Executive Summary / Key Takeaways

• Strategic Reinvigoration Underway: Papa John's is executing a comprehensive transformation, focusing on core product innovation, amplified marketing, advanced technology, enhanced customer experience, and a growth-oriented franchisee model. This strategy aims to drive sustainable, profitable growth and reclaim market share.
• Digital and Loyalty as Core Moats: With over 70% of sales from its own digital channels, Papa John's is leveraging a revamped loyalty program (Papa Rewards) and a strategic partnership with Google Cloud for AI-powered personalization and delivery optimization. These technological differentiators are driving higher app conversions, increased customer engagement, and faster repeat purchases.
• Financial Momentum Building: Recent Q2 2025 results exceeded expectations, with North America comparable sales up 1% (driven by 1% transaction growth) and International comps up 4%. Despite near-term investment-driven margin pressures, the company anticipates sequential sales acceleration in North America through H2 2025 and raised its International comparable sales guidance to 2-4%.
• Operational Efficiency and Franchisee Profitability: Significant initiatives are in motion to improve four-wall economics, including a supply chain optimization program targeting over $50 million in cost savings by 2028 (1 percentage point margin improvement) and reduced new restaurant build costs to below $500,000.
• Outlook and Risks: Papa John's projects 2-5% system-wide sales growth and adjusted EBITDA between $200 million and $220 million for 2025, viewing 2025-2026 as investment periods. Key risks include a cautious consumer environment, intense competitive discounting, and inflationary pressures on food and labor costs.

The Recipe for Reimagination: Papa John's Strategic Transformation

Papa John's International, Inc. (NASDAQ:PZZA) stands at a pivotal juncture, actively redefining its place in the highly competitive quick-service restaurant (QSR) pizza landscape. Founded in 1984, the company built its brand on the promise of "Better Ingredients. Better Pizza." This commitment to quality has been a foundational strength, differentiating it from rivals who often prioritize speed or aggressive value. Today, Papa John's is executing a multi-faceted transformation, aiming to leverage this quality heritage with modern operational and technological prowess to drive sustainable, profitable growth.

The broader QSR pizza market is characterized by a cautious consumer, intensified competitive pressures, and a pronounced shift towards value. In this environment, digital channels have become paramount, with over 70% of Papa John's sales originating from its own platforms. This digital dominance underscores the company's strategic imperative to innovate in technology and customer experience.

Technological Edge: Digital Dough and AI-Powered Delivery

Papa John's is not merely participating in the digital shift; it is actively working to establish a technological moat. Its core differentiated technology lies in its robust first-party digital channels, which serve as the primary interface for a significant majority of its customers. This direct connection allows for rich data collection and personalized engagement, a critical advantage over competitors heavily reliant on third-party aggregators.

The company's strategic partnership with Google Cloud, announced in April 2025, is a significant leap in its technological roadmap. This collaboration aims to revolutionize the ordering and delivery experience by leveraging artificial intelligence (AI). The stated goals include anticipating customer cravings, optimizing delivery routes, generating proactive recommendations, and sharing relevant offers based on learned customer preferences. This hyper-personalization is designed to create a more consistent, seamless, and customized customer journey from "click to crust."

Tangible benefits from these technological investments are already emerging. The revamped Papa Rewards loyalty program, which lowered its redemption threshold in November 2024, has been a notable success. It has led to the acquisition of approximately 2.7 million new loyalty accounts since its relaunch, with more members redeeming Papa Dough and returning for their next order more quickly. This enhancement, while initially decreasing the overall order ticket by 100-130 basis points due to faster redemptions, is driving higher engagement and frequency across customer cohorts. Furthermore, Papa John's is rolling out a system-wide delivery tracking service, currently active in 60% of its restaurants, with substantial completion expected by Q1 2026. This initiative directly addresses a previous operational weakness identified in a mystery shop study, which showed a need to improve the delivery experience.

For investors, these technological advancements are crucial. They contribute to Papa John's competitive moat by enhancing customer loyalty and operational efficiency. The ability to offer a highly personalized digital experience, coupled with improved delivery logistics, can translate into higher revenue, better margins through optimized operations, and a stronger market position against rivals like Domino's Pizza (DPZ) and Yum! Brands (YUM)'s Pizza Hut. While DPZ is known for its advanced digital infrastructure, Papa John's AI-driven approach with Google Cloud aims to close this gap and potentially leapfrog in customer personalization.

A History of Adaptation and Turnaround

Papa John's journey has been marked by periods of both growth and challenge, shaping its current strategic focus. After its founding in 1984, the company expanded steadily, becoming a first mover in partnering with third-party delivery providers in 2019, recognizing the evolving consumer landscape. The introduction of popular menu items like the Shaq-a-Roni, which became a permanent fixture in 2025, demonstrated an ability to connect with consumers through product innovation.

However, the company faced significant headwinds in 2018-2019, including a public fallout with its founder and subsequent activist investor involvement. This period necessitated a strategic turnaround, which began to take shape with leadership changes and a renewed focus on core operations. The International Transformation Plan, initiated in December 2023, marked a decisive step to optimize its global footprint, particularly in markets like the UK, through strategic closures and refranchising. This was followed by a significant strengthening of the leadership team in late 2024, bringing in new talent in digital, technology, and marketing, alongside expanding responsibilities for key executives. In March 2025, the company further bolstered its financial flexibility by refinancing credit facilities and securing a new $200 million term loan. These historical actions underscore a company committed to adaptation and strategic realignment.

Financial Performance: Investments for Future Growth

Papa John's recent financial performance reflects a business in transition, balancing strategic investments with a challenging macroeconomic backdrop. For the second quarter ended June 29, 2025, total revenues increased 4% to $529.2 million, primarily driven by a $20.3 million increase in commissary revenues due to higher volumes and pricing, and a $2.7 million increase in other revenues from higher technology service fees. This was partially offset by a $5.7 million decrease in Company-owned restaurant sales, mainly from UK refranchising. Year-to-date Q2 2025, total revenues grew 2.5% to $1.05 billion.

North America comparable sales showed positive momentum, increasing 1% in Q2 2025, marking a 220 basis point sequential improvement driven by a 1% transaction growth. International comparable sales also demonstrated strength, growing 4%. However, Domestic Company-owned restaurant segment EBITDA margins declined approximately 220 basis points in Q2 2025, impacted by labor inflation, aggregator fees, advertising investments, and higher food costs (particularly cheese and proteins). This reflects the company's deliberate strategy to invest in brand-building and value perception, even at the expense of near-term profitability. North America commissary segment adjusted EBITDA margins, however, improved by 130 basis points to 7.3% in Q2 2025, benefiting from higher volumes and pricing.

Consolidated adjusted EBITDA for Q2 2025 declined modestly, reflecting significant strategic investments, including $9 million in incremental loyalty and marketing spend and $3.7 million in higher incentive compensation. Net income attributable to the company for Q2 2025 was $9.5 million, or $0.28 diluted EPS, down from $12.2 million, or $0.37 diluted EPS, in the prior year. Year-to-date Q2 2025, net income was $18.8 million, or $0.56 diluted EPS.

From a liquidity standpoint, Papa John's maintains a strong position. As of June 29, 2025, total available liquidity was approximately $500 million, with a gross leverage ratio of 3.4x, well within its covenant limits. Net cash provided by operating activities for YTD Q2 2025 was $66.8 million, a $24.9 million increase year-over-year, and free cash flow stood at $36.5 million, up from $12.8 million. This robust cash generation supports ongoing investments and shareholder returns, including a recently declared quarterly dividend of $0.46 per share.

Competitive Positioning: Quality vs. Scale and Speed

In the QSR pizza market, Papa John's competes primarily with Domino's Pizza and Yum! Brands's Pizza Hut. Papa John's distinguishes itself through its "Better Ingredients. Better Pizza." philosophy, emphasizing fresh, never-frozen dough made with six simple ingredients, real mozzarella cheese, and vine-ripened tomato sauce. This quality focus positions it as a premium player, appealing to consumers seeking a higher-quality product.

Compared to Domino's, which excels in digital innovation and delivery efficiency, Papa John's is working to close the technology gap with its Google Cloud partnership and loyalty program revamp. While Domino's often leads in speed and convenience, Papa John's aims to differentiate through hyper-personalization and a superior product. Financially, Papa John's TTM Gross Profit Margin of 24.23% and Operating Profit Margin of 7.12% are competitive, though DPZ's TTM Gross Profit Margin of 39% and Operating Profit Margin of 19% suggest greater operational efficiency and scale. Papa John's is the number-two player in market share in several key strategic markets, particularly in the Southeast and Midwest, indicating strong regional presence despite overall market dynamics.

Against Pizza Hut (YUM), Papa John's maintains a qualitative edge in perceived ingredient quality. Pizza Hut, benefiting from Yum! Brands's vast global footprint and diversified portfolio, often competes on value and broad accessibility. Papa John's strategic focus on optimizing its supply chain for cost savings aims to improve its four-wall economics, making it more competitive on price without sacrificing its quality differentiator. YUM's TTM Gross Profit Margin of 47% and Operating Profit Margin of 32% reflect the benefits of its massive scale and diversified brand portfolio.

Papa John's was also a first mover in the aggregator ecosystem (since 2019) and commands a leading position in sales per store on these platforms. This early adoption provides a competitive advantage, as the company understands how to operate effectively within this channel, which continues to see high teens growth in sales and orders.

Outlook: An Investment in Accelerated Growth

Papa John's management views 2025 and 2026 as critical "investment periods" designed to fuel sustainable, long-term growth. The company has reiterated its 2025 guidance, expecting system-wide sales to increase between 2% and 5%. North America comparable sales are anticipated to be flat to up 2% for the full year, with management expecting acceleration through the remainder of Q3 and into Q4, driven by its barbell strategy and new product innovation. International comparable sales guidance was notably raised to a range of 2% to 4%, reflecting continued operational strength in priority markets.

Consolidated adjusted EBITDA is projected to be between $200 million and $220 million in 2025, reflecting planned strategic investments. These include up to an additional $25 million in marketing spend compared to 2024, with $5 million to $7 million allocated for Q3 alone, focusing on CRM, loyalty, and optimizing national and local media mix. Capital expenditures are estimated at $75 million to $85 million, including $8 million to $13 million for tornado damage rebuilds, with anticipated insurance recoveries.

Operationally, the company expects to open 85 to 115 gross new restaurants in North America and 180 to 200 internationally in 2025. Closures are anticipated to be at the higher end of historical averages (1.5-2% in North America, 4-5% internationally) as part of market optimization. A significant initiative is the North American supply chain optimization, targeting over $50 million in cost savings by 2028, aiming for at least a 1 percentage point margin improvement for the average North American restaurant. This is expected to begin yielding benefits in 2026. Additionally, the planned sale of a 70% interest in a joint venture operating 85 domestic company-owned restaurants by the end of 2025 is expected to generate a pre-tax gain of $15 million to $20 million, with a negligible impact on net income.

Risks to the Reimagination Story

While the strategic roadmap is compelling, several risks warrant investor attention. A persistent "cautious consumer" environment, coupled with intense competitive discounting, could pressure sales and profitability, particularly if Papa John's struggles to balance its premium positioning with value demands. Inflationary pressures on food, labor, and fuel costs remain a significant headwind, directly impacting company-owned restaurant margins and indirectly affecting franchisee profitability.

Operational execution of the ambitious transformation plan, including the successful rollout of new technologies like AI-powered ordering and delivery tracking, is critical. Any delays or missteps could hinder the anticipated sales and efficiency gains. Furthermore, the dynamic international operating environment, subject to geopolitical and economic uncertainties, could impact growth in key markets. The company's historical challenges with brand reputation, though addressed, underscore the importance of consistent operational excellence and positive customer experiences.

Conclusion

Papa John's is actively writing a new chapter, moving beyond past challenges to forge a path of profitable growth. The company's commitment to its "Better Ingredients. Better Pizza." promise, combined with aggressive investments in digital innovation and operational efficiency, forms the bedrock of its investment thesis. By leveraging its revamped loyalty program and AI-powered technology through the Google Cloud partnership, Papa John's is building a stronger, more personalized customer experience designed to drive frequency and market share.

While the journey through 2025 and 2026 will be characterized by strategic investments and a focus on strengthening foundational elements, the anticipated sequential acceleration in North America comparable sales and robust international growth signal a positive trajectory. The long-term vision of improved four-wall economics for franchisees, driven by supply chain optimization and reduced build costs, positions Papa John's to deliver sustainable value creation. For investors, Papa John's represents a compelling turnaround story, where strategic leadership and technological leadership are being harnessed to redefine its competitive standing and unlock significant upside potential.