In March 2019, former basketball star Shaquille O’Neal made a risky decision. He became spokesman for Papa John’s Pizza (NASDAQ:PZZA). But he did more than just put PZZA stock back in the spotlight for a moment.
Shaq bought part of nine outlets near his Atlanta home. He paid $840,000 for 30% interest in those restaurants. He also took half his compensation in stock, 87,136 shares to be vested through 2022.
The pizza chain opened for trade June 18 at about $80 per share of PZZA stock. Shaq’s shares are worth about $7 million. They’re up 66% since his arrival. The company’s market cap is now $2.7 billion.
Not Quite a Slam Dunk
In the year before O’Neal arrived at Papa John’s, sales had dropped 7%. He was hired to front for a corporate turnaround.
Shaq’s arrival came alongside a $200 million investment from hedge fund Starboard Value. This fueled a leadership change at the company. New CEO Rob Lynch introduced new items like the Papadia, flatbread pizza folded to look like a quesadilla, and a new garlic-parmesan crust.
Shaq also distracted diners from the multi-year scandals of founder John Schnatter.
Schnatter, who still owned about 4% of the company at the end of March, was forced out as CEO at the end of 2017. He had engaged in colorful feuds with the NFL, his ex-wife and the University of Louisville. UL once had Papa John’s name on its stadium and business school.
Schnatter is still news, as when he dissed the chain’s pizza last year. But now, the company responds with Papa Shaq, who talks about his “mission” to make the chain the No. 1 brand.
Shaq was not brought in to be a hands-on manager. He was brought in to publicize the chain and appear in its ads. His agreement called for him to devote just eight days a year to the chain’s interest. Proxy firm Institutional Shareholder Services tried to get him kicked off the board in April, saying he hadn’t been to enough board meetings. The company defended him, and he was re-elected.
A Pandemic Winner
New management and new ads helped PZZA stock in 2019. The catalyst this year has been the novel coronavirus pandemic.
Since the market’s bottom on March 18, shares in Papa John’s have nearly doubled in value. CEO Lynch called April the best month in the chain’s history. He backed the company in March with his own stock purchases and now owns 75,581 shares.
Lynch joined from Arby’s, where he had been President and won several industry awards for marketing. Arby’s is owned by Inspire Brands in Atlanta. Lynch had also worked at YUM! Brands’ (NYSE:YUM) Taco Bell, which like Papa John’s, is based in Louisville.
Year-over-year sales in April rose 27%. The company burnished its image by delivering pizza to front-line workers with hockey star Alex Ovechkin. Its new TV ads emphasize the convenience of ordering pizza during lockdowns, avoiding a trip outside.
The Bottom Line on PZZA Stock
Think of the Papa John’s transformation as a three-stage rocket, lit by Starboard Value.
Shaquille O’Neal was the first stage. He stopped the public relations bleeding.
The pandemic was the second stage. The chain’s performance got it back into contention among pizza chains.
Lynch is the third, most important stage. Investors will be counting on him for menu innovation and profits.
Those profits have yet to appear. March quarter sales were just $10 million ahead of the previous year’s numbers. The company next reports earnings Aug. 6, with 46 cents per share of earnings expected, but no growth.
O’Neal acted as a bridge between Schnatter and Lynch. It’s Papa Rob who now must take the chain into orbit.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.