FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)
Papa John's International
Nasdaq: PZZA
P.O. Box 99900
Louisville, KY 40269-9990
(502) 266-5200
papajohns.com
UNION CITY, CA (May 19, 1997)/FOOLWIRE/ --- Papa John's International released their
first quarter 1997 results on April 30th. They had a great first quarter with revenues of $109.6
million and net income of $5.7 million. They exceeded the original Street consensus by $0.02 per
share and the recently raised consensus by $0.01 per share with earnings per share of $0.20 for
the quarter. This represents an increase of 54% over the same quarter last year.
EXPANSION. They set a new unit opening record during the quarter at 90 units with the
company opening 22, 6 ahead of plan, and franchisees opening 68, 13 ahead of plan. Unit count at
the end of the quarter was 325 company-owned and 925 franchised for a total unit count of 1,250
in 35 states and the District of Columbia. Thusfar into the second quarter, they have opened 4 of
their 15 planned corporate openings and 11 of their 55 planned franchise openings, with one
franchise closing. They also acquired 4 units in the Arlington, Texas market. Their development
pipeline contines to remain strong with 118 signed leases, 36 corporate and 82 franchise, and 150
additional approved sites for a total of 268 sites in the pipeline. Their full-year corporate build plan
remains at 70 units and their franchise build plan has increased from 230 to 243. They now have
Papa John's units in 39 states and the District of Columbia having entered 7 new states in 1997.
Store count to-date is 1,264.
COMPARABLE SALES & AVERAGE WEEKLY SALES. Strong system-wide sales
continued during the quarter with corporate comps at 11.9% and franchise comps at 7.3%. What
they have seen in the first quarter and so far in the second quarter is that franchise comp sales and
company comp sales are narrowing, the margins are narrowing. A lot of that has to do with
programs they put in place last year, communications with the franchisees, and also more franchise
co-ops are becoming electronically efficient. This past promotion, their 12th Anniversary
promotion, during one of the weeks of that promotion their franchise comp sales actually exceeded
the company's comp sales, both of them being over 10%. So they are excited that the trend is
narrowing. Strong sales continue in the second quarter. The first quarter corporate comp base
consisted of 215 restaurants, or 66% of the total and the franchise comp base consisted of 643
restaurants, or 70% of the total. Average weekly sales for the corporate comp base restaurants
was $13,805 and restaurants not included in the comp base averaged $11,520 for an overall
average of $13,100. Average weekly sales for the franchise comp base restaurants were $12,305
and restaurants not included in the comp base averaged $10,330 for an overall average of
$11,770. During the Summer quarter they expect comps in the 5-7% range.
MARKET PERFORMANCE. Older markets are extremely strong. Louisville, for example,
posted the 45th straight quarter in a row of positive sales. They were up 8.5% for the quarter over
record sales in the first quarter last year and that is dealing with a PSA of almost $17,000 per
week that they are running 8.5% comps. All of their markets were positive and had record
averages during the quarter, there were no negative markets.
COST OF SALES AND OPERATING EXPENSES. Restaurant cost of sales was 26.5% and
operating expenses were 55.1% compared to 27.8% and 54.7% during the first quarter last year.
Restaurants included in their comp base averaged cost of sales of 26.3% and operating expenses
of 52.5% compared to 27.8% and 54.2% during the first quarter last year. As expected,
restaurants not included in their comp base averaged higher cost of sales of 27.1% and operating
expenses of 61.9% versus 28% and 70% during the first quarter last year.
COMMISSARY AND EQUIPMENT OPERATING MARGINS. Commissary and
equipment operating margins improved year-over-year, offset by an increase in G&A and
depreciation for the commissary and equipment group, resulting in approximately 3% profit after
tax. Just as a reminder, Papa John's commitment to their franchisees is to manage these support
groups to approximately 3% after tax and they will continue to do that. They opened 2 new
commissaries during the quarter -- Phoenix, Arizona and Rotterdam, New York. Their ninth
commissary will open in Des Moines, Iowa during the third quarter.
CHEESE COSTS. The cheese block price averaged $1.28 per pound during the first quarter
versus $1.38 per pound for the first quarter last year and cheese is currently averaging $1.26 in the
second quarter. Right now cheese has stabilized to some degree. What they are seeing is a return
to a more normal patter that they would have seen prior to 1996. 1996 was not representative.
Cheese is down right now to $1.18 per pound which is a very low price and they don't expect it to
go much lower. For the second quarter they are averaging about $1.27 per pound versus last year
when it was $1.46 per pound. April last year was when it started a steep climb, so year-over-year
they are in really good shape.
GENERAL & ADMINISTRATIVE AND OTHER EXPENSES. G&A was in line with
revenues of 7.7% for the quarter compared with 7.6% in the same quarter last year. Other
expense of $448,000 consists primarily of costs related to the relocation of restaurants and that
would include equipment and leasehold writeoffs as well as lease buyouts. They have also invested
more in training, which they feel is important.
ADVERTISING AND PROMOTION. Advertising was a little lower in the first quarter
because they launched their thin pizza in the fourth quarter. Going forward, they are going to stay in
the 8.5%-9% range. Their target this year was 9% and they came in a little better than that in the
first quarter. In the second quarter they are doing 12th Anniversary promotions so they would
expect it to be back up in the 9% range. They are media efficient in every trade area because
media is the sum total of all their different messages. They are a very heavy print user. They begin
every trade area with print and maintaining print and go from there. In terms of broadcast they
were in 60 markets for their 12th Anniversary promotion.
THIN CRUST PIZZA PERFORMANCE. They were asked about the impact of thin-crust
pizza in terms of comps. They responded that thin crust did about what they expected it to do. It
has settled to around a 10% mix from a high of 13-14% when they rolled it out. They will continue
to promote it as the year goes on and expect it to grow. At this point out of their comps the thin
crust probably represents something in the neighborhood of 2% of the comps they are currently
running. They want to get more out of it and will continue to promote it.
12TH ANNIVERSARY PROMOTION. They staffed up for their 12th Anniversary promotion.
They didn't see a big impact from minimum wage on their percentage of labor due to their higher
sales. That continued in the first quarter. They have more staffing per restaurant than they have ever
had in their history right now as they head into the 12th Anniversary. 12th Anniversary is a 2-week
promotion. Both weeks of the promotion were record high PSAs for both company and franchise
restaurants. They ran over 10% positive sales during those two weeks which is over record highs
from the previous year. Every corporate market of the 16 achieved record high sales. Some key
markets, St. Louis, had 3 record weeks in a row and in the big week during the promotion
achieved a $17,000 average unit sales. That is a market that, years ago, they were doing $8500
per week. South Florida, another market they have had challenges in, both weeks of the promotion
were over $15,000 average unit sales. Northern Virginia/DC, another challenging market, was
over $14,000 both weeks of the promotion. The Delaware market has held steady at $14,000 per
week with the average store being open just over two months, which is the best market opening
they have ever had. That market did almost $16,000 the big week of the promotion. Something
they are also particularly proud of is that during the promotion they ran their best service of any
two weeks combined in their history. They averaged 16 minutes out-the-door time and that is the
best they have ever done which helped them to achieve all time high sales averages outside of the
anniversary weeks for the company. They will contine to focus on their service and quality.
DELIVERY. They were asked about delivery. They responded that, as a percentage, about 75%
of their business is delivery so it is a major part of what they do. On delivery, they average 16
minutes out the door which means they were giving 25-30 minute service. For pickup, they are
normally between 10-15 minutes for the consumer on wait time.
INTERNATIONAL EXPANSION. They are still in the early stages. They now have a staff of 3
people to work on it. They have identified the first international market they are going to enter.
They have an agreement in principle with a franchise group in place. They also have a general plan
in place which they hope to finalize during this Summer. As they are comfortable sharing that
information they will do so. They are not comfortable talking about specifics until they have their
business plan in place. They expect to have their first international unit open late this year or early
next year.
STRONG BALANCE SHEET. They ended the quarter with a strong balance sheet including
$79 million in cash and investments and $1.5 million in long-term debt. As far as their Louisville
headquarters, they are currently still looking at a July 1998 time frame for the new facilities. They
are evaluating that cautiously. They understand the importance of making sure they are out front
with their units with their commissaries. They have to have the right stores and the right
commissaries to make the better pizza and get it to customers every day. Corporate headquarters
operations and facilities aren't where they make their money. So they are constantly looking at that
and trimming that.
PARTNERSHIP. Although their results are very good on the short-term and the past 13 quarters
their approach is more toward the long term. It is important to them to communicate the important
points of differentiation of Papa John's to the investment community. Although the forum is
corporate their attitude towards their vendors, their franchise family, their employees, and the
investment community is partnership. They hope that the investment community partners with Papa
John's indefinitely.
COMPANY WILL BENCHMARK SUCCESS OVER THE LONG-TERM. They realize
that their comp sales are the best in the restaurant industry. They are excited by the fact that they
opened 90 stores in the first quarter. They don't ever recall setting a store opening record in the
first quarter, usually the first quarter is their worst quarter. Also, for 13 straight quarters they have
met or beat their analyst estimates. They realize the investment community looks at the
month-to-month data, but the company intends to continue to benchmark their progress on a
long-term basis, i.e., they will measure the success on the long-term brand loyalty of the customer.
The only real strength they feel they have is the power they have in the retail pizza market.
Marketing is all about trust. Marketing is all about winning in the long-term.
SUCCESS FROM WORK DONE OVER TIME. They feel they are not having a great 1997
strictly because of things they have done well in 1997. They feel they are doing well in 1997
because of the seeds they planted in terms of hard work, planning, and the positioning they did in
1993, 1994, and 1995. They feel they are going to have a very good 1998 and 1999 because of
the things they are building and deploying and positioning in 1995, 1996, and 1997. Again, they
are going to continue to reinforce victory.
COMPETITIVE LANDSCAPE -- BRAND VS. LABELS. They were asked to talk about the
competitive landscape given Pizza Hut's recent promotion based on "quality." Papa John's founder
John Schneider responded that the battle is really won or lost in the minds of the consumers. They
feel that you need to burn your way into the mind by narrowing the focus. They would rather be
strong somewhere than weak everywhere. They feel that the investment community doesn't
understand the difference between that focus -- the long-term approach to brand versus the label,
e.g., Wendy's Old Fashioned Hamburgers right now is doing pitas. Chili's Bar and Grill is doing a
big hamburger. Long John Silver's Seafood is doing a wrap. Arby's Roast Beef is doing tuna fish.
Pizza Hut local is doing subs. In their opinion, these are not great brands, these are labels or flavors
of the month. These are the kinds of things companies do to try to pacify and make happy the
short-term investor, but the company is going to pay an enormous price in the long term. Papa
John's will continue to make progress on the long term as long as they protect the long-term
well-being of the brand. They have worked 12 hard years to enhance Papa John's enterprise. They
feel, fortunately for them, that no one will be able to copy them in the short term because in the
marketplace in the mind of the consumer, the quality paradigm -- the superiority, positioning, etc.
-- is impossible to imitate or plagiarize when a company is in a defensive, scared mode, scrambling
like most of their competition is doing.
PIZZA HUT'S NEW PROMOTION. They talked about Pizza Hut as an example. Pizza Hut
has realized after a long time period that pizza eaters really want a great-tasting pizza. They have
paid Papa John's a compliment by trying to adopt what Papa John's has been doing for 12 years --
a quality pizza, delivered extremely well. It is one thing to say they are going to do it because they
want to do it, but you have to have a total system in place, a total structure in place to be able to
execute whatever promises they make. It is also interesting that they are going to wrap in their
quality story an ingredient story which is Papa John's story -- better ingredients, better pizza. So,
Papa John's is flattered that Pizza Hut has taken the stance they have. Papa John's will continue to
execute their plan. Their plan is to make their pizza eating customers satisfied day-in and day-out.
They will continue to stay focused. They think any time someone spends a couple hundred million
dollars on something it is going to have an impact. They think the thing that is kind of dangerous for
Pizza Hut with the promotion is the resulting question -- what have they been making all these
years. They think it is dangerous to tell your customer that they have not been getting a good pizza.
That said, we've been through Big Foot, they went through Triple Decker, in 1988 they started
delivery, they have subs right now. Papa John's has seen a slight fluctuation in short-term same
store sales when Pizza Hut launched their $200 million campaign. But, it seems to be very
penalizing to the Pizza Hut brand over the long term when they complicate things -- not only for the
consumer but for store-level operations. They think we can count on seeing some kind of hit to
Papa John's same store sales with the Pizza Hut campaign. But, Papa John's thinks they are
positioned better than ever before and they think that consumers are kind of tired of this flavor of
the month and other things they keep coming up with and Papa John's remains focused on the
long-term results and success.
REACTION TO TASTING PIZZA HUT PRODUCT. They were asked if they had tasted the
new Pizza Hut product and what they thought of it. They responded that they had and, from a
visual standpoint it looks like a better pizza because there is more stuff on top. Clearly it looks
better. From a taste standpoint, they had a hard time telling the difference other than that they were
eating more toppings. There is something in the balance of the ingredients they use that left them a
bit disappointed as a pizza eater with the overall taste, but they recognize they are biased. They are
surprised with the addition of all those toppings and the claims Pizza Hut is going to make about
making a better pizza than they have ever made, that the actual product falls so short of
expectations. But that is Pizza Hut's challenge. As for an improvement, they think it is an
improvement from what Pizza Hut had, they just don't think it is a significant one.
DOMINOS AND LITTLE CAESAR'S. On the Dominos front, they have also tried to adopt a
quality story, but they probably have an equally difficult task. They tried to do that 5 years ago as
did Little Caesar's. It is one thing to say that you are going to shift your strategy and it is another
thing to be able to execute it. Papa John's is winning. They are going to continue to reinforce every
victory. They welcome the competition. The competition has been there all the while. Papa John's
will rise to the challenge every day.
RESPONSE TO PIZZA HUT IMPACT ON MARKET SHARE, IF ANY. They were asked
how they will respond if the Pizza Hut promotion eats into their market share. They responded that
this isn't really anything new. The Big Foot pizza was a $300 million promotion as was Stuffed
Crust pizza. It has been quite a battle now for the past 10 years. That said, Papa John's likes the
four players in this game. They don't like seeing Pizza Hut falter as bad as they have been because
if Papa John's is ever going to have 4000 stores and do $3 billion a year, they really need a big
market. They would like to see pizza go from a $22-24 billion market to a $30-35 billion market.
They have already seen that wherever they go, as long as they execute properly they can get their
market share. They would like to see the leader get back on track to expand the market. Papa
John's is going to continue to focus on their plan and executing well. That has done well for them
for 12 years and they believe that is the best strategy. Their way works. There is no question that
Pizza Hut's promotion will generate trials. The real question is how much of that can they retain.
The difference is what you do every day over the long term.
PRICE WAR. They were asked about price wars developing in the pizza industry. They said that
right now, they are priced above Little Caesars but below Pizza Hut and Dominos. Market
research indicates that people care more about quality than price when selecting pizza. If Pizza Hut
initiates a price war to drive marketshare it will be because they are not succeeding with their new
"quality" promotion, and they will have to drop the price of their pizza significantly at this point to
undercut Papa John's standard pricing, which will hurt them. So, Papa John's is not concerned
about a price war and feels that they are well-positioned and very competitive price-wise. They
also feel that any strong movement on price will be a temporary issue and won't make a lot of
difference in the long run in terms of market share.
CONTINUING TO WORK ON THEIR OWN IMPROVEMENTS. As far as improving
their own product and service, they have many targets in place. 10% of their pizzas are delivered in
longer times than they want, so they have a nice window there to attack and improve.
Product-wise, they believe that only about 80% of all the pizzas going out are "8s" or above as
they rate them. They want to move the "7s" out and get to "8s." They are about to rollout an
operations development program for both the franchise and company restaurants to make sure that
the fundamentals are being more consistently trained throughout the system. They, operationally,
are still below where they believe they need to be and feel there are a lot of opportunities just in
product, service, and training. They are building a base of consistency in terms of what equipment
and systems are used to make it a lot easier to make fine adjustments going forward. They are
working on making their advertising better. They have worked very hard to deliver their message
of quality loud and clear in a memorable, compelling, and persuasive way in television, radio, and
print. They will continue to do that. Some of the other areas they are trying to improve include
public relations and international. When they look at overhead growth, they are growing the
company at about 40% per year. That is big. There is a lot of opportunity to continue to operate
more efficiently, more effectively, and the team is committed to getting a little better every day.
They are looking at slowing some of their overhead growth as a percentage versus their total
company growth. They have some programs right now focused on just that. |
