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Wendy's and Papa John's Shareholders Still Hungry for Better News

Motley Fool Staff, The Motley Fool

If it's been a while since you've dipped your french fries in your Frosty, you're not alone. Burger chain Wendy's (NASDAQ: WEN) dropped its first-quarter results this week, and while comps were up marginally, for the most part the story is that it's treading water. But that's an upbeat narrative compared to Papa John's (NASDAQ: PZZA), where comps were down 7%. And it's a measure of how rough things have gotten for the pizza slinger that its sales, despite that showing, were better than expected.

In this segment of the Market Foolery podcast, host Chris Hill and MFAM Funds' Bill Barker talk about what these companies are doing to get out of the doldrums, how the damage John Schnatter did to his pizza company is still resonating, and the differences between the strategy at Wendy's and the one being tried at McDonald's.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on May 8, 2019.

Chris Hill: Let's move on to a couple of restaurants. Wendy's and Papa John's both reporting first quarter results. Same-store sales in the U.S. for Wendy's, barely in the positive range, just 1.3%. I will say, though, that's not completely out of line with what we've seen from the bigger burger chains. That's basically in between what we've seen recently from McDonald's and Burger King. Papa John's same-store sales in North America down nearly seven 7%. I guess the bright spot for Papa John's, because the stock is up a little bit today, is that overall sales came in better than expected.

Bill Barker: Yeah, Papa John's is continuing to suffer from the damage to the brand from the actions of John Schnatter, both his public proclamations -- or, not public; they became public over a year ago now -- and then suing the company and his being ousted and sorting out, what does Papa John's look like once Papa John himself is completely out of the company? Which seems to be coming, as the reports today also include indications that Schnatter, who has no operational role with the company, is thinking of selling his very large stake, which I think is around 31% of the company. But they're forced now to pay back their franchisees. They're lowering their franchisees fees because of the damage to the brand, the franchisees having made their investments in running these units. The company is not wise to spend a lot of money on advertising right now while it's sorting out what kind of a message it's trying to put out to people. They're putting out Shaquille O'Neal as the big reason to be happy about the company right now.

Hill: They are. Although they're also doing some pretty smart promotions featuring local franchisees, basically dropping the John's and just being like, "Oh, here's your local Papa, here's the person who runs a bunch of franchises in your area." I think that's smart. I think in the case of Papa John's, this was slightly more good than bad, slightly more optimism in this report. To some degree, that is, as you pointed out, absolutely helped by the reports that Schnatter might finally be looking to unload his stake in the company. Run well, this is a good business to be in. People like pizza, and if you can do a decent job of actually making the pizza and getting it to them, that's a profitable business.

Barker: Yeah. I guess they prefer pizza that comes without controversy.

Hill: Yes.

Barker: There are so many choices of pizza that are non-controversial pizzas. Many people find pineapple on pizza to be controversial, but they don't have to get pineapple on their pizza. When you're going to Papa John's, you're just buying into controversy at the moment.

Hill: Right. And most places in America, whether it's a big city or a small town, you've got options when it comes to pizza. There are a lot of local places that do it.

Barker: Yeah, or you can go over to Wendy's and get a burger.

Hill: You can, although apparently fewer people are doing that.

Barker: They're still showing up. What were the same-store sales, around 1%?

Hill: Yeah, 1.2%.

Barker: They're doing OK. There's nothing exciting about the report. They're opening and shutting restaurants at about the same pace. I think they had 43 total global new restaurants. I think they closed one more than that. Systemwide sales are treading water. 1% same-store sales, it's OK. Nothing special. It's stable, burgers. They're working on upgrading their menu. That's a thing. I think they were pointing to the asiago cheese and applewood smoked bacon elements that you can get with your burger.

Hill: But I don't get the sense that Wendy's, on a systemwide level, is doing the same type of investing the you and I talked about recently with McDonald's, the investments that McDonald's has made in kiosks. Again, it's all geared toward the same thing, which is, how do we increase throughput? How do we get more people through the line in an hour than we have been getting? How do we raise the average ticket price? And in the case of Wendy's, it seems like they're focusing on one but not the other. It really seems like they're focused on, if we can sell some more premium items -- and they've said that -- then that's their pathway to increasing the average ticket price. I don't get the sense that they're making investment to really boost the throughput in the way that McDonald's is.

Barker: No. The investment seems to be in their Twitter account.

Hill: Do they have a strong Twitter?

Barker: They do have a strong Twitter. Are you unaware of that?

Hill: Apparently I am.

Barker: Yeah, they're pretty good.

Hill: OK. Well, let me know when that translates to higher throughput. That's great from an entertainment standpoint, but that's not showing up on the balance sheet, as we like to say.

Bill Barker is an employee of MFAM Funds, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and MFAM Funds are not the views of The Motley Fool, LLC, and should not be taken as such.

Bill Barker has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.