Papa John's to 'prune' intl. markets in '06

March 11, 2006

Last year was stellar for Papa John's ... a turnaround year when founder John Schnatter gave his chief executive's chair to outsider Nigel Travis ... a make-or break year in the minds of shareholders frustrated with the chain's performance ... a "What the heck are they doing?" year for pizza industry competitors who gulped as the No. 3 chain broke a three-year string of uninspiring performances ... a money-making year when its stock price soared to a record and nearly tripled.

And yet there's much work to be done at Papa John's, according to Travis, also the Louisville, Ky.-based company's president. Speaking to stock analysts and media during a March 1 investor conference call, the first-year CEO applauded his company's successes, but pointed out the stiff challenges remaining: two foundering international markets; a need for deeper U.S. penetration; and the search for a replacement for former international director Grant Miller—a person, who Travis anticipates being his successor.

In the United Kingdom, Travis's homeland, Papa John's is selling the Perfect Pizza chain, which it purchased in 1999. The investment never yielded great dividends, and in 2005 it cost Papa John's a $1.1 million impairment charge after being reclassified as "discontinued operations." Now at 112 units—down from 205 units when Papa John's bought it—the company is

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Despite an incredible year in its U.S. market, Papa John's CEO Nigel Travis sees much room for improvement in the chain's international markets.

In 2006, it will sell off its 112-unit Perfect Pizza chain in the U.K., and it will close its Mexico units in preparation for reopening them when it finds suitable franchise partners.

The company sees great potential in penetrating deeper into U.S. markets and expanding into new territories like China, Korea and India.

eager to sell the brand in order to devote all its U.K. resources to its 89 Papa John's units.

In Mexico, where Papa John's had 57 stores two years ago, 17 stores closed in 2005, and before the end of 1Q '06, the remaining 22 are expected to close. Though it's a red-hot property in the U.S., the chain has never had much south-of-the-border sizzle.

But Travis, ever the optimist, views both the changes in both countries, positively.

"Sometimes to move forward, you need to prune the existing business, and that's what we've been doing in the U.K. and Mexico," he said. "We believe in the future potential of our Papa John's brand in the United Kingdom. ... In Mexico ... we believe the closings will give us the opportunity to restart our operations there on a much stronger footing. ... You'll see us putting a lot of focus on getting the product right, getting the marketing right and getting the operations right."

In recent regulatory filings, Papa John's did not elaborate on its problems in Mexico other than to say it's searching for better franchisees.

At Perfect Pizza, however, it blamed steadily declining sales and profits as the impetus to dispose of the chain. In 2005, Perfect Pizza's profit was $1.78 million versus $3.18 million in 2004. Net sales in 2005 were $13.6 million, down from $17 million the year prior.

But even without Perfect Pizza, improving its situation in the highly competitive U.K. market won't be easy for Papa John's. Recent Pizza Hut numbers show the chain's struggles there continue unabated. (Read also Pizza Hut sales slide in the U.K.) Domino's Pizza UK & IRL, however, had an impressive 2005 (read also Online ordering drives strong year at Domino's Pizza UK & IRL), and England's own 350-unit Pizza Express chain is enjoying strengthening sales as well.

Still, Papa John's remains bullish on international growth, though its non-U.S. segment (which now excludes the Perfect Pizza) lost $5 million last year and $4.3 million in 2004. The company views China, Korea and India as markets of large potential. The chain opened 96 international units in 2005, including 39 in Korea and China (a total of 65 operating in the two countries). Papa John's has agreements for an additional 490 units in those same areas over the next nine years, plus a 100-unit development agreement for Northern India, the first unit of which is expected to open in the second quarter of 2006. It also is sending out franchise feelers into the ultra-competitive Australia market, where Domino's Pizza and Eagle Boys Pizza rule the roost.

"Our total international development pipeline as of the end of 2005 included 848 units to be opened over the next 11 years," the company said in a regulatory filing.

Stateside initiatives

Despite the chain's impressive 2005, Travis isn't content to put Papa John's U.S. operations on cruise control. Online sales increased 50 percent in 2005 (the company won't cite specific sales or transaction numbers), and Papa John's expects that to increase this year with increased e-mail marketing campaigns.

It expects customers will order more online now that its Web site can accept advance orders 24 hours a day and as far as 21-days ahead of delivery. Previously, the system could only accept online orders during store operating hours.

Travis mentioned "an exciting promotion coming out in April, which we cannot discuss at this time for competitive reasons," and added that customers should expect new product rollouts to continue throughout 2006.

And in a move designed to improve the customer

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carryout experience, all stores will get a $2,000 re-imaging package.

Travis called new unit development his top priority for the year and set a system-wide net-unit increase goal of about 145. He said the company's developing "buy and build strategy ... will help accelerate the development of certain under-penetrated markets" in the U.S., such as Philadelphia. It acquired 15 franchise units there last year, it plans to open five new units there this year and "we anticipate building an additional 20 or more corporate stores there over the next four to five years."

Investment analysts, such as Buckingham Research's Mark Kalinowski, responded favorably to Papa John's plans. A day after the call, Kalinowski rated Papa John's stock "accumulate," and set a target price of $40.

"Our bullish investment thesis on the shares of Papa John's International primarily reflects our belief that the domestic system has fixed a good portion of the operational issues which dogged the chain earlier this decade," Kalinowski wrote. "(That) should lead to more stability in same-store sales trends, and opportunities to accelerate net unit growth worldwide."

Topics: Marketing , Papa John's , Public Companies

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