Papa John's bets on long-term initiatives to counter sales slump

Oct. 31, 2002

LOUISVILLE, Ky. -- A warning from Papa John's International that its 18-month sales slump will carry over to 2003 sent the company's stock tumbling more than 16 percent in two days.

During the company's Oct. 30 conference call with stock analysts and journalists, several company officers cited intense price competition and poor franchise store performance as core reasons for a third-quarter '02 same-store sales decline of 2.5 percent. (See also Q3 report illustrates Papa John's continued challenges.)

For the first nine months of 2002, sales at Papa John's have dropped 1.2 percent, and the company believes its October sales will be off as much as 3.8 percent from last year's pace.

Papa John's will meet this quarter's earnings-per-share projection of 58 cents, but largely because of its continued stock buyback program.

In 2002 alone it has spent $42 million repurchasing 1.4 million of its own shares. (On Nov. 1, the company announced its board of directors approved spending as much as $50 million more on Papa John's stock by Dec. 28, 2003. The company has repurchased $325 million of its own stock since the buyback program began two years ago.)

Forty-eight hours after the conference call, Papa John's share price had dropped from a five-day high of $30.75 on Oct. 28 to $24.44 on Nov 1. That mark is well below its 52-week high of $35.19, but still above its 52-week low of $23.37.

Whoa! to growth

Though growth was Papa John's strong suit throughout the 1990s, when it achieved a store-opening pace of 400 units in some years, its net store-opening count in the first three quarters of 2002 is just 17. Last year the company projected it would open as many as 165 stores and close some 120 others in 2002. Through the first three quarters of the year, however, 90 new stores have opened, while 73 have closed.

In 2003 it is forecasting no net unit growth.

Chief resource officer Mary Ann Palmer said the company still believes it can achieve its goal of 3,300 total U.S. stores, but she didn't set a timetable. She said Papa John's has its work cut out for it to add units in the challenging markets of the U.S. West and Northeast, where well-entrenched independent pizza shops dominate.

Marketing moderately

Despite its struggle to maintain positive comps, COO Robert Waddell insisted Papa John's won't slash prices like its closest competitors -- Dallas-based Pizza Hut and Ann Arbor, Mich.-based Domino's Pizza -- to generate short-term sales gains.

He cited new, inexpensive and heavily marketed products, such as Pizza Hut's $5.99 Pzone deal as instrumental in luring buyers away from Papa John's somewhat pricier pizzas.

"Most recently, in certain markets, Pizza Hut has offered the Chicago-style product on a buy-one-get-one-free basis, with a one-topping medium for $11.99," Waddell said. "I'm not sure we understand the logic of this promotion, but we do know it is an incredibly aggressive deal."

Domino's own long-running "three medium pizzas for $13" deal and its buy-one-get-one-free pizza offer on Sundays, Mondays and Tuesdays, he added, demonstrate that company's willingness to trade profits for market share.

"It would be easy to chase these guys down this price rat hole, but we think that driving transactions at all costs is bad business," Waddell said. "Playing the price game can be a recipe for disaster. While it may build short-term sales, it is contrary to our long-term way of thinking."

While Papa John's has introduced two new pizzas and a chicken strips side item this year, Waddell said none of the three was sold at a deep discount like similar products introduced by competitors. He said all three accomplished their intended purpose: to deliver an incremental sales boost and broaden the menu.

"It would be easy to chase these guys down this price rat hole, but we think that driving transactions at all costs is bad business."

Robert Waddell
COO, Papa John's International

In response to an analyst's question regarding Papa John's own deep-dish pizza test, Waddell said it was still under evaluation and that he was "not prepared to comment" on a possible roll-out date.

Waddell did say that the company will increase its advertising spending slightly in 2003, and that its new ad firm, Atlanta-based Austin Kelly, will help it do its first ever movie tie-in. That promotion begins when the animated adventure tale "Ice Age" comes to theaters on Nov. 4.

An eye toward the future

Chief development officer Chuck Schnatter said since the company began its international expansion program in 1998, it has added a total of 346 stores; 205 of those came from its purchase of the UK-based Pizza Perfect chain in 1999.

Forty-seven Pizza Perfect stores have been converted to Papa John's, and the company plans to convert the remaining units at a rate of 20 stores a year.

As a result of recently signed agreements for new store openings in Asia and Europe, Schnatter said the number of stores in Papa John's international development pipeline is now 522 in 14 markets. Those stores are planned to open over a nine-year timeframe, but Schnatter said the number of new units opened could be much higher.

"We see the potential for 1,500 new restaurants over the next 10 years or so," said Schnatter. "Our two biggest competitors have a tremendous presence internationally ... they have paved the way for us to grow Papa John's on a global scale."

Testing technology

Chief administrative officer Julie Larner said the company plans to continue developing technological assets such as its proprietary POS software and its online ordering service.

One goal, she said, is to use the company's POS system to procure sales and customer data from its stores and warehouse it at its Louisville headquarters. The company expects to use that data to develop highly targeted promotions based on a better understanding of its customers' buying habits.

The latest version of the POS system's software "is being tested and likely will be deployed in our corporate restaurants by Q1 2003, followed by our franchise restaurants throughout the year," Larner said.

While its online order numbers make up only a small percentage of Papa John's overall customer purchases, Larner said it's pleased with Internet sales traffic growth. Given that the service has received no special promotion other than Web site mentions on pizza boxes and advertising materials, she said usage of the service is growing at a better-than-expected rate.

In 2003, the company expects the online ordering service will pay for itself and include online credit card acceptance.

All in all, she said, development of its e-sales vehicle will proceed at a measured pace to ensure "that technology is sound, and we're comfortable with the operational integrity of the system."

Topics: Public Companies

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