Papa John's International, Inc. (PZZA) Q3 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Papa John's Third Quarter 2022 Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Stacy Frole, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to our third quarter earnings conference call. This morning, we issued our 2022 third quarter earnings release. A copy of the release can be obtained on our Investor Relations website at ir.papajohns.com under the news releases tab or by contacting our Investor Relations department at investor_relations@papajohns.com. On the call this morning are Rob Lynch, our President and CEO; and Ann Gugino, our CFO. Before we begin, I need to remind you that 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 for the required reconciliation of non-GAAP financial measures discussed on today's call. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Rob?

Thank you, Stacy. Good morning, everyone, and thanks for joining us today. It has been three years since my first earnings call where we established our company purpose and values, and reaffirmed our commitment to our five strategic priorities. Those strategic priorities remain the same today, build a culture of leaders who believe in diversity, inclusivity, and winning, improve unit level profitability of our operations and franchisees, establish the superiority of our pizza through our commercial platforms, build a technology infrastructure that enables our business operations, and expand our footprint domestically and internationally. Over the past three years, we haven't wavered from these priorities, despite the many challenges our team members and franchisees have faced. This positive momentum would not have been possible without the culture that we have created one of innovation, diversity, and inclusion. And for the second year in a row, we are proud to be named the Forbes world's best employers and best employers for diversity lists. Before we get into our company's Q3 earnings results, I would like to highlight the significant growth our system has seen over the past three years. 2022 will be the highest sales volume in our brand's history, and we continue to grow on top of our post-pandemic highs. To put it in perspective, in June 2019, we implemented our We Win Together program, an $80 million multi-quarter package that provided our franchisees with royalty relief and other financial investments during a distress time for our business. At the time, system-wide average unit sales in North America were less than $850,000. Now, our North American average unit volumes are over $1.1 million and continue to grow. System-wide comparable sales in North America have increased 30% on a three-year stack, outpacing our peers. This top-line growth has largely been driven by successful menu innovations, a key part of our differentiation strategy with products such as Papadias and Epic Stuffed Crust becoming exciting new menu platforms on which we continue to innovate. Our continued investment in our proprietary technology stack is evident in our digital innovation, including personalized consumer communications, made possible through enhancements to our marketing tech: data analytics, and ECRM capabilities. Our integrated partnership with third-party aggregators and our loyalty program Papa Rewards, which has grown to more than 26 million members today, doubling the membership over the past few years. We believe these investments will unlock long-term growth opportunities across our entire system. Our development activity continues to steadily increase coming out of the pandemic. Nearly all of our top 25 North American franchisees now have development agreements in place up from only three 2019. Internationally, our teams are laying the groundwork for the future by accelerating growth in our established markets, identifying attractive new markets to enter, and attracting new well capitalized franchisees to partner with. Over the past three years, we have signed some of the largest long-term development agreements in Papa John's history, and those agreements will result in approximately 3,000 new units being built globally. I'm extremely proud of our team members and franchisees in everything we have accomplished so far. More than ever, I feel that we have a solid foundation and are well-positioned to withstand any near-term headwinds as we move closer towards becoming the best pizza company in the world. With that context, I'd now like to discuss our third quarter results. In the third quarter, global system-wide sales in constant currency were up 0.5% year-over-year to $1.2 billion. This was on top of 11% growth in the prior year. As anticipated operating income and EPS were down in the third quarter when compared with the same period last year as strategic pricing actions only partially offset higher food and labor costs. We also continue to face headwinds internationally, particularly in the UK market. While we are never satisfied when results fall short of our expectations, we do recognize that market conditions have significantly changed. Food and labor costs remain at all-time highs, the return to seasonal travel trends has been amplified coming out of the pandemic, and the VAT tax holiday in the UK has lapsed. We'll continue to navigate this dynamic environment with a balanced approach of optimizing short-term results, while investing for our future. This positions us even better for long-term growth and margin accretion when the commodity cycle reverts and costs normalize which we already beginning to see in certain categories of commodities. Our North American comparable sales for the third quarter were down less than 1% following record sales the last two years, as high inflation continued to weigh on consumer demand, we saw increasing price sensitivity, especially around food throughout the third quarter. While we saw competitors undertake aggressive discounting, we continued to take a balanced approach, providing the right promotions to our value-oriented customers without risking the erosion of our brand or pricing integrity on our more premium offerings. Alongside our targeted loyalty offers, we launched a national value message that did it in a way that is uniquely Papa John's. Papa Pairings is a national deal where you can buy two or more items from a limited menu selection for the value price of $6.99 each. Since its introduction in September, this offering has been successful in driving incremental transactions from our more value-oriented customers by engaging them with an accessible price point. International markets are also experiencing inflationary and macroeconomic pressure. Record high inflation in many countries, rising interest rates, looming European energy crisis, and continued COVID-related lockdowns in China have all contributed to a more difficult international operating environment. In the third quarter, our international comparable sales were down 10%, still delivering a three-year stack of 19%. The current environment in the UK disproportionately impacted our international segments overall results. With increased energy costs rapidly accelerating inflation, and the lapsing of the VAT tax holiday, our UK franchisees are navigating an unprecedented operating environment. Our other international markets continue to perform well, but since the UK currently represents more than 20% of our international sales, these headwinds will result in international comp sales being down mid-single-digits for the full-year. While we expect these challenges in the UK market to continue into 2023, we're committed to supporting our UK franchisees with a needed operational adjustments and investments to manage through the current environment and reposition our UK portfolio to drive above average industry growth over the long-term. In addition to the development potential of our international business, we're also excited about the opportunities to drive international AUVs across all of our international markets. As we've previously discussed, we see opportunities to implement the operating model enhancements we have developed and refined in the U.S., including our revenue management capabilities, product and technological innovation and third-party relationships, to achieve gains in both sales and restaurant level profitability in our international markets. I would now like to discuss the products and technology innovation that continues to differentiate Papa John's. In August, we unveiled our First-Ever Crustless menu innovation, Papa Bowls featuring everything our customers love about Papa John's Pizza, just without the crust. As we have explained on previous calls, when considering new innovations, we look at how these products can add sales layers to our system and serve as an opportunity to bring new news to our customers. Our consumer research showed that when it comes to ordering food, there can sometimes be that one veto vote in a household who is looking for something other than pizza. Papa Bowls allows us to be back in the consideration set and is highly complementary to pizza sales. We're pleased to see Papa Bowls performing well and in line with our expectations. Additionally, a few weeks ago, we brought back fan-favorite, Shaq-a-Roni, our pizza with a purpose, and also launched a limited time Pepperoni Crusted Papadia toasted with even more cheese and pepperoni on the outside. For the third year, sales of the Shaq-a-Roni will benefit the Papa John's Foundation for building community. The marketing message calling this promotion Shaq-Flation, which highlights the extra cheese and extra pepperoni topping, Papa John's adds this extra-large pizza when other brands are cutting back on ingredients and portion sizes is resonating with consumers and generating some great media buzz. While we have focused on menu innovation is important to not lose sight on our investments in digital innovation, to identify new ways to engage and understand our customer's evolving needs by using data and analytics to deliver a differentiated customer experience. Our marketing tech and data analytics platform is enabling us to segment, analyze, and activate our customer base in ways that we have not been able to do in the past. In the third quarter, we made additional investments in marketing automation and AI, and as a result, every month we are gaining better customer insights and are putting this knowledge to work to activate and engage different segments of our customer base. We've always said that our mission is to meet our customers where they are through carryout options, our own delivery drivers, or through our partnerships with third-party aggregators. We offer these different channels to address customers' particular needs, whether that is seeking greater value, speed, or convenience. This allows us to service customers across socioeconomic categories, whether they are looking to save by picking up the pizza themselves or willing to pay a premium to order through their favorite marketplace. We'll continue to be nimble throughout this challenging macroeconomic environment to adjust to consumers changing needs without denigrating our premium position. However, as I have said before, pizza has traditionally performed well during a recession because it is an affordable meal choice. That is consistent with our solid start to the fourth quarter and our continued expectation to finish with positive comparable sales in North America. Now, turning to development. Year-to-date, we have added 127 net new units globally. In Q3, our net new unit growth of 18 units was less than anticipated, primarily due to the delay of some global openings being pushed into the fourth quarter, some North America openings pushed due to permitting delays, and the closing of 20 stores in Belarus due to the conflict in Eastern Europe. As others have referenced this quarter, permitting delays within North America are making it difficult to identify exactly when a location may open in the future. It's important to emphasize this isn't a matter of if a location will open; it's simply a matter of when. Based on our recent experiences with permitting delays in the U.S. and store closings in Belarus, we are reading -- reducing our 2022 guidance to between 240 and 260 net new unit. We believe the items impacting our 2022 guidance are short-term market specific situations, do not impact our confidence in our ability to achieve our multi-year development goal to grow net new units by 1,400 to 1,800 units between fiscal years 2023 and 2025. As an example of the continued potential growth in new markets, I would like to highlight Honduras, a new country for us where we had two very strong store openings in the fourth quarter. We anticipate opening at least 25 stores in this market over the next three years. We also recently signed a deal with Levant our third largest global franchisee to add two new countries and a 100 more restaurants, bringing their overall commitment to operate more than 335 stores in four countries by 2030. One of those new countries will open in the fourth quarter and the other in 2023. As I've said before, there are significant white space for Papa John's both domestically and internationally. This white space, combined with our attractive unit economics, gives us confidence in our ability to continue attracting new, well capitalized franchisees, contributing to our steady development pipeline. To summarize, as we drive continuous improvements across our business, we will leverage the competitive differentiation of our brand, the quality and innovation of our products, and our data-driven customer insights to navigate the ups and downs of the market while continuing to grow strategically and sustainably. We've accomplished a lot over the past three years, and there remains even more opportunity ahead of us. I'll now turn the call over to Ann to provide more color on our financial results. Ann?

Thanks, Rob, and good morning, everyone. For the third quarter global system-wide restaurant sales were $1.2 billion, up a 0.5% in constant currency. Net unit growth particularly in international markets contributed to the higher system-wide sales, but was largely offset by the lower global comparable sales Rob discussed earlier. I'd like to take a moment to provide a little more color around our long-term North American comp trends and outlook relative to our third quarter results, which were more reflective of short-term headwinds and trends. First, we continue to see a return to more normal seasonality in our business post-pandemic. The third quarter is typically our slowest quarter due to summer travel, which means our customers are spending less time at home or in the office and ordering less pizza delivery. This year, travel demand was even higher, especially in July and August coming out of the pandemic. It has been my experience over the years to be careful to not overreact in short-term in ways that could negatively affect the customer experience and perception of value. While we never like to see a decrease in comps and operating income, our teams did a great job staying committed to providing quality product and maintaining our pricing integrity, which is what leads to sustainable value creation for all stakeholders. Entering the fourth quarter, our North American comp sales have returned to their positive growth trajectory. Consolidated revenues for the third quarter were $511 million down less than 1% from the third quarter in 2021. Excluding the impact of our strategic refranchising of a 90 restaurant joint venture earlier this year, total company revenues increased 3% versus the prior year. As a reminder, the year-over-year impact of the strategic refranchising is most pronounced in revenue, as revenues from the joint venture are no longer consolidated in restaurant sales revenue and instead, our recorded in royalties and commissary sales. Its impact on adjusted operating income is nominal and neutral to EPS consistent with our previous announcements. Turning to profits. Adjusted consolidated operating income for the third quarter was $34 million compared to $42 million for the third quarter of 2021. Consistent with our expectations, adjusted consolidated operating margins were 6.6% down from 7.9% last year, and down sequentially from 7.7% in the second quarter. This reflects near-term pressure from our lower UK contributions and continued inflation in our corporate restaurants. For our corporate restaurants, food basket costs were up 18% in the quarter, driven largely by a year-over-year increase in cheese. Labor costs also remained elevated in the quarter. Together, these factors represented approximately 600 basis points of headwind for the corporate restaurant segment margins year-over-year. Strategic pricing actions reduced the impact of this record inflation resulting in a 300 basis point decline in restaurant level margins year-over-year. Since the beginning of the year, menu prices on average at Papa John's have risen approximately 8% to 9% system-wide. Commissary revenues rose 14% in the third quarter, driven by the continued acceleration of costs and somewhat offset by lower volumes. As a reminder, our commissary arrangement with North American franchisees passes through food, labor, and fuel costs on a cost plus fixed margin basis. Rising costs are slightly accretive to commissary operating income, but dilutive to consolidated operating margins. In addition, variances can exist between quarters as a result of a lag in timing from when costs are incurred and when they are passed through to franchisees. The lower volumes in the third quarter resulted in slightly lower margins for the segment, but we still expect full-year margins to be consistent with the prior year. International operating income was down in the third quarter due to lower UK contributions. Recall, the UK is our largest market and the only international market where we own the commissary. Since this market is more than just a royalty stream, near-term challenges are having a more pronounced impact on international profits. Additionally, changes in foreign currency exchange rates negatively impacted adjusted corporate operating income in the third quarter by approximately 3 percentage points. The cost headwinds we are experiencing in the corporate restaurants and internationally were also somewhat offset by a $7 million decline in general and administrative expenses, excluding special items. Altogether, these factors were an approximate 140 basis point drag on third quarter adjusted corporate operating margins slightly improved from what we experienced in Q2 and in line with our expectations. Continuing to earnings, on a GAAP basis, diluted earnings per share was $0.23 for the third quarter compared with $0.79 last year, including $0.31 and $0.04 in special items respectively. Included within the special items are a $10 million or $0.28 accrual for certain legal settlements and a $4 million or $0.12 non-cash impairment charge related to the termination of our second largest franchisee in the UK. The impairment charge was incurred as an initial step forward in our commitment to reposition our UK portfolio in a way that ensures our franchisees and this market are aligned to a drive above average industry growth over the long-term. We will keep you apprised of the progress going into 2023 and are confident in the long-term growth potential of our international business. Excluding the impact of special items, the third quarter adjusted earnings per diluted share for the quarter was $0.54 down from $0.83 a year ago. Breaking down the year-over-year change further operating results accounted for half the decline, with the balance coming from interest and to a lesser extent taxes. Moving onto cash flow and the balance sheet. For the first nine months of the year, net cash provided by operating activities was $77 million. After deducting $48 million in capital expenditures for the development of new domestic restaurants and investments in technology innovation, we generated free cash flow of $28 million. This was down from $146 million from the first nine months of 2021, reflecting the impact of our overall business performance, working capital changes, and a $7 million increase in capital expenditures. We ended the third quarter with ample liquidity approximately $480 million in cash and borrowing available under our revolving credit facility and have a conservative growth leverage ratio of 2.4x. We also continued to return significant cash to our shareholders. During the quarter, we repurchased 19.5 million shares. In total, we have repurchased more than 980,000 shares since the beginning of the year. We also paid out approximately $15 million in cash dividends during the quarter. In addition, based on our strong balance sheet, our Board has declared a fourth quarter dividend of $0.42 per common share, bringing the annual dividend rate to a $1.68. Papa John's capital structure provides us with substantial operating flexibility. We'll continue to take a disciplined and balanced approach to managing our cash flows to maximize value for our shareholders through organic growth opportunities, share repurchases and cash dividends. Now to our outlook. Regarding adjusted operating margins, we continue to expect near-term pressure from lower UK contributions and ongoing commodity and wage inflation against prior year. Consistent with our expectations at the end of the second quarter, we expect full-year food basket costs to be up between 15% and 17%. We also expect consolidated operating margins to be down between 100 basis points to 150 basis points when compared with 2021. Looking at the longer-term, we'll continue to drive long-term value through innovation, unit growth, operational productivity, and strategic capital investments. Our marketing teams are aggressively pursuing top-line growth through menu and digital innovations, while our restaurant operations have a renewed focus on productivity coming out of the pandemic. Process enhancements are already resulting in faster service and improved customer satisfaction, giving us great confidence in our ability to drive future margin expansion. We expect 2022 CapEx to be between $75 million and $85 million as we invest in technology innovation and the development of new company stores. Full-year net interest expense is expected to be slightly above $25 million. While our tax rate was higher in the third quarter due to timing, for the full-year, we remain within our current guidance range of 18% to 20%. Before I turn the call back over to Rob for some final comments, I want to thank all of our team members and franchisees for their commitment to Papa John's as we navigate these near-term challenging times together. Their hard work and dedication is a testament to our culture, and I'm proud of the organization we are building together. I'm excited for the future of Papa John's and our ability to drive steady earnings expansion and sustainable comp sales for many years to come. And with that, I'll turn the call back over to Rob for some final comments. Rob?

Thanks, Ann. As you've heard from us today, the last three years have been extraordinary for this company and the core fundamentals of our business are strong. We are fully committed to executing against our strategic priorities to be the world's best pizza company, and in turn provide strong returns for our shareholders. With that, I'll turn the call over to the operator for Q&A.

Thank you. [Operator Instructions]. Our first question comes from Eric Gonzalez with KeyBanc. Your line is open.

Hey, thanks for the question and good morning. Your competitor is out there cautioning that the delivery business is vulnerable to consumer shifts towards buying in and is also more sensitive to inflation. So have you seen any relative weakness or consumer shifts away from the delivery business that might be worth calling out? And unlike your competitor, you do participate in three channels, you carryout delivery in the marketplaces. So perhaps you could touch on the relative performance of each channel and maybe speak to your expectations for each and whether you anticipate any shifts in the future. Thanks.

Thanks, Eric. We have seen over the last few months a bit -- a little bit of a shift into our carryout business. We do a very strong carryout business even though we don't market and significantly discount that business. It is something that we anticipate being a general trend as we go through these low consumer sentiment times. It's not something that we are necessarily pushing because we haven't seen significant softness in our delivery business. There's a shift, but it's not like our delivery business isn't operating at a high-level and very productive. And that I -- when I talk about our delivery business, I talk about it both in the context of our organic channels, which obviously our preferred method of getting our product to our customers, 26 million loyalty members. We definitely, they're our most valuable customers. We definitely want to see them come through our loyalty channels and get the best deal they can from Papa John's and make sure we get all of that information so we can service their needs in the future. But we're also seeing continued strong performance from our marketplace partners across all four of the national partners that we have now integrated with. And I know there's been a lot of talk about the aggregators and some of their challenges and some of the ways they're trying to shore up their business as we head into some of these more challenging times. But our business has remained strong with them. They continue to deliver incremental and profitable transactions for us. So it definitely is a good mix of business for us. We don't disclose what percentages of the business each of those make up for competitive reasons, but I can tell you that we're happy with each of them. And it's part of the reason why we have enough confidence to be able to kind of, to guide to positive comps in Q4, as Ann mentioned and I talked about, we have gotten off to a good start in Q4 and we feel like we are going to be able to deliver a positive Q4 and a positive 2022.

Thank you. And our next question comes from Brian Bittner with Oppenheimer. Your line is open.

Thanks. Good morning, Rob and Ann. I have a question on development. Obviously, there's just a lot of uncertainty that business owners are feeling out there regarding the economy, and of course, they're in absorbing a lot of inflation as well. So Rob, I'd love for you to just highlight exactly what is reinforcing your confidence in that multi-year development outlook, getting to that 6% to 8% growth, because I don't think a lot of investors at this point are underwriting that actually occurring. And can you also remind us how you expect the build of this algorithm to unfold over the next few years?

Sure. Thanks, Brian. So our confidence is driven by the fact that we continue to open restaurants especially internationally. We really -- we're pretty much right on our target on openings. The challenge with the net development number that we disclose each quarter and that we kind of sign-up for in our guidance every year is, we've had more closures internationally, and some of those closures are a function of the conflict in Eastern Europe. Belarus is a market, had to close the whole market which was 20 units for us this year. And in the UK, the UK right now, we talked a lot about it in the script, the UK, we are actively working with our international and UK team, with our UK franchisees to really paint the path forward. What does it look like? So we had a franchisee, our second largest franchisee that was underperforming, wasn't necessarily meeting kind of the standards that we hold for our franchisees. And so we made a -- we had to go in and make a change and work with them to do that. And so that's just kind of the beginning of a holistic effort to make sure that the franchisees that are set up for long-term success are going to be continue to be able to operate and deliver profitable, sustainable sales growth. And that's going to lead to a return to unit growth and less closures over the long-term. But there may be some short-term changes and short-term work that needs to be done there in the UK. Domestically, it's getting harder now. It's been harder. It's really not a capital issue. At least our franchisees haven't shared that with us yet. It's really about permitting. It is never been harder to get permits. A lot of the government agencies in the U.S. are still shutdown from the pandemic. And it's just a really challenging time to build. So as we called out in the script, it's not a matter of if these restaurants are going to open. It's really about when these restaurants are going to open. And then the last piece I'll share with you that gives us a ton of confidence is we're still signing agreements. We highlighted in the -- in the -- in our call -- in the call that we've signed lot -- we're opening -- we're signing agreements to open new countries. So it's not even just people doing what they already know in their own markets. People have enough confidence in our global development right now to go and open new countries, and we're seeing really positive shoots within those new countries. We highlighted Honduras. We had two openings last month that were record openings for the system, not just for that market, which is a new market for us. So all of those things make us feel really confident in the long-term viability. And development is a long-term investment. It's not -- obviously access to capital and those types of things can impact the short-term run rate, but it's a long-term investment. When they sign these agreements, they're signing up 10-year agreements, 10 to 20-year agreements. So our franchisees believe in the brand. The unit economics are still very strong. So we're not seeing any slowdown in the agreements that we're bringing into the system.

Thank you. And our next question comes from Chris O'Cull with Stifel. Your line is open.

Great. Thank you. This is Patrick on for Chris. Good morning. Rob, in the past, the company has indicated that there wasn't a need to promote low price points on a national level. And I know you mentioned the Papa Pairings offer, you launched at that $6.99 price point. So I'm just curious if you experienced significant sales weakness at some point during the quarter that caused you to change your thinking there or to pivot. And then we noticed software on the app, but we hadn't seen it advertised on TV or at a national level. So is there an approach that you're thinking about where you might bring that more to the forefront in order to drive additional traffic?

So the first piece around the national promotion, our -- we did absolutely state in the last call that we thought about value differently than maybe some others in the category. And that's why our national promotion isn't a large 50% or 40% or 30% off every item. We strategically decided on this promotion because it is a great price point to be able to put out on national TV at $6.99, but it's actually Papa Pairings, you have to buy two. So it's a $14 transaction to actually execute against this value program. And we're actually seeing the checks with that include this program higher than our average check. So we thought about it a lot differently than just a pure discount off of the purchase. And so I think that's primarily what we were highlighting that is not necessarily consistent with our strategy. This is a definitely a challenging economic time for our customers and consumers sentiment has continued to decline and we are always trying to strike the right balance between continuing to deliver our premium innovation and meet the needs of our customers that, that, that want things like Epic Pepperoni-Stuffed Crust and some of our other more premium priced innovation while also making sure that we're meeting the needs of our customers that are more value conscious, particularly in its value-oriented time period.

Thank you. Our next question comes from Andrew Strelzik with BMO. Your line is open.

Hey, good morning. Thanks for taking the question. I was hoping you could talk a little bit about your innovation pipeline. And kind of where it sits now, are there more platforms that you're thinking about the way that that you've done in prior quarters or we're shifting maybe a little bit more to an iterative kind of price innovation process? And do you prioritize, I guess, differently the types of innovation that you think about in this environment just as you think about price points, managing check, et cetera? Thanks.

Yes. We absolutely think about our calendar in a way that's going to be balanced and continue to meet the needs of all of our customers across the different spectrum of their price sensitivity or their appetite for premium versus value. So -- but we are always focused on innovation at Papa John's, both product innovation as well as technology innovation. It's the two things. It's part of our DNA here. On -- your question is specific to the product innovation sales. I'll speak to that. We are definitely working on new platforms both across our core pizza as well as new items that can complement our pizza opportunity -- our pizza product. So we've got a full calendar lined up for the front half of next year with new innovative products coming in Q1 and Q2 that we're really excited about. Even, in Q4 when we launched Shaq-a-Roni, we still have a brand new item that is complimenting the Shaq-a-Roni, which is our Pepperoni Crusted Papadia, which is a new innovation that actually has our pepperoni crusted on the outside of the Papadia. So even when we're kind of doing iterative or even repeat promotions like Shaq-a-Roni, which is a really important promotion for us because it contributes back to our foundation, allows us to invest in our communities. We still try to bring something new, something different, something that can help Papa John's standout from the competition. So yes, 2023 will be a big year for innovation for us.

Thank you. Our next question comes from Todd Brooks with Benchmark. Your line is open.

Hey, thanks for taking my question. Not wanting to talk about forward sales trends other than the commentary of getting back to positive, but can we talk, Rob, about maybe what the trend was like across the third quarter, so that outsized travel impact in July and August, and then maybe if you could size any sort of rebound magnitude that you saw in September with a return kind of back to school, back to work, as well as the launch of the Papa Pairings and having a more overvalue offering out during that period? Thanks.

Todd, thank you for the wonderful question. I couldn't be more excited to tell you that we did see sequential improvement throughout the quarter and that we did see an -- a definitely a noticeable improvement in our transaction rates with our launch of Papa Pairings. So it's part of the reason why we have a lot of confidence in our positive guide for Q4 and frankly for 2023, I think we've -- I think we understand -- we obviously are cognizant of the changing dynamics in the industry and the changing needs of our consumers in accordance with those dynamics. And so I feel like we have started to strike -- of -- we talked about in prior calls leveraging our 26 million loyalty members to try and drive frequency and try and make sure that we're giving them the right incentives and the right products at the right time. But I also think there is a need for us to continue to have more broad-based strategic value offerings for a customer base across the industry that is definitely becoming more price sensitive and with consumer sentiment going down. I mean I think I said on the last call, I -- we position ourselves as a premium player in this segment with premium innovation. But if you're in QSR and you don't have a value strategy, you can't win. So we've always had a value strategy. And I think that value strategy continues to evolve as the customers' appetite for the industry. This -- that our segment continues to evolve as well. We've obviously seen across pizza a decline in transactions. And so we need to make sure that we are doing our part for our customers to meet their needs in the current environment which we're competing in.

Thank you. We have a question from Lauren Silberman with Credit Suisse. Your line is open.

Thank you. Hope all is well. I wanted to just follow-up on unit development, as we think to 2023, is your expectation that you're in that 6% to 8% unit growth target over the long-term, just given the near-term headwinds, trying to understand how to think about the cadence. And then, my actual question is, as you pointed out over the last few years, unit economics meaningfully improved for franchisees dealing with cost pressures now, but can you talk about where you see the biggest opportunities to drive incremental four wall returns for franchisees? Thank you.

Sure. Yes, we do have confidence in being able to deliver development consistent with our long-term guidance over the long-term. And it -- it may be -- it may vary from year-to-year, but that's always right around where we're targeting. Once again, we are signing agreements right now this year and those agreements include new stores for next year. We haven't seen any type of indication lead indicators in most of our international markets outside of the UK that that those development agreements are not going to be upheld and those agreements are not going to be executed. Domestically, once again, we have gone from frankly zero domestic development. I think if you look back over 2017, 2018, 2019, we had net negative restaurants or right around there. In 2020, even with a great year in comp sales, we still only delivered seven net new restaurants globally. So our domestic development is something that we continue to focus on. It has grown at a high rate over the last two years. But it -- there's -- right now it's a tough time to open restaurants, not from a confidence in the ability for those restaurants to produce the kind of returns that warrants the investment, but more from the challenges associated with just getting the permitting and all the other stuff that needs to go into opening a restaurant done. So it may continue to be that way. As we look into 2023, our hope is that -- our -- the permitting process and the construction process does get back to normal in 2023, but that's something that's kind of out of our control. In terms of improving the four walls, the unit economics, our operations team is completely focused on two things. One is driving productivity, one is driving customer service. And as we talked about during the pandemic, we are focused on just keeping restaurants open and doing everything we could to get as many people in there to staff against the demand as possible. We still have -- obviously have a lot of demand but we're now coming out of the pandemic. We've kind of shifted our focus to making sure that we are managing our labor appropriately, which allows us to deliver great productivity and improve customer service. We're seeing our customer service KPIs go up right now behind some initiatives we have in our stores. And ideally, improved customer service is going to lead to improved loyalty and increased frequency. And that is the best way to grow unit economics is by growing top-line sales through transactions. So that's what we're focused on. That's what our operators are currently activating against and we're making a ton of progress. We've made a ton of progress in a very short time.

Our next question comes from Alexander Slagle with Jefferies. Your line is open.

Hey, thanks. Good morning. Just want to get a little more color on the UK, the headwinds you're seeing there, the portfolio repositioning actions and any specifics around the different kinds of support or I guess franchisee support you're considering? Maybe just how we might see this play out in the financials and growth metrics next year.

Yes. We need to make sure that that market is setup to be able to weather a storm that we see continuing for the foreseeable future. And that means that we need to have franchisees and restaurants that can continue to deliver strong EBITDA cash flow to get through these times. So we're evaluating that with all of our franchisees. We're looking at the whole system where we can make strategic investments to continue to drive both sales as well as profitability for the restaurants that are going to be here for the long-term. We've had 12 restaurants in the UK close as an outcome of the trends -- of the work that we just did with that we highlighted with our second largest franchisee over there. Right now, we're working with all of our franchisees to figure out what the right way to support them is. We haven't finalized those plans. So we're not disclosing any specifics, but we will definitely have a very big update on that in our -- on our next call.

Our next question comes from Joshua Long with Stephens. Your line is open.

Great. Thank you for taking my question. Just curious if you could talk about the human capital and labor pipelines that know that you called out, that there's still some inflation there, but just curious, if you could talk about the stability, the African flow and just what the store level operations are like now that we've maybe a little bit further away from some of the peak pressures and your commentary around being able to focus on productivity initiatives at the store level?

Yes. Definitely -- definitely continued challenge in staffing but getting better and part of it getting better is some return to the workforce, but part of it is the changes I've already articulated around our labor management. We are making sure that we have labor in the store when we need the labor and not necessarily just labor at all costs, if you will. And that's actually made us more productive, more efficient, while also making sure we're better staffed, because we're utilizing the labor in a more efficient way. Also, as we've talked about, our partnership with the aggregators does help us. We have the delivery as a service capability. So as we get to capacity on Friday night, Saturday night, Sunday strong football season, we're definitely able to leverage those partnerships and those strategic integrations that we've done with them to offset any -- some of the labor challenges that we face on an ongoing base basis. So that's we're getting better at that. It's been three years now since we really started going full steam on building out those partnerships. So we feel like we're really good at it. We're optimizing how we use that, that, that capability strategically. So right now staffing is always a challenge, but I feel like we're managing it relatively well. Halloween is always a crazy time. We just had a crazy Halloween on Monday, but we got through it great. And our restaurants are excited about our positive sales and continuing to grow.

Thank you. Our next question comes from Jim Sanderson with Northcoast Research. Your line is open.

Hey, thanks for the question. Could you let us know what Papa John's market share is in the U.S. relative to peers and if that is slipping or stable where you think that share is going?

So we had up until this quarter, we had 12 straight quarters of same-store sales outperformance. So when you think about it that way, obviously on growing share of each -- of our current restaurant base, we absolutely gain share over the last three years. Some of our competitors have built more restaurants than us domestically and therefore, that factors into an overall volume share as well. So if we're not building as many restaurants, there's more volume from new restaurants going to our competition. But in terms of our ability to outperform on sales, we've definitely gained share over the last three years. Obviously, this quarter with Domino's and Pizza Hut, both reporting prior to us, they had -- both had small positive comps. We have a small negative comp. So that would obviously change that dynamic in the quarter. But for the year, we are confident that we're going to be able to deliver same -- positive same-store comps. We don't think that's going to be consistent with others in the industry given the results that have already been delivered. And we're delivering positive same-store comps on top of higher comps year ago than anyone in the industry. So we feel really good about our share gains over the last three years.

And just a quick follow-up, any concern with competitor promotions starting to look a little bit similar and what I'm talking about is the $6.99 price point, and then now we've got Pizza Hut with a I think something that looks like a Papa Bowls, just a concern that the differentiation is becoming a little bit murky.

Yes. I mean that just as a -- I couldn't agree with you more but that is just motivates us to continue to innovate and find new ways to differentiate. Yes, I mean I think on the promotion front, I don't -- I don't know that it's necessarily a negative thing for us that the $6.99 price point is now kind of the price point. Some of our competitors we're promoting lower price points in the past, so I feel like that gives us a bit more of a level playing field because that's where we have been and it's been a little bit of higher price and now we're more competitive in that regard. On the innovation, yes, I mean I think that there definitely have been some recent entries into the market that are consistent with what others are doing including us, but that once again is just more motivation for us to go out and ideate and create new items that are going to stand out in a -- in potentially some of the more -- some of the redundant innovations that have been launched recently.

Thank you. And I'm showing no further questions in the queue. I'd like to turn the call back to Rob for closing remarks.

So I just want to thank everybody for being on the call today. Obviously, we are going as an industry through some challenging times. But I just want to remind everybody, pizza is a great value through challenging times. And it is -- it a great industry for -- we're excited about being a part of this industry heading into 2023. We're excited about the innovation that we are going to bring to the industry to continue to grow comp sales while we continue to build more restaurants and bring Papa John's to more people across the globe. So as you can tell from our comments today, we have a lot of belief in the -- in 2023, but even -- but are even more excited about the long-term for this brand and the white space that we can go and tap into. So I'd like to thank our shareholders and everyone on this call for their interest in our company and for all of your continued support. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.