Papa John's Guidance and the State of QSR Franchisors

| About: Papa John's (PZZA)

Not sure if you caught it, but in its December 15th, 2009 earnings outlook announcement, Papa John's (NASDAQ:PZZA) noted it expected negative domestic same store sales, down 0 to 2% next year, and a decrease in US unit counts of 50-70, but a increase in international counts of 170-190.

The recognition of a decline in US unit counts is both breathtaking but a sign of things to come. In the past, it was the weak operators, like Krispy Kreme (KKD), that posted unit count decreases. Krispy confirmed significant closes likely upcoming, last week. Now, even stronger concepts may experience unit count declines.

Keep in mind that Papa John's has a decent unit economics model, with company store sales of about $830K and a 18% unit level profit margin.

For years, the restaurant sector was built around unit growth, with franchisors attaining 70-100% incremental profit flow through on franchise royalties received.

The US is way over restaurant developed, with almost 900K restaurants in 2007. But QSR franchisors will have a difficult time growing, with the credit crisis underway, particularly if they don’t have larger franchisee groups. The days of the single unit, mom and pop franchisee model is fast drawing to an end.

We attended the November 2008 Restaurant Finance Conference in Las Vegas, and the lenders there all said "money is available". But the reality is there may be some money available for the large successful franchisees, since they have a track record, and hopefully some internally generated cash flow, to fund unit growth internally.

Disclosure: no positions