LOUISVILLE Ky. Papa John’s International Inc. said late Tuesday it would ease economic pressures on domestic franchisees by reducing the price of cheese typically charged by the franchisor and exploring ways of providing financial assistance during the credit freeze.
Papa John’s, parent of the 3,317-unit pizza chain, already has rolled back the cheese prices for the final two months of the year. The move by the pizza segment’s third-largest player could reduce domestic franchisees’ food costs by about 1.4 percent, the company said.
The price is now based on the expected futures spot market price for cheese, plus interest, which Papa John’s said is about 28 cents per pound less that the standard cheese price the franchisor charges through its commissary.
In addition, the company said it would consider offering additional financial assistance to franchisees, but it did not detail those plans.
“Some franchisees, or prospective franchisees, are experiencing difficulty in obtaining financing from commercial banks for working capital or development purposes,” the company said in a statement. “In addition, our franchisees continue to face pressures on operating margins related to increased commodity and labor costs. In light of these conditions, we are considering various options to assist our domestic franchisees through this difficult period.”
The moves follow similar undertakings by rival Domino’s Pizza, which said late last month it would consider offering bridge financing or royalty cut backs to certain franchisees that want to expand but can’t obtain financing for restaurant acquisitions. Industry observers have said that franchisors, especially those reliant on franchisee expansion and health, will have to brainstorm financing alternatives to help franchisees survive an economic downturn that has raised operating costs while slowing sales.
In a possible indicator of what’s to come, the company separately said it has agreed to sell 37 corporate restaurants to a franchisee as part of its refranchising program. The latest deal, however, will be fully financed by Papa John’s — a rare move, as the operating results of the sold restaurants will still require inclusion in Papa John’s financial statements even though the company has no ownership in the locations. It may also reduce corporate earnings.
“Given the current credit environment, we will provide 100 percent of the financing for the transaction,” Papa John’s said, “with [an] expectation that the buyer … will obtain third-party financing at a future date when the credit markets have stabilized.”
The corporate steps could reduce profit this year and the company’s per-share earnings outlook for next year, Papa John’s said. The company now expects full-year, per-share earnings to hit the low end of its $1.68 to $1.76 target. The company added, however, that any short-term initiatives will produce long-term benefits mainly by mitigating restaurant closures.
For the third quarter ended Sept. 28, Papa John’s net income rose nearly 60 percent to $7.7 million, or 28 cents per share, from year-ago earnings of $4.8 million, or 16 cents per share.
But excluding a series of such items as restaurant sales and closures as well as the finalization of income tax issues, Papa John’s adjusted earnings fell 18 percent in the latest quarter to $7.9 million, or 28 cents per share, from year-ago adjusted results of $9.7 million, or 32 cents a share.
Latest-quarter revenues rose 6.6 percent to $280 million. Domestic same-store sales rose 1.9 percent at corporate restaurants and 1.6 percent at franchised locations. The company said it booked negative same-store sales in Septembers and October, however, and that full-year domestic same-store sales growth is expected to be near or below the previously issues forecast of between 1.25 percent and 2.75 percent.
