• Q3 report illustrates Papa John's continued challenges

LOUISVILLE, Ky. -- Papa John's International (PZZA:Nasdaq), once the pizza industry's fastest-growing company, continues to show signs of an overall system slowdown through its third quarter 2002.

According to a company report, reduced operating and commodity costs helped the world's third-largest pizza chain maintain projected earnings per share on its stock. But sales at both corporate and franchise stores have continued to slide amid keen competition. In October alone, comparable-store sales are expected to be off 3.8 percent.

Revenues for the quarter, which ended Sept. 29, were $227.9 million, down 5.6 percent compared to $241.4 million for the same period in 2001. Net income was $10.5 million, identical to the number reported in the same period last year.

Diluted earnings per share for the period were 53 cents, up from 46 cents for the same period in 2001. The company credited the rise to its continued stock repurchasing program.

Third-quarter systemwide domestic comparable-store sales dropped 2.5 percent, made up of a .7 percent decrease at company-owned restaurants and 3 percent decrease at franchised restaurants.

For the first nine months of 2002, domestic systemwide comparable-store sales decreased 1.2 percent, made up of a .1 percent increase at company-owned restaurants and 1.7 percent decrease at franchised restaurants. The company blamed comp-store sales drops for both periods on "the overall competitive environment, including significant price discounting by major competitors."

In 2001, Papa John's projected it would open as many as 165 new stores and close some 120 others in 2002. Through the first three quarters, 90 new stores have opened, while 73 have closed.

The company's UK-based Perfect Pizza chain saw 12 of its stores converted to the Papa John's brand during the third quarter.

Papa John's stated it will spend an additional $3.2 million in 2003 on store managers' salaries in an effort to reduce turnover. But at its corporate headquarters, the company has cut a "relatively small number" of positions this year. It did not specify which positions were cut or how many.

The chain also continues to battle widespread problems with its heated delivery bag systems. In 2002 alone it has absorbed approximately $900,000 in costs connected to a plan for refurbishing the systems. The report said it's still too early to tell whether the repairs are working, "although early results are encouraging."

Some bright spots in the report included a 3.6 percent drop in the company's cost of sales in 2002, thanks to price reductions on cheese and other commodities. The company's occupancy costs also dropped .1 percent, due mostly to favorable utilities costs in the U.S.

As of Sept. 29, there were 2,782 Papa John's stores (596 company-owned and 2,186 franchised) operating in 49 states and nine international markets. It also owns or operates 157 Perfect Pizza restaurants (two company-owned and 155 franchised).

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