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Papa John's Supports US Franchisees

PZZA DPZ

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In order to shore up its U.S. franchisee business, Papa John's International Inc. (PZZA - Snapshot Report) banked on a slew of initiatives. The latest one is the announcement of the ‘2013 Development Incentive Program’ that offers a package of incentives to its existing and potential domestic franchisees.

The initiative is a part of the company’s ’Domestic Franchise Development Incentives’ scheme that was introduced in 2009 to increase unit openings. According to management, the program that has so far garnered huge acceptance has boosted its unit openings considerably since 2009.

The latest program exempts franchisees from franchisee fees (standard fee is $25,000) as well as equipment cost of $50,000 for new units opened through 2013. A royalty waiver for up to 18 months is also included in the program.

The list does not end here. A food credit worth $3,000 with PJ Food Service, which operates Papa John’s fresh dough and food distribution quality control centers, will also be offered for each restaurant that opens at least 30 days prior to the scheduled opening date. Franchisees signing new U.S. unit development agreements through November 30, 2013, for new restaurant openings on or before December 29, 2013, will be eligible to access this program.

We believe, following the continued traction in the North American franchised business, as evident from the 5.1% growth in domestic franchise comparable sales growth in second-quarter 2012, management resorted to this initiative to further spur the segment. Papa John’s also implemented a royalty rebate for the franchisees that can be availed upon meeting certain conditions.

A ‘Franchise Support Initiative’ is also in place that includes food cost relief by lowering the commissary margin on certain commodities sold to franchisees, targeted royalty relief, local marketing support and more.

Papa John’s believes that these support programs help gain market share as well as reduce potential unit closures amid a tough economic condition. This Louisville, Kentucky-based company also uses several other options such as Franchisee Loans, Franchise Insurance Program, Franchise Training and Support.

Presently, most of the companies are transforming to a more franchise-centric model to reduce the volatility in earnings and increase cash flow generation. As of June 24, 2012, Papa John’s had 3,973 restaurants across 33 countries, among which 3,297 were franchised. Of the total franchised units, North America had as many as 2,475 units.     

We remain encouraged by the company’s long and successful track record, continued uptrend in earnings, upbeat guidance, viable business strategy and strong balance sheet. In fact, this latest strategy of freebies-to-franchisee will help strengthen its franchisee network and perform better going forward.   

Papa John’s which competes with the likes of Domino's Pizza Inc. (DPZ - Analyst Report), currently carries a Zacks #1 Rank, implying a short-term strong Buy rating. We also reiterate our long-term Outperform recommendation on the stock.

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