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Heard on the Call: NPC International Inc.

Pizza Hut franchisee anticipates further cost savings, value pricing in 2011

NPC International Inc., Pizza Hut’s largest franchisee, reported Tuesday a swing to profit in the fourth quarter as traffic and sales increased.

NPC, based in Pittsburg, Kan., reported a profit of $3.39 million for the fourth quarter ended Dec. 28, compared with a net loss of $260,000 for the fourth quarter in 2009. Sales for the 2010 fourth quarter rose to $229.86 million, compared with $212.36 million in the year-ago period.

NPC executives credited the income swing at its 1,136 Pizza Hut units to an 8.8-percent increase in same-store sales in the quarter, compared with a decrease of 10.5 percent in the same quarter last year. For fiscal year 2010, same-store sales increased 10.1 percent, compared with a decrease of 10.2 percent in fiscal 2009.

The company is not expecting such dramatic same-store sales gains in fiscal 2011. Jim Schwartz, NPC’s president and chief executive, said in a conference call with securities analysts, “We have a challenging sales comparison to lap this fiscal year.

“As a result in 2011 we do not expect to match the 10.1-percent comparable-store sales growth performance posted in 2010,” Schwartz said. “Instead, we would expect to revert to a more traditional sales growth result expected of a mature restaurant brand.”

Historically, he said that for typical retail it is 0-percent to 3-percent growth.

NPC’s net income for the entire year was $21.46 million, compared with $10.39 million for the same period in 2009. Total sales rose to $978.28 million, compared with $882.46 million a year earlier.

Among the issues NPC executives addressed in Tuesday’s analyst conference call:

Cheese costs. Troy Cook, NPC’s executive vice president and chief financial officer, said, “Based on the information we are getting from our purchasing cooperative, the expectation currently, in respect to cheese, which is 30 to 35 percent of our cost of sales. He said NPC already is seeing a rapid rise this year and that’s expected to continue into early second quarter, but advisers expect “significant relief” in the dairy market in spring. For the year, Cook added, “We’re being told what we should expect is more normalized cheese prices like what we saw in 2010.”

Anticipating other commodity increase. Schwartz said, “Knowing what the commodity market does look like, we have been spending a lot of time over the last six to eight months working on mitigation strategies with respect to our overall commodity basket.” Several projects are underway, he said, “and we’ll start to see some materialization of that toward the back end of 2011.” Food inflation for NPC was about 1 percent in fiscal 2010, Schwartz said.

Other cost savings. Schwartz said that project also includes finding savings in other aspects of the business. “It goes into utilities and fixed assets and other operating expenses,” he explained. “It is a full-scope project to look at where we can be more efficient as a system, where we can buy better, where we can consolidate volumes and some other things from an overall supply chain standpoint.”

Promotions. “Core pizzas” — hand-tossed, pan and thin/crispy — will continue to be value priced, NPC executives said. In addition, the “strong lineup of value on the early week platform,” which includes the Monday Madness promotion started in fall — which offers two medium pizzas with three toppings on Mondays for $12 — the Tuscani Tuesday and Wing Wednesday.

Credit card costs. More customers are paying with credit cards, so that line of NPC’s balance sheet continues to grow, executives said. In the fourth quarter, NPC experienced a credit card cost increase of $300,000, consistent with the increase of most quarters, Cook said. “We have a running joke around here,” Cook said. “The fastest growing line on our P&L is our credit-card transaction fees. And that’s not so much because of the rate but because of customer utilization of credit cards.”

NPC International operates Pizza Hut restaurants and delivery units in 28 states.

Contact Ron Ruggless at [email protected].

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