Restaurant Business – Hundreds of Jack in the Box locations are losing money

A lot of the brand’s locations had negative operating income in 2018, and the problem is concentrated in a surprising state, says RB’s The Bottom Line.
jack in the box storefront

Photograph courtesy of Jack in the Box

the bottom line

Whoever takes over as CEO of Jack in the Box will face an immediate problem: what to do about a large number of money-losing franchised restaurants?

Hundreds of the San Diego-based burger chains had negative operating income last year, according to data from the company’s newly filed franchise disclosure document. That would put those locations in near-term danger of closing down.

According to the document, about 300 of Jack in the Box’s 2,200 locations generated $1 million or less in annual sales.

Those locations had a median operating income of negative $36,260. That suggests that between 150 and 200 of those restaurants had a negative operating income.

What’s more, there were locations with higher annual revenues that still finished with negative operating income.

John Gordon, a restaurant consultant out of San Diego who analyzed the document, said he estimates that at least 300 Jack in the Box locations, or about 13% of the system, are cash-flow negative.

The problem may well be worse than this, too. The document, which was filed earlier this month, provides only 2018 numbers, and Gordon believes conditions have likely deteriorated since, given rising labor and other costs.

While 40% of Jack’s locations are in high-cost California, the brand’s problem is most acute in supposedly low-cost Texas, home to 27% of Jack in the Box locations but 50% of the restaurants generating less than $1 million. Only 9% of the under-$1 million locations are in California.

The data highlights the challenge the burger chain faces as it looks for a new chief executive: A large percentage of its restaurants are underwater and face near-term uncertainty. The problem helps explain why franchisees have been fighting with the brand over the past two years.

Jack in the Box did not respond to requests for comment.

Jack in the Box CEO Lenny Comma resigned last week after a tumultuous two years that saw the brand unable to find a buyer and fighting with franchisees who called for his resignation while the company slashed corporate overhead. His successor will feel immediate pressure to generate sales to keep franchisees from closing units.

The new CEO will also face challenges getting operators to build locations.

For much of its history, Jack in the Box was a mostly company-owned brand. Around 2004, it started selling those stores to franchisees, and in the 15 years since then, it has sold all but 137, or about 6% of the brand’s locations.

In many of these refranchising deals, Jack in the Box kept control of the property, leasing it to the operator for about 9.5% of revenues.

Such deals are not uncommon—McDonald’s is the most notable example. Franchise rent now makes up nearly 30% of Jack in the Box’s overall revenues.

Some note that Jack’s charges are too high given the chain’s average unit volumes. Rental charges might be exacerbating an overall profitability problem at the burger chain.

But they may also be putting Jack in the Box in a difficult spot, leaving the brand on the hook for the leases if some stores have to shut down.

For all of Jack’s locations, 10% operating margin is also low, leaving franchisees less able to fund capital expenses and debt, as well as corporate overhead. It may also make it harder for the brand to accomplish its next goal: convincing operators to build new units.

Jack in the Box had hoped the end of the refranchising process, along with improved sales, would convince operators to build new restaurants. Same-store sales have improved in the past two quarters, including 3% in the most recent earnings period.

Operators that had been focused on buying existing locations might now be free to build new, at least in theory.

But franchisees that are filing lawsuits against the brand while their operating margins are low, and hundreds are underwater, are a lot less likely to build new units.

That said, it’s not as if things are hopeless. Gordon said Jack in the Box’s situation is similar to Burger King in 2009, the year before the brand was sold to 3G Capital. The private-equity firm settled lawsuits filed by franchisees and focused on rebuilding the brand’s same-store sales—though the company also quickly refranchised restaurants.

Still, today Burger King’s unit volumes are higher. Operators are building units, and lawsuits are nonexistent. The next CEO of Jack in the Box should take a cue from that experience.

Bloomberg – McDonald’s finds a flaw in its ordering kiosks: No cash accepted




Guest place their order at a kiosk at the McDonald’s corporate headquarters restaurant during the grand opening in Chicago on June 4, 2018.

McDonald’s Corp. has pitched self-ordering kiosks as a key part of its plans to boost sales by improving technology and renovating restaurants. But it turns out the kiosks aren’t usable by a significant slice of McDonald’s customers: cash payers.

The Big Mac seller is leaning hard into digital ordering and technology improvements to attract on-the-go customers, but a recent test shows the kiosks may need to be replaced or retrofitted to accommodate cash transactions. About 6.5% — or 8.4 million — of U.S. households don’t have a bank account or a debit or credit card, preventing them from using McDonald’s kiosks that are in about 9,000 domestic locations.

That’s problematic for the company because franchisees have been bearing much of the cost for renovations that include the kiosks and creating a more modern look. Many restaurant owners have already having paid as much as $750,000 per store for the kiosks and other improvements.

“As part of McDonald’s efforts to identify the best experience for customers and employees, we are always testing new approaches to meet customer demand,” the company said in an emailed statement. It confirmed it’s testing kiosks that accept cash in a “small handful of U.S. restaurants.”

The kiosks, which started being used in the U.S. in 2015, quickly became a focus of recently departed Chief Executive Officer Steve Easterbrook, who said last month that touchscreen ordering is increasing worldwide. He noted that diners usually spend more when ordering via kiosk, and said in July that 40% of in-store customers used one in Australia and major European markets.

“Potentially the franchisee could have to pay,” said John Gordon, principal at restaurant adviser Pacific Management Consulting Group. He called the oversight for the kiosks a “mistake” and said the world’s biggest restaurant company “should have thought about that.”

He estimates that 30% of fast-food customers use cash in the U.S. McDonald’s says that worldwide, 40% to 60% of its diners use cash.

“Lower income people just don’t have access to credit cards; they’re paying with a lot of things in cash,” Gordon said. “Why should they not have the same access to personalization, or to get in and out quickly if there’s a line?”

McDonald’s says the kiosks offer a faster ordering experience and that some cash-paying customers have said they want to be able to use them.

Cashless restaurants, including Dos Toros Taqueria, have faced criticism that they discriminate against low-income consumers who may not have bank accounts.’s Go grocery markets and the Sweetgreen salad chain reversed their no-cash policies earlier this year.

Cities and states are starting to ban cashless stores. Philadelphia and San Francisco have such rules in place now, and other municipalities are weighing similar measures.

Nation’s Restaurant News – Starbucks straddles the store format fence with minimalist mobile stores and elaborate roasteries

Pickup-Store-Starbucks-b.png Eric Soltan/Starbucks
Coffee shop diversifies store portfolio with Reserve Roasteries and pickup-only stores

Joanna Fantozzi | Nov 15, 2019

In the month of November, Starbucks has opened both its largest location in the world — the Chicago Reserve Roastery — and one of its smallest, minimalist stores: a pickup-only location in New York City.

The sixth Reserve Roastery in the world allows customers to order coffee cocktails, shop for fancy merchandise, and eat liquid nitrogen ice cream in a five-story, 35,000-square-foot mega-Starbucks.

 By contrast, the express, pickup-only Starbucks that just opened last week in New York City is minimally designed for customers and delivery drivers to quickly pick up their order and leave.

At first glance, the strategies behind these two new stores seem to be at odds with each other; one focuses on customer experience while the other favors convenience. Are Starbucks customers the types to want to savor their siren-branded moment, or do they just want to get through their morning coffee routine as quickly as possible?

The answer is both.

During the company’s most recent earnings call, Starbucks CEO Kevin Johnson said that customers are responding to improvements made to the in-store experience, which includes new technologies and staffing enhancements. These are just two different types of store experiences to add to Starbucks’ repertoire.

“I think they are being supremely conscious in terms of not wanting to present too confusing of a message to customers and investors,” John Gordon, a restaurant consultant at Pacific Management Consulting Group said.

“I would say they definitely timed it this way on purpose. … To have two cross-current concepts being developed at the same time would help alleviate some of the pressure and media/investor attention on the roasteries.”

Gordon predicts that this will be the last large-format Reserve Roastery that Starbucks opens for a while, as Starbucks makes the final shift from the Howard Schultz era of Starbucks to the Kevin Johnson era. Although Johnson started his tenure as CEO in 2017, and Schultz ended his the same year, the reserve roasteries were Schultz’s pet project. Originally, Schultz said that he wanted to have 1,000 Starbucks Reserve bars and 20 to 30 of these mega Reserve Roastery stores around the world.

But Johnson has since tried to scale back on the original ambitious vision for the Roasteries:

“One thousand was an aspiration,” he told the Wall Street Journal in a Jan. 2019 interview.

“Starbucks’ aspirational goals for both Reserve Store and Reserve Bar formats remain unchanged,” a Starbucks representative told Nation’s Restaurant News at the time .

Although not much has been said about the future goals of the large-format Reserve Roastery stores beyond Chicago since then, Johnson has put his money where his mouth (and priorities) are: Many of the company’s resources have since been devoted to expanding the convenience of mobile order platforms and delivery. Around the same time that Johnson announced that Starbucks delivery would go nationwide in July, the first Starbucks Now express store opened in Beijing that focused on mobile order pay and delivery customers.

Now four months later, a similar concept — the Starbucks pickup store — has made its way to the U.S. The pickup store in New York similarly focuses on mobile customers: customers can use their mobile order and pay to pick up at the new Penn Plaza location. Once they arrive at the minimalist store with no seating and very little décor or branding, they can track the status of their order on a digital board and pick it up when it’s ready.

But don’t expect these pickup-only stores to start popping up all over the place. Starbucks said that these specialized stores are ideal for “high-traffic, metropolitan areas,” while the Reserve Roasteries seem to be similarly ideal for more tourist-driven, but still high-traffic areas.

“I don’t think there’s much doubt that they will open up more [of these pickup-only locations] because it fits their portfolio perfectly as long as they pin it to the right type of location,” Gordon said.

“But remember, the idea of the traditional third place Starbucks is deeply-embedded and if they try to get too cutesy with [these new concepts], they could lose out on market share.”

Contact Joanna Fantozzi at

Follow her on Twitter: @joannafantozzi

Nation’s Restaurant News – Winter Is Coming: Brace for flurry of restaurant transactions

Experts see fast pace of mergers, acquisitions to continue in last quarter

Ron Ruggless | Oct 04, 2019

The Cheesecake Factory Inc.’s completion of the Fox Restaurant Concepts acquisition this week capped a frantic nine months of merger dealing that have marked 2019. Restaurant industry experts see the pace continuing or picking up steam.

“It’s a very attractive, large global industry that has been slow-moving and is being disrupted,” said Aaron Allen, principal in the Chicago-based Aaron Allen & Associates global restaurant consultancy.

“When you have negative bond yields in most of the established economies of the world, that will lend itself very well to alternative-asset investments and lots of M&A activity,” Allen noted.

“We see that continuing for the foreseeable future.”

The past week alone illustrated how those investments were being made, in consolidations among established restaurant companies, in private-equity purchases and in bankruptcy acquisitions:

cheesecake-factory-completes-fox-restaurant-concepts.jpgThe Cheesecake-Fox $353 million deal came on the heels of acquisitive Arby’s parent Inspire Brands buying Jimmy John’s Sandwiches last week and private-equity firm L Catterton purchasing Del Frisco’s Restaurant Group in a $650 million deal and spinning off the steakhouse and grill brands to Landry’s Inc. Houston-based Landry’s, meanwhile, in a bankruptcy auction bought locations of Restaurants Unlimited.

Analysts expect the demand for quality restaurant mergers and acquisitions to continue, especially with the benchmark LIBOR, or London Interbank Offered Rate, that banks charge each other remaining fairly low. On Oct. 1, the one-year LIBOR interest rate was 2.04%, down from 2.92% a year ago.

“With interest rates still pretty low and with the recent sea change toward stronger restaurant companies adopting the portfolio — multi-brand — approach, there is and there will be demand for strategic M&A,” said John A. Gordon, principal with Pacific Management Consulting Group.

“However, there are increased underwriting standards,” Gordon warned. “The strongest brands get done at the best terms. Some very weak brands get no offers.”

Allen said the amount of potential investment money available globally is nearing $5 trillion, a near record level that rivals the amount “sloshing around” before the global financial crisis and Great Recession in 2008.

“It’s creeping back up,” Allen noted, adding that it was happening domestically as well as globally.

“It’s a spending spree spurred on by low interest rates and abundance of capital seeking a home,” Allen said in a phone interview. “The global foodservice industry remains an attractive place for that.”

Cracker Barrel third quarter 2019.jpgDisruptions such as third-party aggregators for delivery — similar to what was seen in the hotel industry for room reservations — and a consumer-taste shift to convenience and experience have motivated established brands to invest in younger brands.

Lebanon, Tenn.-based Cracker Barrel Old Country Store Inc. in July agreed to invest up to $140 million in Denver-based Punch Bowl Social, adding an experiential brand founded in 2012 to its 50-year-old brand. The Cheesecake Factory effected a similar move, adding fast-casual Flower Child to its casual-dining portfolio as well as a number of innovative Fox concepts.

L Catterton’s acquisition of the Del Frisco Restaurant Group included spinning off the Double Eagle Steakhouse and Del Frisco Grille concepts to Houston-based Landry’s.

“The Del Frisco/L Catterton/Landry’s situation was exceedingly complicated — with way too much debt and some underperforming brands like the Grille, and the complicated legacy M&A [in the Bartaco and Barcelona Wine Bar] acquisition,” Gordon said.

“Even then, a reasonable separation transaction finally occurred.

“This actually shows the strength of strategic M&A demand,” Gordon said.

That demand had evidenced itself in January with J.H. Whitney Capital Partners LLC’s purchase of Firebirds Wood Fired Grill, a 48-unit “polished-casual” restaurant concept, from Angelo, Gordon & Co.

In continued in March with the purchase of Scottsdale, Ariz.-based P.F. Chang’s China Bistro Inc. by investment firms TriArtisan Capital Advisors LLC and Paulson & Co. Inc. In June, when San Antonio, Texas-based burger chain Whataburger Inc. agreed to sell a majority interest to Chicago-based merchant bank BDT Capital Partners. And in July the investment group behind Hooters of America LLC sold the casual-dining wings brand to Nord Bay Capital and TriArtisan Capital Advisors LLC.

MA-pull-quote.jpgThe sellers included H.I.G. Capital, Chanticleer Holdings and other investors. Financial terms of the deal were not disclosed. Hooters of America, founded in 1983, owns and franchises more than 430 Hooters restaurants in 38 states and 27 countries.

With large sums of private equity investment money looking for a place to land, the public markets have seen little interest from restaurant brands.

In August, Kura Sushi USA Inc., the 22-unit technology-enhanced sushi chain, launched its initial public offering.

However, in late July, CEC Entertainment Inc., parent company of Chuck E. Cheese and Peter Piper Pizza, terminated an agreement that would have taken the 750-unit, Irving, Texas-based company public.

“The US restaurant IPO market remains essentially closed for now,” Gordon said.

“The recent last-minute pullback of CEC Entertainment was very telling, probably an indication of weak demand and/or problems with CEC’s latest numbers. The Kura Sushi IPO is very lightly trading (about 33,000 shares/day) and has drifted lower from a slight stock price rise after its IPO.”

Bankruptcy purchases like the Landry’s-Restaurants Unlimited purchase continue to fuel some consolidation. On Sept. 12, Huddle House Inc. agreed to buy 342 Perkins Restaurant & Bakery locations. Parent Perkins & Marie Callender’s Inc. had filed for bankruptcy protection in August.

One Hospitality Group Inc. was seeking to buy locations of Kona Grill Inc., which had been publicly traded, in a bankruptcy court bid.

Perkins.jpgAllen said more companies are looking to private than public.

“They want to get off the exchanges,” he explained, “because you’re basically in the frying pan. You are in such a hot seat with so much pressure, the investment thesis — not just in restaurants but across the board — is starting to be around the notion of staying private.”

Companies are staying private a lot longer as well. “Who wants to live in an aquarium?” Allen said of the public market.

In the final three months of the year, Allen said he expects “a flurry of deals trying to be pushed through.”

He said he knows of a number of proposed deals that are going through due diligence and would be expected to be announced or to be closed by the end of the year.

“We then think it will be ‘Wait and See’ as we enter into an election year,” Allen said. “We expect there will be more caution, but still cash available for these deals.”

Contact Ron Ruggless at

Follow him on Twitter: @RonRuggless

New York Post – Papa John’s Scores $200M Investment, New Chairman

There’s a new big cheese at Papa John’s — and embattled founder John Schnatter is not happy about it.

The pizza franchisor announced a $200 million investment from hedge fund Starboard Value Monday in a deal that places the fund’s boss Jeff Smith in the chairman seat.

The deal between Papa John’s and Smith’s Starboard Value also threatens to further loosen Schnatter’s influence over the company he founded in 1984, by expanding the board and diluting his stock.

It weakens Schnatter’s voice on the board by adding three new directors, including Smith and Anthony Sanfilippo, former chairman and CEO of casino operator Pinnacle Entertainment.

The company also added a seat for Schnatter’s nemesis Steve Ritchie — who became CEO in December 2017 after Schnatter was booted over his criticisms of the NFL’s handling of football players kneeling during the national anthem.

In addition to expanding the board, the $200 million investment gives Starboard a new chunk of convertible preferred stock that stands to shrink Schnatter’s stake from 31.1 percent to about 26 percent, according to restaurant analyst Mark Kalinowski of Kalinowski Equity Research.

“It doesn’t neutralize him, but his percentage of voice on the board goes down,” said John Gordon of Pacific Management Consulting Group.

A source following the situation said the deal suggests Papa John’s may be seeking to start a sales process that could have a better chance of success with Schnatter owning a smaller stake.

Private equity firms circling the company during its recent woes were hesitant about bidding for the pizza-maker with Schnatter owning 31 percent, this person said.

Schnatter — who was removed as chairman in July 2018 when it emerged that he used the N-word during a call — isn’t expected to take the setback lying down.

The pizza slinger is evaluating his “legal remedies” over Papa John’s decision to choose Starboard’s offer over his own, according to a filing with the Securities and Exchange Commission.

Schnatter’s SEC filing describes his $250 million counteroffer as “essentially the same” as Starboard’s but at a lesser cost to the restaurant company.

Schnatter could buy more stock to boost his stake, but he faces a “poison pill” that was implemented last year to prevent him from amassing too many shares. The poison pill is set to expire in July.

Shareholders cheered the investment Monday, sending the stock up almost 9 percent, to close at $41.97.

Smith pulled off a coup at Darden Restaurants in 2014 by replacing the entire board of directors and then pushing for culinary changes, including selling more alcohol and better-tasting bread sticks at Olive Garden.

“Papa John’s has always stood for higher-quality pizza, and we believe Papa John’s has a strong foundation, with the best product in the space and a strong franchisee and customer base,” Smith said in announcing the deal.

“We see tremendous potential for the company both in the US and internationally,” Smith said.

Papa John’s has been suffering from stagnating sales amid fierce competition from other fast-food pizza chains.

New York Post – Subway’s Arbitration for Minor Infractions Is Out of Control: Franchisees

The restaurant business is messy — but try telling that to Subway Restaurants, which is being accused of going after franchisees for minor infractions, like smudged glass, in an effort to put them out of business.

Mom-and-pop franchisees of the nation’s largest fast-food chain claim they’re under attack from an army of lawyers and store inspectors who are pressuring them to shutter or sell their stores, according to sources and court filings.

At the heart of the controversy is a 700-page-plus operations manual, which dictates everything from what oven temperatures to use to how to display vegetables.

“No one can comply with that,” Ohio lawyer Mark Shearer said of the manual. “[Celeb chef] Gordon Ramsay can’t comply with this.”

The Milford, Conn., company uses the manual to ding franchisees during monthly inspections for violations that can then put them in jeopardy of breaching their licensing agreements, according to sources and court filings.

In the case of Shearer’s client, Jack El Turk, who runs a Subway in Brook Park, Ohio, the company’s inspections led to complaints of “smudge marks on the glass in the dining room” and “coats and purses in the backroom,” according to court papers filed by Shearer.


In some cases, dinged stores are sold to Subway’s own development agents — the very same people who direct the monthly inspections, according to sources and court filings.

“My clients were targeted because sometimes they liked the store’s revenue and wanted the store for themselves,” Shearer told The Post, echoing his statements in a recent court filing about an Ohio franchisee who was allegedly forced out by a development agent “attempting to acquire restaurants in the territory.”

A Subway spokeswoman said the monthly inspections “are ensuring the high standards demanded by us and expected by guests are met.”

“If a restaurant is not meeting the requirements, the brand first makes every effort to work with the franchise owner to fix the issues,” she said.

But the accusations of an uneven playing field come at a time when the company known for the $5 footlong is flooding franchisees with legal actions.

The company took 955 actions against franchisees in 2017 and 718 last year. Most of the actions were through arbitration, which means the reasons behind them were not disclosed.

Based on the numbers alone, Subway is involved in hundreds more disputes with franchisees than McDonald’s, Dunkin’ donuts, Burger King, Pizza Hut and Wendy’s combined, according to restaurant consultant John Gordon of Pacific Management Consulting Group.

Subway initiated 702 arbitration actions against US franchisees in 2017, Gordon said, compared to one by McDonald’s, two by Dunkin’ and none by Pizza Hut, Burger King or Wendy’s.

“It stands out like a sore thumb,” Gordon said of Subway’s arbitration record.

Critics say the legal actions are tied to the company’s plan to slim down the chain amid sagging sales as competition for healthy and fresh food options grows.

Last year, Subway lost a net 1,108 stores, or 4.3% of total locations. McDonald’s, by contrast, lost a net 122 stores in 2018, or just 1% of its US base, according to regulatory filings.

San Diego Union Tribune – Jack in the Box Shelves Efforts to Find a Buyer, Eyes Refinancing

Jack in the Box, a San Diego institution.

Jack in the Box said Wednesday that it has dropped efforts to find a buyer and will now look to recapitalize the company through securitization.
(Jack in the Box)

San Diego restaurant chain is looking at securitization to change its capital structure

San Diego’s Jack in the Box said Wednesday that it has dropped efforts to find a buyer and instead will look to recapitalize the company through a debt securitization.

The move comes after Jack in the Box began exploring strategic alternatives last November, including a possible sale, under pressure from activist investors.

The fast-food restaurant chain also is facing a backlash from some franchisees, who contend it has failed to provide enough marketing and other support for their businesses. A group that represents owners of the bulk of Jack in the Box’s franchise restaurants has called for Chief Executive Leonard Comma to step down, among other things.

In a statement, the company said it contacted “a broad range of potential strategic and financial buyers, both domestic and international.”

At the same time, it looked at a range of financing options including a new capital structure that included adding debt through the securitization.

Jack in the Box’s board of directors opted for the latter. It expects to replace its existing term loan and revolving credit line with the securitization, which essentially means refinancing the loans with marketable debt securities that are sold to investors.

Once it pays off existing loans, Jack in the Box intends to use some of the proceeds for the debt securitization to repurchase shares, which could boost earnings per share and its stock price, depending on future financial performance.

“With this evaluation behind us, we are dedicated to moving the Jack in the Box brand forward,” said David Goebel, lead director of the company’s board, in a statement. “The Board of Directors unanimously and wholeheartedly supports Chairman and Chief Executive Lenny Comma and the entire management team as we collectively pursue a strategic plan focused on value creation as a standalone company.”

Just how much additional debt the company might take on through the securitization remains unclear. In a statement, Jack in the Box said it is targeting a leverage ratio of about 5 times adjusted EBITDA — or earnings before interest, taxes, depreciation and amortization.

“They’re saying we are going to do a securitization that is going to free up funds for general corporate purposes and for the share buyback and the like,” said John Gordon of Pacific Management Consulting Group, a restaurant industry adviser. “That may or may not be enough to get the activists out of their tailpipe. It really doesn’t do anything to alter the fundamentals of the business.”

At the end of its 2018 fiscal year, the company’s debt ratio was four times adjusted earnings of about $264 million, said Lance Tucker, chief financial officer, in a February conference call with analysts.

Jack in the Box has forecast adjusted earnings of $265 million for the 2019 fiscal year ending in September but aims to boost adjusted earnings to about $300 million in coming years, said Gordon.

“It looks like they are moving from approximately $1.1 billion in debt to $1.5 billion in debt,” with the securitization, he said.

Jack in the Box has been talking about securitization for some time. On the February conference call, Tucker said the move allows the company to tap into low interest rates. He added that the leverage ratio of 5 times adjusted EBITDA would be less than the ratio of some of the company’s restaurant industry peers.

Jack in the Box also reported fiscal second quarter earnings on Wednesday after markets closed. Revenue came in at $216 million, compared with $210 million for the same quarter last year.

Earnings from continuing operations were $25.1 million, or 96 cents per share, compared with $25 million, or 85 cents per share, a year earlier.

The company’s shares ended trading Wednesday up 44 cents at $77.84 on the Nasdaq exchange

Nation’s Restaurant News – John Schnatter Sells $6M in Papa John’s Shares

papa-johns-schnatter-sells-shares.gifJoe Raedle/Getty Images News/Getty Images

John Schnatter sells $6M in Papa John’s shares

The sale accounts for approximately 1.1% of his total holdings

Joanna Fantozzi | May 15, 2019

After stepping down from the Papa John’s International Inc. board in March following a settlement with the pizza chain, the company’s controversial founder and former CEO John Schnatter has sold 114,061 Papa John’s shares, worth approximately $6 million, or 1.1% of the total 9.9 million shares he owns, according to a May 10 SEC filing.

Schnatter still owns more than 30% of the company’s total shares.

The move comes just one week after Schnatter enlisted the help of financial advisors to help sell all or part of his 31% majority stake in the Louisville, Ky.-based pizza chain. Although the shares represent just a tiny fraction of the total stake Schnatter has in Papa John’s, he has indicated that this will not be the only shares he sheds.

“Based on his analysis of, among other things, investment considerations, economic conditions and public disclosures made by the Issuer, Mr. Schnatter may sell, trade or otherwise dispose of more or less of his Common Stock in the Issuer in the public markets,in privately negotiated transactions, in registered offerings or otherwise, consider and/or implement various alternatives to maximize the value of his investment in the Issuer, or take any other lawful action he deems to be in his best interest,” the original SEC filing stated. “Mr. Schnatter has solicited the advice of financial advisors regarding a possible disposition of all or some of his common stock in [Papa John’s].”

Schnatter originally stepped down as CEO in December 2017 following controversial comments during an earnings call in which he blamed NFL protests for Papa John’s struggles. Following last summer’s reports of racist language and behavior, he resigned as chairman. After more than a half a year of legal battles, Schnatter and Papa John’s have all but completely cut ties.

John Gordon, analyst at Pacific Management Consulting Group said the sale likely represents a small fraction of what Schnatter might try down the line:

“I believe the small stock sale by John is an attempt to test how much the market would react if he eventually dumps his shares,” Gordon said. “He has a duty not to harm the company … and his own share value. So, just a little check.”

Both Papa John’s and a representative for John Schnatter declined to comment on the sale.

As of March 31, Papa John’s has 5,336 locations worldwide.

Contact Joanna Fantozzi at

Follow her on Twitter: @JoannaFantozzi

Restaurant Business – Why Do Struggling Chains Always Turn To Franchising?

Companies with steeply falling sales frequently turn to franchisees to turn stores around. RB’s The Bottom Line examines whether this is a good idea.
Photograph: Shutterstock

the bottom line

Fuddruckers hasn’t exactly set the world on fire lately. Same-store sales in the burger chain’s fiscal second quarter declined 5.3%, parent company Luby’s Inc. reported this week.

And that was an improvement. Same-store sales in the first quarter declined by 11.2%.

Not surprisingly, the company is refranchising. Fuddruckers currently operates 54 company stores, following 14 closures over the past year and after the sale of five locations in San Antonio earlier this year. Franchisees operate another 102.

Refranchising has been a common strategy in the restaurant business for the past couple of decades, as executives embrace an investor-friendly and more profitable “asset light” business model.

But they’re really common when systems struggle, often coming across as a last-ditch rescue effort to keep chains afloat.

“They do it because they don’t have a better alternative,” said John Gordon, a restaurant consultant out of San Diego.

Famous Dave’s announced plans to refranchise its company stores in 2017, for instance. Those company stores had produced 13 straight quarterly same-store sales declines when it announced the plan.

Papa Murphy’s, which had employed a strategy of buying back struggling franchisees, after its 2014, began selling them back in 2017.

Steak ‘n Shake announced plans to refranchise all 415 of its company-owned restaurants last year, after its same-store sales turned south for the first time in nearly a decade. It has closed 31 locations this year to “prepare” those locations for incoming franchisees.

Refranchising isn’t necessarily a bad thing. Oftentimes, companies are simply bad at operating restaurants and better at franchising. And franchisees can do a better job of running the locations.

That was clearly the case when Burger King sold off all of its company restaurants to franchisees in 2012 and 2013. Many operators simply fixed up poorly operated restaurants and yielded improved profits.

“Just because you operate restaurants doesn’t mean you have an operating culture,” Kevin Burke, managing partner at Trinity Capital, told me.

Refranchising done right can inject some energy into restaurants while freeing up executives to concentrate on running the brand. The strategy can work, so long as the system focuses on ensuring franchisee profitability and operates the brand well.

When the brand is struggling, franchisees can frequently get stores at low prices because the franchisor is eager to let the restaurants go. The operators buying the units often pick off the best stores that can be more easily turned around, which can leave the franchisor closing weaker stores—Fuddruckers has been closing unprofitable stores for the past year, after all.

Still, such strategies can sap the credibility of the refranchising model when they’re done so frequently by companies desperate for a turnaround.

And just because franchisees are willing to take the risk of buying such stores doesn’t mean they are making a good decision.

Gordon pointed out that when an operator buys up a store that is losing money, it not only has to get that store to basic profitability, it has to generate enough profits to pay the royalty payment, which is typically about 5%.

And let’s not forget that many of these companies buying up stores are borrowing money to do so.

But the simple fact is that, if running stores were a more profitable venture, then more companies would seek to operate more stores.

And when restaurants are less profitable, companies seek to get out of it and hope someone else can do a better job. They often can, but sometimes they can’t.