Papa John's Grabs Pizza Share On Web Orders, Ad Claim


Papa John's ( PZZA ) may be No. 3 in size in the pizza wars afterYum Brands ' ( YUM ) Pizza Hut andDomino's Pizza ( DPZ ), its chief rival in deliveries.

But the growing operation led by founder John ("Papa John") Schnatter claims it is tops in quality, at least among the major chains.

Its advertising tag line: "Better Ingredients. Better Pizza."

That quality message makes its slightly higher prices easier to swallow, management says.

A bevy of emerging pizza players in local and regional markets might beg to differ, claiming their handcrafted pies have even fresher ingredients and taste better.

True or not, such claims may not add up to much when it comes to the ordering power of the Web.

More than 40% of Papa John's U.S. orders in 2012 came from digital sources, whether through a mobile phone, smartphone, tablet or personal computer, said Chief Financial Officer Lance Tucker in a recent phone interview.

At Domino's, digital orders make up 35% of the total.

"We're taking market share from the smaller mom and pops and local and regional chains," Tucker said. And he says a chief reason is its ability via digital orders "to reach consumers wherever they are."

Papa John's is increasingly everywhere. It opened its 4,000th restaurant last year and ended the year with 4,163 units. Of those, 3,204 were in North America and 959 in international markets.

"Domino's is a little more mature in the U.S. and on a faster growth trajectory internationally," said restaurant analyst Peter Saleh of Telsey Advisory Group. "Papa John's has more growth prospects in the U.S. and there is no reason it can't get to 2,000 or 3,000 overseas. It's at an earlier stage."

New Restaurants

Papa John's intends to open 230 to 260 net new units this year, roughly evenly split between North America and the rest of the world. Its two biggest overseas markets are the U.K. and China.

The company's international business attained profitability last year for the first time in years.

Schnatter told analysts in the fourth-quarter earnings call that agreements are in place to open 1,400 units worldwide over the next six years.

Papa John's fourth-quarter same-store sales in North America grew 5.2% and 7% in global markets. For the full year, they were up 3.6% and 7.1%, respectively.

First-quarter results will be released Tuesday.

"They probably had a fine quarter," Saleh said. "But this is a company that doesn't build business for any one particular quarter. They build for consistent growth and results over a long period of time."

Analysts expect Papa John's first-quarter earnings to rise 18% over last year to 81 cents a share on revenue of $364 million, up 10% from the prior year, according to a Thomson Reuters poll.

Tucker attributes much of the company's steady growth in sales, profits and unit openings in recent years to founder Schnatter's return to leading day-to-day operations in late 2008.

He oversaw new brand-building efforts, including beefed up marketing. The company extended its three-year sponsorship with the NFL earlier this year "for the long term," Schnatter said in the conference call.

Papa John's also got a new spokesman last year in the Denver Bronco's Peyton Manning, who also morphed into a Papa John's franchisee in the Denver market.

"Papa John's is also pushing hard on its loyalty rewards program," Saleh said.

Digital Orders

Papa John's management says average orders through digital channels are typically higher than phoned-in orders. Since customers can see the entire menu on their screens, they are more apt to supersize their orders with add-on items.

Orders are also more accurate than those phoned in. And as analyst Saleh says, they save on labor costs since a store employee doesn't have to spend time taking an order over the phone.

"So it's cost savings on labor and food waste and higher customer satisfaction and higher average checks," he said.

Domino's has also pointed to the advantages of taking orders online, both domestically and overseas. Its first-quarter profit, reported on Tuesday, jumped 25.6% to 59 cents a share. Revenue grew 8.6% to $417.6 million. Both were above analysts' estimates.

Domino's same-store sales in the U.S. rose 6.2% while international's jumped 6.5%.

Pizza Hut didn't fare so well. Yum Brands said Pizza Hut's same-store sales in the U.S. fell 1% in the first quarter.

Pizza Hut has had a tougher time competing with upstart local pizza restaurants, analysts say.

Major pizza chains make up about 55% of the pizza delivery market, so the category is still fairly fragmented, Saleh says. Independents make up 30% and smaller chains comprise the remaining 15%.

"There is still a lot of share for the major pizza chains to capture from small independents and small chains," he said.

Those smaller operators don't have the same level of marketing resources, and their smaller scale means they're at a buying disadvantage in terms of food costs.

Restaurant analyst Lynne Collier of Sterne Agee expects food costs to rise only slightly this year, 2% to 3%, most of it beef-related.

But she noted in a recent report that cheese prices are on the rise due to a drought in New Zealand, the largest exporter of dairy products.

Big chains typically lock in prices on key products over a longer period to offset cyclical price swings.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: DPZ , PZZA , YUM

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