Papa John's: 3Q One Of Best In Brand's History

Officials of Papa John's International Inc. said continued focus on the fundamentals would help fuel future company growth in an inflationary environment.

"From a sales standpoint to unit openings to earnings per share growth, this was one of the most solid, fundamentally sound, well-rounded quarters that I can recall," founder and chief executive John Schnatter told analysts during the company's third-quarter earnings conference call.

For the third quarter ended Sept. 25, Papa John's earnings per share rose 37.5 percent to 44 cents, compared with 32 cents per share a year earlier, on the strength of same-store sales rising 5.3 percent at locations in North America and 4.7 percent in international markets.

"This increase was despite one of the toughest commodities environment's in our company's history," said chief financial officer Lance Tucker.

Marketing a key ingredient

The 5.3-percent increase in North American same-store sales during the quarter comprised a 4.9-percent gain at franchised locations and a 6.3-percent increase at company-owned units.

Chief marketing officer Andrew Varga said the third quarter's strong same-store sales gain in North America was in part due to the chain's advertising strategy, similar to what drove a 6.1-percent gain in North American same-store sales in the first quarter.

The second quarter's domestic same-store sales rose only 0.4 percent, however, reflecting the brand's shift to marketing its price points, which were slightly higher than prices in commercials for either Pizza Hut or Domino's. Varga said Papa John's now has established itself as the chain with the premium price point, but it "doesn't happen overnight."

"In the third quarter, we were able to cover a couple periods with national-TV weight we didn't have before, so that helped," he added. "But executing our plan at a slightly premium price point over what's now six and a half months has been effective for us. ... Our goal is to always get the right price point for our quality product that we believe we deserve, and pricing is the one thing we keep the closest eye on."

Varga added that the ongoing National Basketball Association lockout puts the brand's sponsorship of a handful of professional teams in danger of going dormant if games continue to be cancelled. However, the company cannot yet determine the effect the lockout would have on traffic in the fourth quarter and beyond.

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Commodity price increases

Papa John's officials also would not forecast anticipated hikes in commodity prices for next year.

Domestic commissary sales rose 17 percent in the third quarter compared with a year earlier, increasing to $41.1 million. The gain in commissary revenue reflected not only increased volume from Papa John's stores, but also a spike in block cheese prices, for which Papa John's takes a fixed mark-up when selling to franchisees.

"At this point, we're expecting commodity prices to remain high," said Tony Thompson, executive vice president of North American operations and president of the company's PJ Food Service commissary.

Schnatter said this past quarter saw some of the highest commodity prices in the brand's history, and yet Papa John's had one of its best overall quarters ever.

"So, commodities jump around, and the competitors are good at what they do, they're big, and you never know what they're going to do next," he said. "We're trying to produce consistent earnings growth in an inconsistent world."

Doing that requires growing store counts and earnings methodically, he said, whether through managing the commissary with a long-term view or leveraging digital marketing, which now accounts for more than 30 percent of domestic sales.

Tucker said Papa John's would continue to offer franchise development incentives like royalty rebates available to franchisees that meet certain store or sales growth targets, which were passed this year in exchange for higher contributions to the brand's national marketing fund. Those arrangements will continue into 2012 and 2013, he said.

Papa John's plans to open its 4,000th restaurant in the first or second quarter of next year, Schnatter said. The development pipeline includes 410 units in North America and 1,240 international units to open over the next six years.

"This is a scale game," Schnatter said. "We've never been in any market where, once we get scale and get on top as the leader, we don't stay the leader. We're going to use our healthy balance sheet to build restaurants and achieve scale."

Louisville, Ky.-based Papa John's operates or franchises 3,780 restaurants in all 50 states and 32 countries.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN