Papa John‘s International, Inc.
May 2, 2017

Papa John's Announces First Quarter 2017 Results

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the first quarter ended March 26, 2017.

Highlights

"We're pleased with our solid start to 2017, with good comparable sales and earnings growth despite a challenging environment for restaurants," said Papa John's founder, chairman and CEO John Schnatter. "With our digital sales percentage now over 60% and several initiatives that will build on our industry-leading quality advantage, we are leveraging our strengths to steadily grow the Papa John's business globally for many years to come."

 

Operating Highlights

             
(In thousands, except per share amounts) First Quarter

Mar. 26,
2017

Mar. 27,
2016

Increase
%

 
Total revenue $ 449,266 $ 428,595 4.8 %
Operating income 43,681 42,898 1.8 %
Net income 28,428 26,182 8.6 %
Diluted earnings per share $ 0.77 $ 0.69 11.6 %
 

All operating highlights are compared to the same period of the prior year, unless otherwise noted.

Consolidated revenues increased $20.7 million, or 4.8%, for the first quarter of 2017 on higher comparable sales for North America and International. In addition to the impact of higher volumes, North America commissary sales also increased primarily due to higher cheese prices charged to franchisees. The consolidated revenue increase is net of the unfavorable impact of foreign currency exchange rates of approximately $3.1 million, which was primarily attributable to the United Kingdom, and the impact of refranchising 42 restaurants in the fourth quarter of 2016.

On higher revenues, consolidated operating income increased $800,000, or 1.8%, for the first quarter of 2017. Operating income as a percentage of consolidated revenues decreased 0.3% to 9.7% for the first quarter. Significant changes in the operating income percentage are as follows:

The first quarter 2017 effective income tax rate was 28.6%, representing a decrease of 3.7% from the prior year comparable period rate of 32.3%. This decrease was primarily due to adopting new guidance for accounting for share-based compensation in the current quarter. This guidance requires excess tax benefits recognized on stock based awards to be recorded as a reduction of income tax expense rather than stockholders' equity. The impact of this adoption decreased our effective tax rate by 3.2%.

Diluted earnings per share increased 11.6% to $0.77 for the first quarter of 2017. This increase was primarily due to an increase in net income and a decrease in shares outstanding. Diluted earnings per share was favorably impacted by approximately $0.03 due to the adoption of the new guidance for accounting for share-based compensation. Excluding the impact of this adoption, diluted earnings per share would have increased 7.2% compared to first quarter 2016.

 

Global Restaurant and Comparable Sales Information

      First Quarter

Mar. 26,
2017

   

Mar. 27,
2016

 
Global restaurant sales growth (a) 4.9 % 2.3 %
 

Global restaurant sales growth, excluding the impact of foreign currency (a)

5.5 % 4.2 %
 
Comparable sales growth (b)
Domestic company-owned restaurants 3.0 % 1.0 %
North America franchised restaurants 1.7 % -0.2 %
System-wide North America restaurants 2.0 % 0.1 %
 
System-wide international restaurants 6.0 % 5.7 %
 

(a) Includes both company-owned and franchised restaurant sales.

(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 the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation.

We believe global restaurant and comparable sales growth information, as defined in the table above, is useful in analyzing our results since our franchisees pay royalties that are based on a percentage of franchise sales. Franchise sales generate commissary revenue in the United States and in certain international markets. Global restaurant and comparable sales growth information is also useful in analyzing industry trends and the strength of our brand. Management believes the presentation of global restaurant sales growth excluding the impact of foreign currency provides investors with useful information regarding underlying sales trends by presenting sales growth excluding the external factor of foreign currency exchange. Franchise restaurant sales are not included in company revenues.

Free Cash Flow

The company's free cash flow, a non-GAAP financial measure, for the first quarter of 2017 and 2016 was as follows (in thousands):

     
First Quarter
Mar. 26,     Mar. 27,
2017 2016
 
Net cash provided by operating activities (a) $ 47,329 $ 33,853
Purchases of property and equipment (b)   (15,064 )   (10,249 )
Free cash flow $ 32,265   $ 23,604  
 

(a) The increase of $13.5 million was primarily due to the inclusion in the first quarter of 2016 of a legal settlement of approximately $12.5 million and higher net income.

(b) The increase of $4.8 million was primarily due to construction costs for our new domestic commissary in Georgia, which will open in mid-2017.

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 Securities and Exchange Commission (SEC) for additional information concerning our operating results and cash flow for the three months ended March 26, 2017.

Global Restaurant Unit Data

At March 26, 2017, there were 5,082 Papa John's restaurants operating in all 50 states and in 45 international countries and territories, as follows:

                     

Domestic
Company-
owned

   

Franchised
North
America

   

Total North
America

    International     System-wide

First Quarter

Beginning - December 25, 2016 702 2,739 3,441 1,656 5,097
Opened

2

15

17

38

55

Closed -

(30

)

(30

)

(40

)

(70

)

Acquired

1

-

1

-

1

Sold -      

(1

)

   

(1

)

    -      

(1

)

Ending - March 26, 2017

705

     

2,723

     

3,428

     

1,654

     

5,082

 
 
Unit growth (decline)

3

     

(16

)

   

(13

)

   

(2

)

   

(15

)

 
% increase (decrease)

0.4

%

   

(0.6

%)

   

(0.4

%)

   

(0.1

%)

   

(0.3

%)

 

The company has added 179 net worldwide units over the trailing four quarters. Our development pipeline as of March 26, 2017 included approximately 1,300 restaurants (200 units in North America and 1,100 units internationally), the majority of which are scheduled to open over the next six years.

Share Repurchase Activity

The following table reflects our repurchases for the first quarter 2017 and subsequent repurchases through April 25, 2017 (in thousands):

           
Period      

Number
of Shares

      Cost
 
First Quarter 2017 159 $ 13,075
 
March 27, 2017 through April 25, 2017

49

$

3,887

 

There were 37.4 million diluted weighted average shares outstanding for the first quarter ended March 26, 2017, representing a decrease of 2.5% over the prior year comparable period. Approximately 36.8 million actual shares of the company's common stock were outstanding as of March 26, 2017.

2017 Outlook

The company is reaffirming its previously issued 2017 outlook.

Conference Call and Website Information

A conference call is scheduled for May 3, 2017 at 10:00 a.m. Eastern Time to review our first quarter 2017 earnings results. The call can be accessed from the company's web page at www.papajohns.com in a listen-only mode, or dial 877-312-8816 (U.S. and Canada) or 253-237-1189 (international). The conference call will be available for replay, including by downloadable podcast, from the company's web site at www.papajohns.com. The Conference ID is 91077730.

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to use our investor relations website as a means of disclosing information about our business, our financial condition and results of operations and other matters and for complying with our disclosure obligations under Regulation FD. The information we post on our investor relations website, including information contained in investor presentations, may be deemed material. Accordingly, investors should monitor our investor relations website, in addition to following our press releases, SEC filings and public conference calls and webcasts. We encourage investors and others to sign up for email alerts at our investor relations page under Shareholder Tools at the bottom right side of the page. These email alerts are intended to help investors and others to monitor our investor relations website by notifying them when new information is posted on the site.

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, 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:

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 December 25, 2016. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.

For more information about the company, please visit www.papajohns.com.

 
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
         

 

Three Months Ended

March 26, 2017 March 27, 2016
(In thousands, except per share amounts) (Unaudited) (Unaudited)
Revenues:
Domestic company-owned restaurant sales $ 206,896 $ 205,679
North America franchise royalties and fees 27,607 26,476
North America commissary and other sales 186,245 168,985
International   28,518         27,455  
Total revenues 449,266 428,595
 
Costs and expenses:

Operating costs (excluding depreciation and amortization shown separately below):

Domestic company-owned restaurant expenses 165,419 161,310
North America commissary and other expenses 173,712 156,806
International expenses 17,990 17,590
General and administrative expenses 38,007 40,247
Depreciation and amortization   10,457         9,744  
Total costs and expenses 405,585 385,697
 
Operating income 43,681 42,898
Net interest expense   (1,810 )       (1,489 )
Income before income taxes 41,871 41,409
Income tax expense   11,972         13,358  
Net income before attribution to noncontrolling interests 29,899 28,051
Income attributable to noncontrolling interests   (1,471 )       (1,869 )
Net income attributable to the company $ 28,428       $ 26,182  
 
Calculation of income for earnings per share:
Net income attributable to the company $ 28,428 $ 26,182
Change in noncontrolling interest redemption value 520 220
Net income attributable to participating securities   (117 )   (110 )
Net income attributable to common shareholders $ 28,831       $ 26,292  
 
Basic earnings per common share $ 0.78       $ 0.69  
Diluted earnings per common share $ 0.77       $ 0.69  
 
Basic weighted average common shares outstanding   36,810         37,931  
Diluted weighted average common shares outstanding   37,350         38,297  
 
Dividends declared per common share $ 0.20 $ 0.175
 

 
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
 
 
      March 26,     December 25,
2017 2016
(In thousands) (Unaudited) (Note)
 
Assets
Current assets:
Cash and cash equivalents $ 22,715 $ 15,563
Accounts receivable, net 60,586 59,691
Notes receivable, net 3,626 3,417
Income taxes receivable - 2,372
Inventories 22,711 25,132
Prepaid expenses and other current assets 29,899 33,143
Assets held for sale   6,031   6,257
Total current assets 145,568 145,575
 
Property and equipment, net 230,765 230,473
Notes receivable, less current portion, net 10,443 10,141
Goodwill 85,787 85,529
Deferred income taxes 212 769
Other assets   43,674   40,078
Total assets $ 516,449 $ 512,565
 
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 37,362 $ 42,701
Income and other taxes payable 16,357 8,540
Accrued expenses and other current liabilities   66,705   76,789
Total current liabilities 120,424 128,030
 
Deferred revenue 3,157 3,313
Long-term debt, net 294,332 299,820
Deferred income taxes 10,559 10,047
Other long-term liabilities   56,704   53,093
Total liabilities 485,176 494,303
 
Redeemable noncontrolling interests 8,735 8,461
 
Total stockholders' equity   22,538   9,801
Total liabilities, redeemable noncontrolling interests and stockholders' equity $ 516,449 $ 512,565
 

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 the United States for a complete set of financial statements.

 
Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
 
         

Three Months Ended

(In thousands) March 26, 2017 March 27, 2016
(Unaudited) (Unaudited)
Operating activities
Net income before attribution to noncontrolling interests $ 29,899 $ 28,051

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for uncollectible accounts and notes receivable (417 ) 216
Depreciation and amortization 10,457 9,744
Deferred income taxes 1,015 7,141
Stock-based compensation expense 2,736 2,172
Other 769 1,101
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (1,048 ) 6,457
Income taxes receivable 2,372 4,107
Inventories 2,425 (612 )
Prepaid expenses and other current assets 3,440 1,624
Other assets and liabilities (1,577 ) (614 )
Accounts payable (5,239 ) (10,007 )
Income and other taxes payable 7,817 277
Accrued expenses and other current liabilities (5,164 ) (16,738 )
Deferred revenue   (156 )   934  
Net cash provided by operating activities 47,329 33,853
 
Investing activities
Purchases of property and equipment (15,064 ) (10,249 )
Loans issued (715 ) (917 )
Repayments of loans issued 863 1,275
Acquisitions, net of cash acquired (21 ) (11,202 )
Other   7     159  
Net cash used in investing activities (14,930 ) (20,934 )
 
Financing activities
Net (repayments) proceeds on line of credit facility (5,575 ) 61,500
Cash dividends paid (7,354 ) (6,628 )
Tax payments for equity award issuances (2,259 ) (5,670 )
Proceeds from exercise of stock options 3,248 922
Acquisition of Company common stock (13,075 ) (66,033 )
Distributions to noncontrolling interest holders (702 ) (980 )
Other   396     294  
Net cash used in financing activities (25,321 ) (16,595 )
 
Effect of exchange rate changes on cash and cash equivalents   74     (58 )
Change in cash and cash equivalents 7,152 (3,734 )
Cash and cash equivalents at beginning of period   15,563     21,006  
 
Cash and cash equivalents at end of period $ 22,715   $ 17,272  
 

Papa John's International, Inc.
Lance Tucker, 502-261-7272
Chief Financial Officer

Source: Papa John's International, Inc.

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