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Papa John’s on what’s driving sales

Heard on the call: Company cites chain improvement efforts and easing discount pressure

Papa John’s International Inc. credited quality improvements, technology upgrades and a letup in competitive discounting as it reported increased sales across its pizza chain.

Founder and chief executive John Schnatter highlighted efforts the 3,687-unit chain has taken in recent years as he discussed first-quarter results that included same-store sales increases of 6.1 percent in North America and 5.6 percent in the international division.

“The Papa John’s system is experiencing strong sales and unit-growth momentum,” Schnatter told securities analysts during a conference call Wednesday, “but just as important is the pride I’m seeing in our operators in terms of our product quality and our image.”

For the March 27-ended quarter, Papa John’s had net income of $16.4 million, or 64 cents per share, compared with year-ago earnings of $16.9 million, or 62 cents per share. Excluding the impact of the BIBP purchasing cooperative, whose cheese purchasing contract was terminated at the end of 2010, year-ago results would have been $14.6 million, or 54 cents per share. Revenue in the latest first quarter totaled $312.5 million, up 9.3 percent from $285.8 million in 2010.

Highlights from the call:

Investing to be the best

Schnatter attributed the healthy same-store sales increases to investments made in the business over the past years, including quality-control initiatives begun in 2005, distribution system improvements, and technology upgrades and franchise development incentives.

“We look over the long period, and it produces good short-term results,” he said. “We’ve been positive six of the last eight years, with no negative years. So it’s not what happened in the first quarter, it’s the quality initiatives we’ve put in from 2005 and 2006 up to the present.”

Papa John’s officials said they were pleased with the chain’s iPhone app and an online-ordering site that was relaunched last year to include loyalty club functionality.

“The day we flipped the switch and switched the platform on 50,000 orders a day, we were nervous, but it’s been pretty much flawless,” Schnatter said. “We’re just delighted with where we’re at, and probably more excited about the proactive way in which our information systems department is chasing new channels. There are several new channels coming up, which should be a huge competitive advantage for us internationally.”

Franchisees also will be paying more into the Papa John’s system with an increased royalty rate of 5 percent and a national marketing fund contribution that is now 4 percent. However, franchisees are eligible for rebates of 0.25 percent for hitting certain sales growth goals and 0.2 percent for remodeling their restaurant lobbies.

Schnatter said the company would continue improving store-level margins and offering incentives for development.

“Rebates and royalty amounts are important, but if those unit economics aren’t healthy, you jam up your growth,” he said. “There’s more than one lever to pull to drive this thing forward. If we can get parity with stores in a market with our competitors, we have a better horse, as far as our perceptions, product and operators go. It’s a game of scale, and you win that game by protecting operators’ food, labor and mileage.”

Papa John’s is also remodeling its corporate stores, with plans to have all refurbished by the end of the year, said Tim O’Hearn, senior vice president of development. The remodels cost between $8,000 and $15,000 depending on the size of the store, he said.

Discounting lets up slightly

Compared with the beginning of 2010, Papa John’s did not have to do as much discounting to keep up with segment rivals Pizza Hut and Domino’s Pizza, who defined the promotional environment in the segment with aggressive offers for much of 2010. This allowed Papa John’s to focus on more premium price points with its specials and limited-time offers, Schnatter said though he noted the chain would not put value on the back burner.

“With price elasticity and sensitivity with the consumer — they’re still very vigilant, to say the least,” he said. “It’s less difficult than a year ago, but there are no easy days in this business. … Our positioning lets us price a little higher than the competition, which makes margins a little easier for our operators. But you have to be extremely good at this game in every facet, or you won’t make it, and our competitors are very good at this business.”

In addition to a break in the segment’s discount battle, Papa John’s has benefited from a sponsorship deal with the National Football League and a bigger marketing war chest, which Schnatter said would help Papa John’s reinforce its “better ingredients, better pizza” positioning.

Though one of its biggest rivals, Domino’s, spent much of 2010 touting its reformulated pizza, the product quality-focused advertisements didn’t hurt Papa John’s positioning, said chief marketing officer Andrew Varga.

“We track quality as closely as you could imagine,” he said. “Nothing we’ve seen indicates our competitors making any inroads on us relative to quality. In fact, we’re expanding our gap. If you look at the spectrum of pricing, Papa John’s is getting a premium at this point.”

Papa John’s is projecting 2011 same-store sales to increase between 2 percent and 3 percent for the North American system, up from previously stated guidance of growth between 1.5 percent and 2.5 percent. The chain also is forecasting a same-store sales increase between 1 percent and 3 percent in its international division.

Papa John’s updated its earnings per share guidance for 2011 to a range of $2.02 to $2.12, which includes a bump to the low end of a previously stated guidance between $2 and $2.12. Plans call for 190 to 220 restaurants to open worldwide in 2011.

Louisville, Ky.-based Papa John’s operates 613 pizza restaurants and franchises another 3,074 locations worldwide.

Contact Mark Brandau at [email protected].

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