Papa Johns 2008 Annual Report Download - page 22

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15
marketing or promotional strategies, including new product and concept developments, by one or more of
our major competitors can have an adverse impact on our sales and earnings and our system-wide
restaurant operations.
Our results of operations and the operating results of our franchisees may be adversely impacted by any
increases in the cost of food ingredients and other commodities.
An increase in the cost or sustained high levels of the cost of cheese or other commodities could
adversely affect the profitability of our system-wide restaurant operations. Cheese costs, historically
representing 35% to 40% of our food cost, and other commodities are subject to fluctuations, weather,
availability, demand and other factors that are beyond our control. Additionally, sustained increases in
fuel and utility costs could adversely affect the profitability of our restaurant and QC Center businesses.
Higher commodity costs (primarily cheese and wheat) have resulted in operating margin pressure on our
franchisees. Given the current commodity cost environment, we chose to mitigate commodity cost
increases at domestic restaurants by supporting the entire domestic system via reduced commissary
margins. For example, we did not pass through higher fuel charges incurred during 2008 by our QC
Centers to our domestic restaurants. Additionally, for the last two months of 2008, in an effort to assist
franchisees through this difficult period, we decided not to pass along the higher price of cheese that
would have been required under the pricing formula for cheese sales from BIBP to franchisees. Instead,
we allowed domestic restaurants to pay the expected futures spot market price for cheese plus an interest
carry cost (Q4-08 modified price), which was approximately $0.28 per pound less than the pre-
established fourth quarter price paid by domestic restaurants during October 2008. Our decision during
the fourth quarter to reduce the BIBP formula price will result in a delay in the recovery of the BIBP
cheese purchasing entity deficit. Additionally, further delays in the recovery of the BIBP deficit will
occur as we have decided to continue to assist the domestic franchise system in 2009 or beyond by
maintaining a lower BIBP price than would otherwise be called for by the pricing formula.
Changes in consumer preferences or discretionary consumer spending or negative publicity could
adversely impact our results.
Changes in consumer taste (for example, changes in dietary preferences that could cause consumers to
avoid pizza in favor of foods that are perceived as more healthful), demographic trends, traffic patterns
and the type, number and location of competing restaurants could adversely affect our restaurant
business. Also, our success depends to a significant extent on numerous factors affecting discretionary
consumer spending, including economic conditions, disposable consumer income and consumer
confidence. Further adverse changes in these factors could reduce sales or impose practical limits on
pricing, either of which could materially adversely affect our results of operations. Like other food
industry competitors, we can also be materially adversely affected by negative publicity concerning food
quality, illness, injury, publication of government or industry findings concerning food products served
by us, or other health concerns or operating issues stemming from one restaurant or a limited number of
restaurants.
We are subject to federal and state laws governing our workforce. Changes in these laws, including
minimum wage increases, or additional laws could increase costs for our system-wide operations.
System-wide restaurant operations are subject to federal and state laws governing such matters as wage
benefits, working conditions, citizenship requirements and overtime. A significant number of hourly
personnel employed by our franchisees and us are paid at rates related to the federal and state minimum
wage requirements. Accordingly, further increases in the federal minimum wage or the enactment of
additional state or local minimum wage increases above federal wage rates will increase labor costs for
our system-wide operations. Additionally, proposed legislation which may make it easier for workers to