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Papa John's Sales, Store Openings Rise Amid Heavy Competition

--Papa John's focuses on opening new stores in both U.S. and internationally --Same-store sales, profit margins see boost in 1Q --Shares soar 17% to $46.22 By Annie Gasparro Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Papa John's International Inc. (PZZA) logged higher sales at home and abroad in the first quarter, despite aggressive discounts and marketing by its larger rivals. At times, Papa John's has struggled to compete with the mouth-watering deals offered by Yum Brands Inc.'s (YUM) Pizza Hut and Domino's Pizza Inc., given its own aversion to such discounts. But Papa John's delivered first-quarter sales growth of 1.1% in North America--on top of 6.7% the year before--and 8.4% internationally, at restaurants open at least a year. "We are pleased to keep our pricing at somewhat of a premium to our competitors as consumers continue to recognize that our 'better ingredients, better pizza' is worth just a little bit more...among a significant amount of continued discounting from our competitors," said founder and Chief Executive John Schnatter on a conference call. Papa John's has continually argued that maintaining its position as the "premium" pizza delivery chain is key to its long-term profitability. "Everybody wants to own our position or a Chick-fil-A position: a quality position," Schnatter said. "The problem with owning quality is that it takes time and it costs money, and most companies aren't willing to do that." Papa John's shares were soaring 17% to $46.22 Wednesday, representing a 23% climb so far this year, as its latest earnings came in far above Wall Street analysts' expectations. In the first quarter, Papa John's profit rose 1.9% to $16.7 million, or 69 cents a share, as revenue increased 6% to $331.3 million. Excluding the impact of a previously announced marketing incentive contribution, earnings would have been 79 cents per share, an increase of 23.4% over the prior year. The strong quarter caused Papa John's to raise its expectations for the year, now calling for earnings of $2.40 to $2.50 per share, up from the previous projection of $2.33 to $2.43 per share. Papa John's says creating the image of higher-quality food that consumers are willing to pay more for allows it to protect its profit margins in the uncertain economy. In the first quarter, its domestic company-owned restaurant margin widened to 21.9% from 20.4% the prior year. "So, with it being Derby week, we will do a horse metaphor," Schnatter said. "This is not a game of Jockey, this is a game of horses, and we have the best horse." Papa John's highly advertised Super Bowl promotion helped boost first-quarter sales, while adding customers to its loyalty program and email roster, which are intended to drive return business. Still, Papa John's says the company's most significant growth will come from opening new stores rather than increasing sales at existing ones. During the first quarter, Papa John's opened 50 net new stores worldwide--34 of which were in North America--bringing its total to more than 3,900 restaurants in 33 countries. Schnatter said that while international markets offer great opportunity for growth, he believes Papa John's has room to expand in the U.S. too. "There is no doubt we have to be successful in the Asian-Pacific region with China and India," Schnatter said. "With that being said, we don't want to put all our eggs in a basket that could burst...And China does look like a bubble." Meanwhile, Papa John's competition has slowed expansion in the deeply saturated U.S. market in favor of emerging ones. Domino's has been heavily touting its India business, and Pizza Hut is focused on both its upscale casual dining and delivery units in China. That said, Domino's and Pizza Hut have a competitive advantage given their size and scale, with Domino's roughly 9,800 worldwide stores and Yum Brand's more than 37,000 KFC, Pizza Hut and Taco Bell restaurants. -By Annie Gasparro, Dow Jones Newswires; 212-416-2244; annie.gasparro@dowjones.com

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