Pittsburg, KS - NPC International, Inc. announced earnings for the third quarter ended Dec. 23, 1997.
The company reported consolidated net income for the quarter of $3,058,000 or $.12 on a basic and diluted per share computation, which was 17% less than the $3,678,000 or $.15 per share reported last year. For the year-to-date, the Company had consolidated net income of $13,525,000 or $.55 per share on a basic and $.54 per share on a diluted basis for the thirty-nine weeks ended Dec. 23, 1997, for an increase of 3% over the $13,146,000 or $.54 and $.53 per share, respectively, reported last year.
Earnings for the quarter were adversely impacted by lower margins on "The Edge" Pizza that was introduced on Oct. 26th, increased commodity costs, implementation of the Company's delivery dominance program, and launch costs associated with "The Edge". "The Edge" is a lower margin product due to its introductory price point of $8.99 for a medium and $11.99 for a large combined with a more abundant topping specification. "The Edge" accounted for 15.7% of the Company's Pizza Hut sales since it's introduction on Oct. 26th. The impact of reduced margins from "The Edge" combined with increases in Pizza Hut commodity costs during the quarter caused cost of sales in the Company's Pizza Hut division to increase by approximately 1% of sales from the second quarter of this fiscal year.
As expected, Tony Roma's margins were adversely impacted by a 40% increase in baby back rib costs during the quarter which increased cost of sales by approximately 2.5% of sales from the second quarter of this fiscal year. The implementation of the Company's delivery dominance program in its Pizza Hut division also impacted margins during the quarter as the Company increased delivery staffing levels and training to improve the Company's delivery service.
Operating income, or earnings before interest and taxes (EBIT) increased 19% and 25% from the prior year on a quarter and year-to- date basis, respectively and earnings before interest, taxes, depreciation, and amortization increased 31% and 36% from the prior year on a quarter and year-to-date basis. This growth was attributable to the earnings contribution from the acquired Pizza Hut markets and Tony Roma's restaurants opened over the last twelve months.
Operating income declined as a percent of revenues from 9.8% to 7.7% for the quarter and 11.7% to 9.6% for the year-to-date, largely due to the previously mentioned factors. From a year- to-date perspective, operating income, as a percent of sales, was also impacted by the acquisition earlier in the fiscal year of certain Pizza Hut units with operating margins below the Company's historical averages and the increase in the royalty rate paid to the Company's Franchisor from 2.25% to 4.0% effective July 22, 1996.
Total consolidated revenue was $112,926,000 during the quarter for an increase of 52% from the previous year. On a year-to-date basis revenue totaled $330,737,000 for an increase of 53% from the $216,219,000 recorded last year. The quarterly and year-to-date increase in revenue was due to growth through consolidation of the Pizza Hut system and continued expansion of the Tony Roma's concept.
Revenue from the Company's Pizza Hut operations was $90,553,000 during the quarter for an increase of 65% over the same period of the prior year. Year-to-date revenue was $263,472,000 for an increase of 64% over the $160,923,000 reported last year. The increase in quarterly and year-to-date revenue was due to the acquisition of 282 units since the comparable periods of the prior year. Comparable sales, although negative, improved from the negative 7.2% reported in the second quarter to negative 5.6%. On a year-to-date basis comparable sales have declined 7.5%. During the quarter, comparable sales declined by 9.3% during the Company's October period as the Pizza Hut system reserved a majority of it's advertising spending to support the Oct. 26th launch of "The Edge". Since the introduction of "The Edge" pizza comparable sales improved to negative 3.6% and negative 3.5% in the Company's November and December periods. The majority of this improvement was realized in the Company's delivery business where comparable sales improved from negative 11.9% in October to negative 1.8% and negative 1.1% in November and December, respectively.
Tony Roma's sales were $20,368,000 for the quarter for a 19% increase over the same period of the prior year. Year-to-date sales aggregated $61,114,000 for a 25% increase over the prior year level of $48,970,000. These increases are largely attributable to sales realized from units opened since the comparable periods of the prior year. Comparable sales decreased 2.5% for the quarter and were essentially flat on a year-to-date basis for stores open for more than 18 months. Tony Roma's comparable sales were modestly positive in December after being negative in October and November due in to higher promotional activity in the prior year during these periods.
Net franchise revenue was $2,005,000 during the quarter which was 7% below the prior years level. This decrease was due to an incremental $310,000 in franchise fees earned in the prior year which were largely attributable to the sale of certain international franchise territorial rights. On a year-to-date basis royalty income has increased by 6% over the prior year, but net franchise revenue of $6,151,000 was 3% below the prior years level due largely to the sale of certain international franchise territory rights in the prior year.
Gene Bicknell, Chairman and CEO stated, "The third quarter was a difficult one for the Company due to certain external factors and the self-imposed reinvestment in our delivery business. We were pleased to have new product news from Pizza Hut with the introduction of "The EDGE" during the quarter despite the impact upon margins. This mainstay in the Company's arsenal of products as well as our delivery service initiative are expected to provide long-term benefit to our consumers and stockholders."
Jim Schwartz, President and COO said, "We believe that many of the factors that combined to make the quarter challenging were isolated to the quarter. Specifically, launch costs associated with "The Edge", certain of the delivery dominance program costs, and the increased baby back rib costs incurred at Tony Roma's. Furthermore, we anticipate ending the introductory pricing of "The Edge" in late January. However, we expect to experience some continued margin pressure in our fourth quarter as comparable sales in our Pizza Hut Division have been mixed but remain modestly negative during the initial weeks of January. Although Pizza Hut meat ingredient cost have declined as expected, the cheese market has not experienced the seasonal decline previously anticipated. As expected, Tony Roma's returned to positive comparable sales territory during the Company's December period and has recorded positive comparable sales in 12 of the last 13 quarters."
With the exception of historical information, certain of the matters discussed in this news release are forward-looking statements that involve estimates, risks and uncertainties including, but not limited to, economic conditions, consumer demand, the level of and the effectiveness of marketing campaigns by the Company and Pizza Hut, Inc., competitive conditions food cost, labor costs, new product introductions, product mix and pricing and other risks indicated in filings with the Securities and Exchange Commission.
NPC International, Inc. is the world's largest Pizza Hut franchisee and currently operates 684 Pizza Hut restaurants and delivery kitchens in 24 states. Through Romacorp, Inc. a wholly- owned subsidiary, NPC also operates and franchises 192 Tony Roma's restaurants, the casual theme restaurant chain Famous for Ribs(r), worldwide.
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