Papa John's Announces First Quarter 2018 Results and Reaffirms 2018 Outlook
Highlights
- First quarter earnings per diluted share of
$0.50 in 2018 compared to$0.77 in the first quarter of 2017 North America comparable sales decrease of 5.3%- International comparable sales increases of 0.3%; international franchise sales increase of 21.1%, excluding the impact of foreign currency
- 13 net unit openings in first quarter of 2018 driven by International operations
- Free cash flow of
$31.7 million in the first quarter as compared to$32.3 million in the first quarter of 2017 - 2018 outlook reaffirmed
"Although first quarter results were lower than the prior year, they were consistent with our expectations. We remain focused on enhancing our value perception and driving our strategic initiatives," said
Operating Highlights (dollars in 000's, except per share amounts): |
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Decrease |
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Total revenue | $ | 427,369 | $ | 449,266 | -4.9 | % | |||
Operating income | 27,317 | 43,681 | -37.5 | % | |||||
Net income | 16,737 | 28,428 | -41.1 | % | |||||
Diluted earnings per share | $ | 0.50 | $ | 0.77 | -35.1 | % | |||
All operating highlights are compared to the same period of the prior year, unless otherwise noted.
Consolidated revenues decreased
Consolidated income before income taxes of
Domestic Company -owned restaurants operating margin decreased$8.6 million , or 2.7% as a percentage of related revenues, primarily due to lower comparable sales, increased labor costs including higher minimum wages and increased non-owned automobile costs.North America franchise royalties and fees decreased$2.8 million , or 10% as compared to the first quarter of 2017, primarily due to lower comparable sales, and an increase in royalty waivers to franchisees.North America commissary operating margin decreased$1.4 million , or 0.4% as a percentage of related revenues, primarily due to lower sales volumes.- International operating margin increased
$1.3 million primarily due to higher royalties from increased equivalent units and the favorable impact of foreign exchange rates. - Other operating margin decreased
$718,000 , or 3.7%, primarily due to higher advertising spend in theUnited Kingdom . The "Revenue Recognition and Income Statement Presentation" section below provides more information on our newly reported "Other revenues" and "Other expenses" income statement line items. - General and administrative ("G&A") costs increased
$3.3 million , or 9.1%, primarily due to an increase in bad debt expense, higher legal fees and an increase in various technology initiative costs. - Net interest expense increased
$3.1 million for the first quarter due to an increase in average outstanding debt, which is primarily due to share repurchases, as well as higher interest rates.
The first quarter 2018 effective income tax rate was 22.3%, representing a decrease of 6.3% from the prior year comparable period rate of 28.6%. This decrease was primarily due to the reduction of the
Diluted earnings per share decreased 35.1% to
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Global restaurant sales (decline) / growth (a) | (1.3 | %) | 4.9 | % | |||
Global restaurant sales growth, excluding the impact of foreign currency (a) |
(1.0 | %) | 5.5 | % | |||
Comparable sales (decline) / growth (b) | |||||||
Domestic company-owned restaurants | (6.1 | %) | 3.0 | % | |||
(5.0 | %) | 1.7 | % | ||||
(5.3 | %) | 2.0 | % | ||||
System-wide international restaurants | 0.3 | % | 6.0 | % | |||
(a) |
Includes both company-owned and franchised restaurant sales. |
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(b) |
Represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. Comparable sales results for restaurants operating outside of |
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We believe
Free Cash Flow
The company's free cash flow, a non-GAAP financial measure, for the first quarter of 2018 and 2017 was as follows (in thousands):
First Quarter | |||||||||
2018 | 2017 | ||||||||
Net cash provided by operating activities (a) | $ | 41,036 | $ | 47,329 | |||||
Purchases of property and equipment (b) | (9,320 | ) | (15,064 | ) | |||||
Free cash flow | $ | 31,716 | $ | 32,265 | |||||
(a) |
The decrease of |
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(b) |
The decrease of |
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We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less the amounts spent on the purchase of property and equipment. We view free cash flow as an important measure because it is a factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the company's liquidity or performance than the company's GAAP measures.
See the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Quarterly Report on Form 10-Q filed with the
Global Restaurant Unit Data
At
Domestic |
Franchised |
Total North |
International | System-wide | |||||||||||
First Quarter |
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Beginning - |
708 | 2,733 | 3,441 | 1,758 | 5,199 | ||||||||||
Opened | 4 | 18 | 22 | 53 | 75 | ||||||||||
Closed | (2 | ) | (37 | ) | (39 | ) | (23 | ) | (62 | ) | |||||
Acquired | - | 31 | 31 | - | 31 | ||||||||||
Sold | (31 | ) | - | (31 | ) | - | (31 | ) | |||||||
Ending - |
679 | 2,745 | 3,424 | 1,788 | 5,212 | ||||||||||
Unit growth (decline) | (29 | ) | 12 | (17 | ) | 30 | 13 | ||||||||
% increase (decrease) | (4.1 | %) | 0.4 | % | (0.5 | %) | 1.7 | % | 0.3 | % | |||||
The company has added 130 net worldwide units over the trailing four quarters ended
Share Repurchase Activity
The following table reflects our repurchases for the first quarter of 2018 and subsequent repurchases through
Period |
Number of |
Cost | ||||||
First Quarter 2018 | 2,001 | $ | 119,736 | |||||
29 | $ | 1,710 | ||||||
There were 33.6 million diluted weighted average shares outstanding for the first quarter of 2018, representing a decrease of 10.2% over the prior year comparable period. Approximately 32.0 million actual shares of the company's common stock were outstanding as of
As previously disclosed, on
Cash Dividend
We paid a cash dividend of approximately
Revenue Recognition and Income Statement Presentation
On
$21.5 million reduction in retained earnings for the opening balance sheet cumulative adjustment.$2.4 million increase in total revenues primarily due to the requirement to present revenues and expenses related to marketing funds we control on a "gross" basis. This gross up is reported in the new financial statement line items, Other revenues and Other expenses, as discussed further below; this change in reporting had no significant impact on consolidated pre-tax income results.$485,000 decrease in pre-tax income for the first quarter primarily due to the revised method of accounting for franchise fees.- EPS decrease of approximately
$0.01 in the first quarter.
Additional detail on the adoption and 2018 impact of the new revenue recognition standard can be found in our Form 10-Q for the three months ended
While not required as part of the adoption of Topic 606, our income statement includes newly created Other revenues and Other expenses line items. Other revenues and Other expenses include the Topic 606 "gross up" of revenues and expenses derived from certain domestic and international marketing fund co-ops we control, as previously discussed. Additionally, Other revenues and Other expenses include various reclassifications from
2018 Outlook
The company is reaffirming its previously issued 2018 outlook, as we expect our initiatives will result in improved sales and operating results in the last half of the year.
Conference Call and Website Information
A conference call is scheduled for
Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases,
Forward-Looking Statements
Certain matters discussed in this press release and other company communications constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as "expect," "intend," "estimate," "believe," "anticipate," "will," "forecast," "plan," "project," or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, unit level performance, capital expenditures, share repurchases, dividends, effective tax rates, the impact of the Tax Cuts and Job Act and the adoption of new accounting standards, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:
- aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors;
- changes in consumer preferences or consumer buying habits, including the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending;
- the adverse impact on the company or our results caused by product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our company-owned or franchised restaurants or others in the restaurant industry;
- the effectiveness of our initiatives to improve our brand proposition and operating results, including marketing, advertising and public relations initiatives, technology investments and changes in unit-level operations;
- the ability of the company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, store level employees or suitable sites;
- increases in food costs or sustained higher other operating costs. This could include increased employee compensation, benefits, insurance, tax rates, new regulatory requirements or increasing compliance costs;
- increases in insurance claims and related costs for programs funded by the company up to certain retention limits, including medical, owned and non-owned vehicles, workers' compensation, general liability and property;
- disruption of our supply chain or commissary operations which could be caused by our sole source of supply of cheese or limited source of suppliers for other key ingredients or more generally due to weather, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control;
- increased risks associated with our international operations, including economic and political conditions, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new store growth;
- the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business including compliance with the
European Union General Data Protection Regulation; - failure to effectively execute succession planning;
- disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and security breaches, including theft of confidential company, employee and customer information, including payment cards;
- changes in Federal or state income, general and other tax laws, rules and regulations, including changes from the Tax Cuts and Jobs Act and any related
Treasury regulations, rules or interpretations if and when issued; - changes in generally accepted accounting principles including new standards for revenue recognition and leasing; and
These and other risk factors are discussed in detail in "Part I. Item 1A. - Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended
For more information about the company, please visit www.papajohns.com.
Condensed Consolidated Statements of Income | ||||||||||
Three Months Ended | ||||||||||
(In thousands, except per share amounts) | (Unaudited) | (Unaudited) | ||||||||
Revenues: | ||||||||||
$ | 190,242 | $ | 206,896 | |||||||
24,806 | 27,607 | |||||||||
161,713 | 171,340 | |||||||||
International | 30,114 | 25,622 | ||||||||
Other revenues | 20,494 | 17,801 | ||||||||
Total revenues | 427,369 | 449,266 | ||||||||
Costs and expenses: | ||||||||||
Operating costs (excluding depreciation and amortization shown separately below): |
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Domestic company-owned restaurant expenses | 157,319 | 165,419 | ||||||||
151,681 | 159,957 | |||||||||
International expenses | 19,030 | 15,791 | ||||||||
Other expenses | 20,958 | 17,547 | ||||||||
General and administrative expenses | 39,729 | 36,414 | ||||||||
Depreciation and amortization | 11,539 | 10,457 | ||||||||
Total costs and expenses | 400,256 | 405,585 | ||||||||
Refranchising gain, net | 204 | - | ||||||||
Operating income | 27,317 | 43,681 | ||||||||
Net interest expense | (4,955 | ) | (1,810 | ) | ||||||
Income before income taxes | 22,362 | 41,871 | ||||||||
Income tax expense | 4,982 | 11,972 | ||||||||
Net income before attribution to noncontrolling interests | 17,380 | 29,899 | ||||||||
Income attributable to noncontrolling interests | (643 | ) | (1,471 | ) | ||||||
Net income attributable to the company | $ | 16,737 | $ | 28,428 | ||||||
Calculation of income for earnings per share: | ||||||||||
Net income attributable to the Company | $ | 16,737 | $ | 28,428 | ||||||
Change in noncontrolling interest redemption value | - | 520 | ||||||||
Net income attributable to participating securities | (75 | ) | (117 | ) | ||||||
Net income attributable to common shareholders | $ | 16,662 | $ | 28,831 | ||||||
Basic earnings per common share | $ | 0.50 | $ | 0.78 | ||||||
Diluted earnings per common share | $ | 0.50 | $ | 0.77 | ||||||
Basic weighted average common shares outstanding | 33,279 | 36,810 | ||||||||
Diluted weighted average common shares outstanding | 33,552 | 37,350 | ||||||||
Dividends declared per common share | $ | 0.225 | $ | 0.20 | ||||||
Condensed Consolidated Balance Sheets | ||||||||
2018 | 2017 | |||||||
(In thousands) | (Unaudited) | (Note) | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 31,935 | $ | 22,345 | ||||
Accounts receivable, net | 62,949 | 64,644 | ||||||
Notes receivable, net | 4,662 | 4,333 | ||||||
Income tax receivable | - | 3,903 | ||||||
Inventories | 28,285 | 30,620 | ||||||
Prepaid expenses and other current assets | 45,519 | 38,016 | ||||||
Assets held for sale | 5,900 | 6,133 | ||||||
Total current assets | 179,250 | 169,994 | ||||||
Property and equipment, net | 229,576 | 234,331 | ||||||
Notes receivable, less current portion, net | 16,084 | 15,568 | ||||||
86,746 | 86,892 | |||||||
Deferred income taxes, net | 614 | 585 | ||||||
Other assets | 67,547 | 48,183 | ||||||
Total assets | $ | 579,817 | $ | 555,553 | ||||
Liabilities and stockholders' equity (deficit) | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 31,072 | $ | 32,006 | ||||
Income and other taxes payable | 10,094 | 10,561 | ||||||
Accrued expenses and other current liabilities | 92,890 | 70,293 | ||||||
Deferred revenue current | 2,400 | - | ||||||
Current portion of long-term debt | 20,000 | 20,000 | ||||||
Total current liabilities | 156,456 | 132,860 | ||||||
Deferred revenue | 13,671 | 2,652 | ||||||
Long-term debt, less current portion, net | 568,770 | 446,565 | ||||||
Deferred income taxes, net | 6,125 | 12,546 | ||||||
Other long-term liabilities | 76,993 | 60,146 | ||||||
Total liabilities | 822,015 | 654,769 | ||||||
Redeemable noncontrolling interests | 7,037 | 6,738 | ||||||
Total stockholders' equity (deficit) | (249,235 | ) | (105,954 | ) | ||||
Total liabilities, redeemable noncontrolling interests and stockholders' equity (deficit) | $ | 579,817 | $ | 555,553 | ||||
Note: The Condensed Consolidated Balance Sheets have been derived from the audited consolidated financial statements, but do not include all information and footnotes required by accounting principles generally accepted in |
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Condensed Consolidated Statements of Cash Flows | ||||||||
Year Ended | ||||||||
(In thousands) | ||||||||
(Unaudited) | (Unaudited) | |||||||
Operating activities | ||||||||
Net income before attribution to noncontrolling interests | $ | 17,380 | $ | 29,899 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for uncollectible accounts and notes receivable | 1,539 | (417 | ) | |||||
Depreciation and amortization | 11,539 | 10,457 | ||||||
Deferred income taxes | (2,004 | ) | 1,015 | |||||
Stock-based compensation expense | 2,475 | 2,736 | ||||||
Gain on refranchising | (204 | ) | - | |||||
Other | 1,903 | 769 | ||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||
Accounts receivable | 86 | (1,048 | ) | |||||
Income tax receivable | 3,903 | 2,372 | ||||||
Inventories | 2,193 | 2,425 | ||||||
Prepaid expenses and other current assets | 4,880 | 3,440 | ||||||
Other assets and liabilities | (514 | ) | (1,577 | ) | ||||
Accounts payable | 1,209 | (5,239 | ) | |||||
Income and other taxes payable | (466 | ) | 7,817 | |||||
Accrued expenses and other current liabilities | (3,103 | ) | (5,164 | ) | ||||
Deferred revenue | 220 | (156 | ) | |||||
Net cash provided by operating activities | 41,036 | 47,329 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (9,320 | ) | (15,064 | ) | ||||
Loans issued | (563 | ) | (715 | ) | ||||
Repayments of loans issued | 1,636 | 863 | ||||||
Acquisitions, net of cash acquired | - | (21 | ) | |||||
Proceeds from divestitures of restaurants | 3,690 | - | ||||||
Other | 114 | 7 | ||||||
Net cash used in investing activities | (4,443 | ) | (14,930 | ) | ||||
Financing activities | ||||||||
Repayments of term loan | (5,000 | ) | - | |||||
Net (repayments) proceeds of revolving credit facility | 127,000 | (5,575 | ) | |||||
Cash dividends paid | (7,565 | ) | (7,354 | ) | ||||
Tax payments for equity award issuances | (1,342 | ) | (2,259 | ) | ||||
Proceeds from exercise of stock options | 1,770 | 3,248 | ||||||
Acquisition of Company common stock | (141,736 | ) | (13,075 | ) | ||||
Distributions to noncontrolling interest holders | (432 | ) | (702 | ) | ||||
Other | 183 | 396 | ||||||
Net cash used in financing activities | (27,122 | ) | (25,321 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 119 | 74 | ||||||
Change in cash and cash equivalents | 9,590 | 7,152 | ||||||
Cash and cash equivalents at beginning of period | 22,345 | 15,563 | ||||||
Cash and cash equivalents at end of period | $ | 31,935 | $ | 22,715 | ||||
Condensed Consolidated Statements of Income | ||||||||||||||
Summary of Income Statement Presentation Reclassifications | ||||||||||||||
Three Months Ended |
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As reported | Reclassifications | Adjusted | ||||||||||||
(In thousands, except per share amounts) | ||||||||||||||
Revenues: | ||||||||||||||
Domestic company-owned restaurant sales | $ | 206,896 | $ | - | $ | 206,896 | ||||||||
27,607 | - | 27,607 | ||||||||||||
186,245 | (14,905 | ) | 171,340 | |||||||||||
International (2) | 28,518 | (2,896 | ) | 25,622 | ||||||||||
Other revenues (1) (2) | - | 17,801 | 17,801 | |||||||||||
Total revenues | 449,266 | - | 449,266 | |||||||||||
Costs and expenses: | ||||||||||||||
Operating costs (excluding depreciation and amortization shown separately below): |
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Domestic company-owned restaurant expenses | 165,419 | - | 165,419 | |||||||||||
173,712 | (13,755 | ) | 159,957 | |||||||||||
International expenses (2) | 17,990 | (2,199 | ) | 15,791 | ||||||||||
Other expenses (1) (2) (3) | - | 17,547 | 17,547 | |||||||||||
General and administrative expenses (3) | 38,007 | (1,593 | ) | 36,414 | ||||||||||
Depreciation and amortization | 10,457 | - | 10,457 | |||||||||||
Total costs and expenses | 405,585 | - | 405,585 | |||||||||||
Operating income | 43,681 | - | 43,681 | |||||||||||
Net interest expense | (1,810 | ) | - | (1,810 | ) | |||||||||
Income before income taxes | 41,871 | - | 41,871 | |||||||||||
Income tax expense | 11,972 | - | 11,972 | |||||||||||
Net income before attribution to noncontrolling interests | 29,899 | - | 29,899 | |||||||||||
Income attributable to noncontrolling interests | (1,471 | ) | - | (1,471 | ) | |||||||||
Net income attributable to the company | $ | 28,428 | $ | - | $ | 28,428 | ||||||||
Calculation of income for earnings per share: | ||||||||||||||
Net income attributable to the company | $ | 28,428 | $ | - | $ | 28,428 | ||||||||
Change in noncontrolling interest redemption value | 520 | - | 520 | |||||||||||
Net income attributable to participating securities | (117 | ) | - | (117 | ) | |||||||||
Net income attributable to common shareholders | $ | 28,831 | $ | - | $ | 28,831 | ||||||||
Basic earnings per common share | $ | 0.78 | $ | - | $ | 0.78 | ||||||||
Diluted earnings per common share | $ | 0.77 | $ | - | $ | 0.77 | ||||||||
Basic weighted average common shares outstanding | 36,810 | - | 36,810 | |||||||||||
Diluted weighted average common shares outstanding | 37,350 | - | 37,350 | |||||||||||
Dividends declared per common share | $ | 0.20 | $ | - | $ | 0.20 | ||||||||
(1) | Includes reclassification of previous amounts reported in |
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(2) | Includes reclassification of previous amounts reported in International related to advertising expenses and rental income and expenses for |
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(3) | Includes reclassification of various technology related expenditures for fee-based services discussed in (1) above and advertising expenses to be consistent with 2018 presentation. |
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Papa John's
Senior Vice President, Chief Financial Officer
Source: Papa John's
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