnation of our innovation mindset around product, marketing, technology, all of those things coming together and showing what we can do when we do things smart on the commercial side of the business. So yes, the answer is, yes, it was Shaq-a-Roni, but not just because it's a Shaq pizza. It's because we turned on the national media. We leveraged the PR machine around it and were very relevant and timely with the charitable giving piece of it. So I hope that answers your question.
Alton Stump
Yes. No, it does. Thanks for color it's very interesting. Secondly, kind of back to the question about, as you're starting to build either more company owned and/or franchise, kind of following all that, when time's are good you want build a company or stores and on the bad, you want to sell them back to franchisees. But given that is there any preference that you had to choose between adding more stores on the company owned front versus selling your franchisees? Or is it -- all options are being explored equally currently?
Robert Lynch
Yes. I mean we've talked about since I got here that I really like the optionality of owning restaurants and leveraging our balance sheet to create shareholder value. I will tell you that our bias is absolutely to refranchise restaurants and see great new franchisees with development opportunity. So every opportunity that where we can do that, we are exploring it very diligently, it's something that we see as part of our future. So refranchising to see development is probably a priority over any build-out of company restaurants.
Operator
Our following question comes from Brett Levy from MKM Partners.
Brett Levy
A couple of questions. First, if you could build off of Brian's question earlier about what you're learning from your consumers, just given all of this robust data you've been able to attract and acquire from all your digital and loyalty programs, what have you really learned about your customer? Second, when you think about the back half of the year and into 2021, how should we think about level of campaigns, frequency of campaigns, integration of newness on the menu and core? And then just for you, Rob, you're coming up on a year. Obviously, you've had really 4 different tranches of experience, what do you think has changed most in your plan and your approach over that time frame, excluding the shift to a contactless society? And I'll stop there.
Robert Lynch
Those are all incredibly interesting questions. Thank you for recognizing my 1-year anniversary. I was expecting a cake from the team today, and that didn't happen. But it has been a really interesting year. These challenges that face our country, our society and the restaurant industry could not have been foreseen. And I would tell you, and this may sound really crazy, but it's true. Nothing has really changed for us because of the pandemic and the other challenges that we face, other than we're working remotely. Pretty much everything that we were building in Q4 and Q1 is consistent with what we're doing today, it's just all been accelerated. The work around improving our company and our culture and how we're going to treat each other and how we're going to act has been something that has been absolutely accelerated over the last 2 months. Our innovation pipeline has been accelerated. Our work -- our operational improvements have been accelerated to be able to deal with the increased demand. Our technology infrastructure investment has been accelerated. And now our focus on development coming out of all this has also been accelerated. So what's changed the most? What's changed the most is just the rate of change. We came in and we changed out some key members of the leadership team. We instituted our strategic priorities. None of that has changed. We got the right team focused on the right thing. We just got more resources up against it, and we're accelerating all of those initiatives.
In terms of next year and the frequency of our campaigns, we came into this year looking at about probably about 6 innovations. We were kind of looking at each one of our LTOs lasting about 2 months or 2 periods. And that has changed, that has evolved with the needs of the business. We wanted to make sure during the pandemic, while we saw this increase in transactions, that our operations could handle the increase in demand. And so we focused on our core business as opposed to bringing a lot of new innovation, Shaq-a-Roni with the only new innovation we've launched since Papadias, but that doesn't mean we stopped working on the innovation. We have continued to test and build ideas out. And we have a whole closet full of great ideas that are essentially ready to go and hit the market but we'll roll those out as we see fit as we see where we can get the most punch for each one of those launches. And where we can make sure that we're doing it in a way that does not increase complexity and compromise our ability to execute great operations. And then lastly, your last question around learning about our customer, what we have seen in terms of the new customers coming in has been the ability to keep them. I mean we're seeing repeat amongst new customer, repeat rates amongst our new customers significantly improved versus what our repeat rate was prior to this environment. And part of that is because we fixed our loyalty program.
And when they -- and we fixed our digital platforms. And so when they come in, they have a great experience, and because we're so busy, believe it or not, our customer service is getting better because we had -- we can afford more labor. We're putting more drivers out there. We're maintaining service time. No-contact delivery looks like we're going above and beyond for them. So stickiness of our new customers is one of the things that we weren't sure about that we're learning, there is a big opportunity there. Amongst our current customers, the biggest change has been the change in the ratio of pieces to size. So our pieces have stayed about -- our pieces per order have stayed relatively flat, our size per order are up dramatically. So that's an -- that's a function of adding Papadias and Jalapeno Popper Rolls to order -- pizza orders that they were already going to make. And that's driving a lot of ticket growth for us. We've taken almost no pricing this year, and yet our ticket is up significantly. So that's a very healthy ticket growth. That's a function of people adding their desire to add things to their pizza orders. So we're going to continue to leverage that. We're going to continue to build that into our innovation pipeline to take advantage of that. I hope that answered all 3 of your questions.
Operator
We have time for one more question this morning. And your last question comes from Greg Badishkanian from Wolfe Research.
Frederick Wightman
It's actually Fred Wightman on for Greg. Just wondering if you could break down the July performance a little bit across geographies. Are you seeing any divergence in terms of states that are farther along in terms of reopening or subsequently if ones that are seeing an uptick in infections?
Robert Lynch
Now we're not. I mean, we are seeing growth across all of our geographies. And even in markets like New York City, where the rates have come down dramatically, and as the change in dynamic from where they were, our sales continue to exceed -- far exceed our expectations. There has not been a real regionality to our growth, which initially, we thought there would be and I think in our last call, we talked about how New York and some of these other more urban markets that were impacted in a greater way were outpacing in terms of sales growth. They still are, but that hasn't changed. So it gives us a lot of confidence that what we're doing is not absolutely beholding to the dynamics that are impacting each of these markets differently.
Frederick Wightman
Great. And then just 1 final one on the development front. A lot of positive commentary as far as unit growth into next year. But when do you think that we'll start to see those development pipeline statistics increase? Is that something that will be next quarter or a little bit longer down the road?
Robert Lynch
Yes. I mean, if I can leave you with 1 thing, it would be -- we are just getting started. So I realize that in the last year, we've had a very solid stock performance and very solid business performance. But I think we would be -- you would be ill-served to believe that because of the pandemic that this is kind of the peak of where Papa John's is going to be. We have so much upside left in the tank. And that upside is a function of both comp sales and a function of development. And the development opportunity, I would argue, is even bigger than the comp sales opportunity because it really hasn't existed for the last few years. And the closures that happened in the last few years. Those sites now could support restaurants. So we are just getting started on the story, but it's not going to happen overnight. We have to build a development capability that can support the amount of growth that we foresee. So I wouldn't tell -- I'd be lying if I told you that Q3 was all of a sudden going to have a big spike in development. I will tell you that we are planning right now for 2021, and we are focused on large -- a large growth rate in development in 2021.
Operator
At this time, I will turn the call over to Rob Lynch for closing remarks.
Robert Lynch
Well, thank you all for joining us. We hope that you're as excited about the future of Papa John's as we are. The investments -- I hope you realized from this call and the Q&A. The investments and strategic choices that we made at the end of 2019 and into Q1 of 2020, have positioned Papa John's to continue to thrive, both in our current environment and for the long term. As I mentioned, we're just getting started with this story. We're a year in. We see a huge amount of runway. The brand is strong. All of our metrics are moving in the right direction. We're gaining new customers at a highly accelerated rate, and we're keeping that. And they're repeating at a higher rate than our core customers used to. So all of those are metrics that bode well for a very bright future. So we look forward to reporting back to you on our continued momentum, and I wish you all be well and stay safe, and we'll talk to you again soon. Thank you.
Operator
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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