Starboard’s Smith Could Add New Toppings to Papa John’s

An activist hedge fund bought a slice of fast-food pizza chain Papa John’s on Monday, which led to some immediate changes.

Starboard Value ($5.8 billion) bought a $200 million stake in the establishment, with Founder, Chief Executive, and Chief Investment Officer Jeffrey Smith becoming chairman of its board. He’ll replace Olivia Kirtley, who took the gig in July after Papa John’s founder John Schnatter stepped down as chair. That followed negative press surrounding offensive remarks Schnatter made during a media training exercise in May.

“The Board, management and Starboard are aligned on the opportunities,” a Papa John’s spokesperson told CIO in an emailed statement, which said it wants to focus on its employees, franchisees, and customers.

Heading an activist fund, Smith likes to take a troubled business and do a 180 with its value. He made his claim to fame for doing such with Olive Garden, another restaurant he pulled from the depths in 2014.

After he won a proxy vote that put him in a non-executive chair role at Darden Restaurants, the Italian chain’s owner, he cleaned house. He went so far as to publish a near 300-page tome telling Olive Garden how it should prepare its pasta and breadsticks. He also completely overhauled its board.

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By the time Smith stepped down from that position to revamp Web portal Yahoo in 2016, Darden’s stock had increased by almost 50%, and Olive Garden’s sales increased at each existing location at the time for six consecutive quarters.

At the end of the day, Starboard walked away with a cool $540 million from the Darden investment. Since the takeover, Darden’s stock has risen 150%.

While it’s still in the same Italian culinary neighborhood as Olive Garden, Papa John’s presents a different set of problems for Smith.

Schnatter resigned from his CEO post last January after he made lewd comments regarding the NFL related to the protesting players who kneeled during the National Anthem. to draw attention to racial injustice.

Papa John’s shares have fallen almost 40%. Combined with poor earnings, bad press, and low-ball offers from private equity firms, things were coming up Bennigan’s, the classic picture of a restaurant chain wipe-out. That is, until Starboard showed up. The pizza maker’s shares were at $43.73, up almost 15% from Friday’s 52-week low of $38.51.

While the founder still has a board seat and voted against the Starboard deal, he is also actively suing the company regarding losing his chair seat last year.

The Starboard transaction aims to further dilute Schnatter’s influence by adding the company’s CEO, Steve Ritchie, and Anthony Sanfilippo, former chairman and CEO of casino operator Pinnacle Entertainment, to the Papa John’s board. Like Smith, Sanfilippo will also be an independent director. The trio’s board presence now increases to nine directors from six.

Smith, the chain’s new chair, is in an interesting position. If he gets as heavily involved as he did with Darden, there could be some big changes for Papa John’s.

For the investor dubbed by Fortune as “the most feared man in corporate America,” that could be the challenge he’s been waiting for.

The company plans on using half of Starboard’s $100 million to repay debt. The rest will go to”providing financial flexibility to invest in our five strategic priorities of People, Brand, Value/Product, Technology and Unit Economics,” where the details are currently being checked.

“We will take a disciplined approach to capital allocation, ensuring that investments in these five areas are directed to the highest return initiatives, with clear parameters and analytics in place to measure and track performance and execution,” Papa John’s said.

Smith could not be reached for comment.

Tags: Hedge Funds, Jeff Smith, John Schnatter, Papa John’s International Inc., Starboard Value

We hope you enjoyed January, because the rest of the year will be so-so. That is Goldman Sachs’ message to clients following the best performance for the year’s first month in three decades.

An unappetizing stew consisting of “a slowdown in earnings growth, higher rates, and tighter financial conditions” should keep stocks from a boffo performance as the rest of 2019 unfolds, Goldman indicated.

“We argued that a modest bounce at some point early in the year was likely, and if investors missed it there would be a risk of missing the bulk of the returns for the year,” the firm’s analysts wrote.

January’s rally was in marked contrast to the late-2018 downturn, when stocks came close to dropping by 20%, which indicates a bear market. The S&P 500 is up about 9% this year. This goes far beyond the typical January Effect, a tendency of stocks to rally as investors buy to replace year-end tax-loss harvesting sales.

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Earnings thus far for last year’s fourth quarter have been better than many feared, although analysts’ estimates are dropping for quarters in the future. FactSet Research projects a year-over-year decline in earnings growth of almost 1% for the first period of 2019. Such a negative turn would be the first decline in more than two years.

At the moment, stocks are buoyed by the Federal Reserve’s seeming pause in hiking short-term interest rates and less-ambitious depletion of its bond holdings, which affect long rates.

But the Fed has left open the possibility of resuming its tightening behavior if, as it’s fond of saying, the data suggests that would be prudent. For once, when Fed Chairman Jerome Powell addressed reporters last month to announce the central bank’s thinking (and not heralding a rate boost), the market didn’t go down.

Goldman indicated that, “while we saw a bounce in equity markets in 2019, we also argued that this would be followed by the resumption of a ‘flat & skinny’ trading range, with relatively low equity returns.” There’s some comfort in that Goldman doesn’t see another downward jolt, such as the one the market endured in December.

There’s a bit of a disconnect between these comments and Goldman’s official forecast, though. Going forward, the firm believes the market will eke out just meager gains. From here until the end of 2019, it expects further increases in the S&P 500, which will be around 10%, close to what the index scored in January.

In other words, if you were out of the market in January, you missed half the uptick.

Tags: Earnings, Goldman Sachs, S&P 500