Papa John’s 3Q earnings rise despite discounting

While comparable-store sales at Papa John’s International slipped amid segment-wide discounting pressures in the third quarter, chain executives reported that increased guest counts helped the pizza chain grow earnings per share.

Papa John’s officials said that even “in the face of what continues to be a challenging competitive environment,” the chain posted earnings per share growth of 6.7 percent compared with the third quarter of 2009, excluding special items.

For the third quarter ended Sept. 26, net income for the nation’s third-largest pizza chain was $7.8 million, or 30 cents per diluted share, compared with $11.7 million, or 42 cents per diluted share. Those results included the effects of consolidating the results of BIBP Inc., the franchisee-owned cheese purchasing company, which yielded an after-tax loss of 2 cents per share in the current third quarter and a 12-cent gain in the year-earlier period.

Revenue for the quarter totaled $273.1 million, a 6.5-percent jump from $256.3 million in the year-earlier period.

Domestic same-store sales decreased 1.6 percent at company-owned restaurants and 0.3 percent at franchised units, as increases in traffic were offset by lower average checks resulting from discounting.

“In the face of aggressive pricing and promotions within our category, we posted positive transaction growth for the sixth consecutive quarter,” said president and co-chief executive Jude Thompson. “Our operators also provided strong product quality and service levels in the quarter.”

Company officials touted several key developments, including a revamped online-ordering website launched at the end of October, a new quality-control center to service restaurants in the United Kingdom, and continued franchise system development aided by incentives like waived franchise fees and royalties for new operators.

“There’s a lot we have to do that makes sense to us, which includes taking care of the health of our system that currently exists, and continuing to grow it,” Thompson said. “We’re comping over a fairly flat year, but our transactions are growing, and that’s through new customers, and a lot of that’s [coming from] online. We think we’ll build loyalty over time, and that will help with comparable-sales growth.”

The brand continues to target franchise growth in the United States and abroad.

“Our brand … still has a lot of runway to grow,” Thompson said, pointing to the development pipeline with agreements for 270 more restaurants in the United States and 1,300 international locations to open over the next seven years.

During the third quarter, Papa John’s opened 67 net units worldwide, with 34 opening in the United States. Of the 33 international restaurants to open in the third quarter, the company opened its first two locations in Colombia, and expects to debut in two or three more foreign countries in the fourth quarter.

International system sales rose nearly 20 percent, to $75.8 million in the third quarter from $63.3 million a year earlier.

“Our international business, as we manage it, should break even by 2012,” chief financial officer David Flanery said, adding that the significant investment of the quality control center in the United Kingdom already is starting to be leveraged. “A disproportionate amount of our [international] loss is in the U.K., and we’re growing out of that.”

The new quality control center can supply about 600 restaurants in the United Kingdom, he said.

Flanery wouldn’t comment on plans for further franchise development incentives in 2011, but added, “We liked the results from the 2010 plan an awful lot.”

Chief marketing officer Andrew Varga added that, while much of the franchise royalty revenue paid to Papa John’s gets delayed in the incentive program, the company still benefits immediately from new franchisees, who contribute right away to the national marketing fund and buy their ingredients from the company’s commissary.

The new website feature’s the pizza segment’s first online-ordering loyalty program, the executives said. They added that Papa John’s also upgraded its optimized mobile-ordering site for customers using smart phones, and an iPhone application will debut before year-end.

Louisville, Ky.-based Papa John’s operates or franchises 3,583 restaurants in all 50 states and 29 foreign countries.

Contact Mark Brandau at [email protected] [3].