CEO: Papa John's expects higher royalty revenues in FY08
Papa John's International, Inc. (Nasdaq: PZZA) CEO Nigel Travis said the company expects increased revenue from higher royalty revenues in a new franchise agreement. Travis made the comments during the pizza delivery chain’s morning conference call.
The rate increases are designed to counteract higher commodity prices, he said, but will eventually add profit to Papa John’s balance sheet.
“After 2008, assuming a more normalized cost environment, we would expect the royalty rate increases to produce annual operating income at the rate of approximately $3.5 million to $4 million per quarter, most likely beginning in 2009,” Travis said.
Beginning in 2008, the firm’s franchise royalty rates will increase 4.25% and will increase an additional 0.25% at the beginning of 2009, 2010 and 2011. The additional income will allow Papa John’s to compete more effectively against the “much larger” marketing budgets of the company’s national competitors, he said.
CFO David Flanery said Papa John’s is “confident” it can achieve its earnings guidance by controlling general and administrative costs. The company raised its fiscal 2007 earnings to a range of $1.64 to $1.68 per share, from a previous range of $1.56 to $1.60 per share. The outlook excludes the impact of the consolidation of BIBP Commodities, Inc. Flanery noted that the impact of a tax issue during the third quarter added $0.08 earnings per share.
The firm’s debt outstanding at the end of the third quarter was $124.5 million, Flanery said.
During the fourth quarter, Travis said Papa John’s secured marketing rights to the Spiderman III DVD. The pizza chain will release a Spiderman-branded pizza during the fourth quarter. During the last week of October, Travis said the company set a record for online pizza orders, supported by “great football on TV” and Halloween.
Travis said he expects the firm’s international segment to break even in 2010. During the third quarter, Papa John’s international restaurant sales increased to $5.28 million, up 36% from $3.89 million a year earlier. Currently the company is the second-largest pizza chain in China, but Travis said the company is “not likely” to catch up with China’s market leader, Pizza Hut.
The company is in the final beta testing phase of its cell phone text message ordering system, Travis said. The service will allow consumers to order pizzas from their Blackberries or cell phones.
“Only about 25% of mobile phones currently offer the technology needed for that kind of ordering. Industry research shows there are three times more active SMS users than mobile Web users.”
Travis also noted that there is room for price increases. He said Papa John’s quality will give the firm an advantage if price increases occur.
Before the opening, Papa John’s reported third-quarter revenue of $262.78 million, 10% above $239.69 million a year earlier. The firm’s quarterly profit, however, fell 63% to $4.83 million, or $0.16 per share, down from $13.1 million, or $0.40 per share, last year.
“Given the tough macroeconomic condition and a very competitive category, our Q3 performance was good,” Travis said.
The firm had positive comparable store sales during the third quarter and Travis said the sales momentum has continued into the fourth quarter.
The firm expects 2008 to be a “healthy cash flow year” as capital expenditures decline modestly and acquisition activity “all but ceases,” he said. Papa John’s will provide an update on its capital structure and earnings guidance in mid-December, Travis said.
In midday trading, PZZA shares are up 6.05%, or $1.38, at $24.21. Over the last 52 weeks, shares have ranged from $21.76 to $34.57.
