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Heard on the Call: Papa John’s International

Pizza company discusses marketing plans and development for 2011

Papa John’s International Inc. officials told investors Wednesday that marketing plans and new-unit development this year would help the company sustain the momentum gained in 2010 amid “unprecedented” competition in the pizza segment.

Papa John’s discussed plans for 2011 after reporting higher net income and positive same-store sales for the fourth quarter, which ended a year that founder and co-chief executive John Schnatter said was marked by steep discounting and prolific advertising by the chain’s two larger rivals, Pizza Hut and Domino’s Pizza.

“I’ve never seen two of the biggest competitors we have change their core product and run the discounts they ran,” Schnatter said. “Through that, we still had positive traffic. If you use that as a litmus test, the brand is very solid.”

Papa John’s domestic same-store sales increased 0.7 percent in the fourth quarter and were flat for the year.

Chain officials noted that Papa John’s average check dipped in 2010 as the brand kept up with the pizza segment’s rampant discounting — Pizza Hut pivoted from a $10 any-pizza deal to a new, cheaper pricing structure, and Domino’s advertised its reformulated pizza with an offer of two medium, two-topping pies for $5.99 each.

Chief marketing officer Andrew Varga said Papa John’s would continue to balance promoting “competitive” offers and “premium” ones, like $11 large specialty items like Hearty Italian Meats, Spinach Alfredo or Double Bacon Six Cheese pizzas.

“This is the third time this month we’ve run the $11 price point on TV,” he said. “We feel good about it and what it does for us. We think it’s the right move at the right time.”

Papa John’s, which operates or franchises 3,646 units worldwide, said it would look to grow its system by 300 domestic units and about 1,200 international locations over the next several years. The company also said it would extend its Franchise Development Incentives for another year to encourage franchisees to open more restaurants, and that it has reached a new three-year agreement for contributions to its National Marketing Fund.

The contribution rate for franchisees has increased to 4 percent for 2011, though franchisees would be eligible for royalty rebates if they reach certain sales milestones or complete remodeling requirements before a certain time in fiscal 2011, Papa John’s officials said during the call.

Executives would not disclose the contribution rate to the marketing fund for 2012 or 2013, but said the agreement would shift the advertising spending in ways meant to make the brand more competitive.

“We believe the additional funding is important,” Varga said. “It gives us more exposure on national TV and in digital marketing, and we’ll be making record investments in those areas. We have plenty of runway to build this over time.”

Schnatter said the Franchise Development Incentives, which waive franchise fees and the first year’s royalties for any operator opening a new franchised restaurant in 2011, would continue to help grow the Papa John’s system grow, bolstering everything from the marketing fund to the brand’s wholly owned commissary, PJ Food Service.

“One great way to put more dollars in there is by adding units,” Schnatter said. “As we add units on our net development, which is why we have the incentives, they start contributing to that fund and buying commodities from PJ Food Service. It just makes a healthier system.”

Papa John’s also will pursue international growth aggressively over the next few years. At the close of 2010, the brand had 775 international units in 32 countries.

“We are pleased our international franchisees can access public- or private-capital markets to grow and continue to do so,” co-chief executive Jude Thompson said, noting that Russian franchisee Worldwide Papa recently listed itself on Germany’s stock exchange to raise expansion funding. “We expect to reach break-even results in 2012 in our international business.”

For the Dec. 26, 2010-ended fourth quarter, Papa John’s recorded net income of $14 million, or 55 cents per share, compared with $13.7 million, or 49 cents per share, a year earlier. Latest earnings reflected an after-tax gain of 5 cents per share from the consolidation of results of a franchisee-owned commodities purchasing company BIBP Commodities Inc.

Latest-quarter revenue rose 5.2 percent to $286.8 million, Papa John’s said. Domestic same-store sales increased 0.7 percent, which included a 2.1-percent gain at corporate restaurants.

Franchise revenue increased $1.2 million, primarily due to a hike of the franchise royalty rate from 4.25 percent a year earlier to 4.75 percent, the company said. High sales volumes and commodity costs drove an $8.8 million gain in commissary sales for Papa John’s. International revenue rose $1.6 million, largely on the strength of more restaurants opened abroad in 2010.

For the full year, Papa John’s net income totaled $51.9 million, or $1.96 per share, including an after-tax gain of 16 cents per share from the consolidation of BIBP. A year earlier, the company reported net income of $57.5 million, or $2.06 per share, including an after-tax gain of 52 cents per share from BIBP’s consolidation and a 4-cent gain from the finalization of certain income tax issues.

Papa John’s said the year-end deficit from BIBP has been eliminated with the new National Marketing Fund agreement between the company and its domestic franchisees.

Revenue in 2010 increased 4.4 percent to $1.13 billion, reflecting gains of $7.3 million in franchise revenues, $36.8 million in commissary sales and $6.5 million in international-restaurant sales. Same-store sales in the United States were flat for the year, including a 0.6-percent decrease for corporate locations, the company said.

Louisville, Ky.-based Papa John’s operates 612 corporate locations and franchises another 3,034 franchised units worldwide.

Contact Mark Brandau at [email protected].

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