Papa John's International Inc 2026 Q2 Earnings Call

Welcome to our second quarter 2026 earnings conference call. Earlier this morning, we issued our earnings release, which can be found on our investor relations website at ir.papajohns.com under the News & Events tab or by contacting our investor relations department. Joining me on the call this morning are Todd Penegor, President and Chief Executive Officer, and Chris Collins, Interim Chief Financial Officer and Senior Vice President, Corporate Finance and Principal Accounting Officer. Comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These statements may involve risks and uncertainties that could cause 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.

In addition, please refer to our earnings release and our investor relations website for the required reconciliation of non-GAAP financial measures discussed on today's call. Lastly, we ask that you please limit your questions to one question and one follow-up. Now I'll turn the call over to Todd.

Thank you, Heather. Good morning, everyone. Before we get to this, I'd like to briefly address the ongoing media speculation regarding Papa John's and a potential sale of the company. The board and the management team are committed to maximizing value for our shareholders. Consistent with that commitment, we conducted a comprehensive review of our strategy over the past 18 months. We thoroughly explored whether alternative opportunities were available, including a potential sale of the business. We have been well-advised in these efforts, supported by our financial and legal advisors. This work has made clear that for Papa John's, the value creation opportunity that is actionable is the execution of our transformation plan. Of course, the board remains open to other alternatives to maximize value.

However, these options need to be actionable, provide certainty, and serve the best interest of our shareholders. We believe it is in the best interest of the company and all of our shareholders to focus 100% of our attention on Papa John's transformation and the initiatives we are discussing today. In the second quarter, we continued to advance our transformation while strengthening the foundation for long-term growth and value creation. We are seeing encouraging signs of progress, including a growing and highly engaged Papa Rewards membership, meaningful progress on initiatives to improve restaurant-level economics through supply chain savings and restaurant portfolio optimization, and early results from AI and digital investments that are enhancing the customer ordering experience. At the same time, we felt the impacts of the softer consumer backdrop and highly promotional QSR environment, which have continued to challenge our financial performance.

While our focus is unrelenting, it's clear that our transformation is taking longer than expected. We know that we must execute better and move faster. As we look ahead, we're making adjustments where needed across our strategic priorities and leadership team to improve results and position Papa John's for 2027 and beyond. To lead the changes we're making and ensure we drive high performance across the enterprise, we announced several key management changes today. Chris Lyn-Sue, who serves as Senior Vice President, General Manager of International, has been named Global Chief Marketing Officer. Jenna Bromberg is departing the company to pursue other opportunities. As Chris Lyn-Sue assumes this role, Chris Phylactou, who serves as Managing Director, U.K., Europe, and Canada, has been named Senior Vice President, International. In this role, he will be responsible for leading our highly successful international business.

Finally, John Matter, who serves as Senior Vice President, General Counsel, has been named to the newly created position of Global Chief Development Officer, where he will lead global growth and development strategy, including expansion, franchise development, and strategic partnerships. These leaders have already made important contributions to our transformation, giving me great confidence in the impact they'll have in these positions. For example, Chris Lyn-Sue and Chris Phylactou were instrumental in driving meaningful change and outperformance in our international business. John has been a key leader in our highly successful international development and transformation efforts, as well as leading our North American development team, portfolio optimization work, and strategic partnership negotiations. Now, turning to the second quarter results. Our international business delivered 1.5% comparable sales growth in the quarter, marking our seventh consecutive quarter of positive comps and reflecting the continued benefit of our transformation work.

Performance was particularly strong in the U.K., where comparable sales increased 10%, driven by continued strong operational execution and enhanced customer experience and increased media investment, including a 20% increase in PSAs over the course of the transformation that is elevating brand awareness in this market. Korea also delivered strong results, with comparable sales up 9%, supported by product innovation, strategic partnerships, and holiday demand. In the Middle East, comparable sales were effectively flat as ongoing conflict in the region pressured performance. North America comparable sales declined 8.3%, driven by reduced order volume and continued pressure from lower customer acquisition. Our loyalty program remained a clear area of strength in the quarter, with comparable sales from loyalty customers outperforming non-loyalty customers by 12 percentage points, and our Papa Rewards program surpassing 42 million members in the second quarter.

These loyalty members are our most valuable customers, generating tickets that are 6% higher per order and ordering approximately twice as often as non-loyalty customers. Within our core pizza business, orders with multiple pizzas again saw improvement, with pies per order up 6%, positively impacting our overall system ticket, which was flat compared with last year. This upside was offset by pizza mix shifting to smaller, non-specialty pizzas, resulting in mid-single-digit declines in overall pizza sales. Outside of pizza, comparable sales were pressured by declines in sides and desserts, while sales of our new sandwiches almost fully offset the removal of Papadias and opened an entirely new food category for us without complicating our make line and operations. Taking into account our performance and the pressured consumer environment, which we expect to continue throughout the year, we have revised our outlook for 2026.

Chris will provide more detail in his remarks, but at a high level, we now expect global system-wide sales to decline between 2% and 4% compared to last year, and adjusted EBITDA between $180 million to $190 million, which now includes an incremental $18 million of investment to support our franchisees and accelerate our transformation. While our financial performance isn't where we'd like it to be, we have a clear understanding of how to improve our results and gain market share. These focus areas work in tandem with our ongoing strategic transformation efforts. As we have discussed previously, we continue to see two clear opportunities to gain share, continuing to strengthen our value perception with more targeted, personalized offers and a consistent elevated customer experience, and attracting new customers through a sharper aggregator strategy, total addressable market expansion, our rebuilt innovation pipeline, and a re-energized local presence through reestablished co-ops.

Looking at our value proposition, we recognize the importance of meeting the customer where they are in this challenged environment. To do so, we focused on offering customers their favorite menu items at compelling price points while balancing restaurant margin. This quarter, we featured our Papa Pairings offer and local carryout specials. Our sandwiches were added to Papa Pairings, increasing choices within our mix and match. We also put our barbell to work as we featured our Epic Stuffed Crust Pizza at a $13.99 price point. Looking ahead, we're taking a targeted approach to improving our value proposition rather than engaging in sustained extreme discounting at the national level, as we've seen some of our competitors do. In the second half of the year, we'll deploy a more traditional barbell strategy focusing on our most popular fan favorite products with short, targeted windows of disruptive value.

We are also in phase 1 of the rollout of our new personalization engine within our CRM platform. This engine is a sophisticated, multi-channel, AI-powered tool that leverages a mix of national and local offers and delivers a higher degree of personalization. We believe that once fully deployed, this technology will allow us to better tailor communications and offers to our customers, drive incremental purchases from both new and lapsed customers, and preserve restaurant margins while offering customers compelling value in key moments. We'll use learnings from this initial phase to optimize the broader multi-channel rollout planned for the fourth quarter. Turning to operations, we understand that value extends beyond price. To that end, we are also continuing to elevate the customer experience to differentiate Papa John's in the marketplace and drive incremental transactions. We have made significant progress over the last two years, strengthening execution across the system.

When we began our transformation, our operations support team and field support structure were more limited and spread across the U.S., resulting in less market-level oversight and fewer in-restaurant touchpoints than we needed. Since then, we've built a brand standards coaching team made up of pizza experts who have initiated in-person training, workshops, coaching sessions, and restaurant evaluations. However, there is still more work ahead as certain restaurants and operators are lagging behind. For example, in the second quarter, there was a 400 basis point gap in comparable sales, comparable orders, and restaurant margin performance between restaurants in the highest quintile of operation scores versus the lowest quintile. Raising the bar for the bottom quintile of operators is one of the single most important things we are doing to improve the consistency of our customer experience, brand perception, and top-line performance.

To help underperforming restaurants raise their level of execution, we are providing dedicated coaching, earned financial incentives, which raise the bar on operational performance, and a regional franchise business director model designed to provide closer in-market support and greater accountability. This includes more frequent restaurant visits, regular business reviews, documented follow-up, and standardized scorecards to drive measurable improvement. Beyond improved execution, we're also leveraging consumer insights to elevate and optimize our core product, further differentiating Papa John's on quality in a highly competitive marketplace. This work starts with a clear understanding of what matters most to our customers: better ingredients, cravable flavor, consistent execution, and value they see and taste. We are applying those insights across the menu to improve the fundamentals of the pizza experience, from dough optimization and bake consistency to toppings, cheese, sauce, and overall product presentation.