Louisville, Kentucky-based Papa John’s International Inc. (PZZA) recently initiated the guidance for 2011 and affirmed the same for 2010.
Based on the domestic system-wide comparable sales growth of 1.5% to 2.5% and international system-wide comparable sales growth of 1.0% to 3.0%, the company expects its 2011 earnings per share to be in the range of $2.00 to $2.12, up 16% at the mid point. The guidance excludes the impact of consolidation of the franchisee-owned cheese-buying company BIBP Commodities Inc.
Total consolidated revenue is expected to increase 4% to 5% year over year in 2011 on North America and International net unit and comparable sales growth. The consolidated pre-tax income margin for 2011 is expected to increase 0.75% to 1.00% year over year driven by the comparable sales and unit expansion leverage.
Management also anticipates that the interest expense will decline primarily due to a substantial fall in the effective interest rate when the existing interest rate swap agreements expire in January 2011.
On the expansion front, Papa John’s plans to open 190 to 220 stores in 2011, including 85 to 100 stores in North America and 105 to 120 internationally. The entire worldwide net unit growth is expected to be franchised, with single-digit company-owned unit growth expected in North America and Beijing.
Last week, Papa John’s also announced the incentive program for franchisees to develop in 2011. Qualifying restaurants will receive franchisee fees exemption of $25,000, two Middleby ovens, and a royalty waiver for up to 12 months. Additionally, Papa John’s is providing a $3,000 food credit to franchisees opening units 30 days earlier than scheduled.
We expect multi-year National Marketing agreement signed between the company and its domestic franchisees to create sufficient brand awareness for Papa John’s. Additionally, the shift to a franchise-driven business model will also help mitigate the volatility in earnings.
Papa John’s has realigned its business segments as well. The company plans to shift management responsibility for Hawaii, Alaska and Canada from its international to its domestic segment, beginning in the first quarter of 2011. About $1.4 million of operating income will be shifted from its international business segment to the North America Franchising business segment in 2011.
Last month, Papa John’s came up with its third quarter results and lowered the upper-end of its 2010 earnings guidance from $1.74 to $1.82 per share to $1.74 to $1.80. The company is slated to release its fourth quarter earnings on February 21, 2011.
Management expects the current pricing and promotional environment in the pizza category, along with increasing commodities costs trends, to be a drag on restaurant margins in the fourth quarter of 2010. The company is also expected to face stiff competition from the pizza majors including Domino’s Pizza Inc. (DPZ) and Pizza hut of Yum! Brands Inc. (YUM).
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