October 31, 2012

Papa John's Announces Third Quarter 2012 Results

EPS Increased 25.0% on Comparable Sales Increases of 2.5% for North America and 6.9% for International

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the three and nine months ended September 23, 2012.

Highlights

  • Third quarter earnings per diluted share of $0.55 in 2012, an increase of 25.0% over earnings per diluted share of $0.44 in 2011
  • 56 global net restaurant openings during the quarter
  • 2012 earnings guidance raised to a range of $2.53 to $2.63; comparable sales guidance raised for both North America (updated guidance range of +3.0% to +4.0%) and International (updated guidance range of +6.0% to +7.0%)

"During the third quarter, we achieved a significant milestone with the opening of our 4,000th restaurant," said Papa John's founder, chairman, and chief executive officer, John Schnatter. "Consumers and franchisees continue to put a premium on quality and that's where Papa John's wins. This translates into both strong global development and solid comparable sales results."

Third quarter 2012 revenues were $325.5 million, a 6.5% increase from third quarter 2011 revenues of $305.7 million. Third quarter 2012 net income was $13.2 million compared to third quarter 2011 net income of $11.1 million. Third quarter 2012 diluted earnings per share were $0.55, compared to third quarter 2011 diluted earnings per share of $0.44.

Revenues were $975.4 million for the nine months ended September 23, 2012, a 7.0% increase from revenues of $911.7 million for the same period in 2011. Net income was $44.7 million for the nine months ended September 23, 2012 ($46.8 million excluding the $2.1 million Incentive Contribution discussed later in this press release), compared to net income of $39.7 million for the same period in 2011. Diluted earnings per share were $1.85 for the nine months ended September 23, 2012 ($1.94 excluding the Incentive Contribution), compared to $1.55 in the prior year.

Global Restaurant and Comparable Sales Information

 
  Three Months Ended   Nine Months Ended

Sept. 23,

2012

 

Sept. 25,

2011

Sept. 23,

2012

 

Sept. 25,

2011

 
Global restaurant sales growth (a) 7.1 % 8.3 % 7.6 % 8.3 %
 

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

7.4 % 7.6 %

8.0

% 7.7 %
 
Comparable sales growth (b)
Domestic company-owned restaurants 5.0 % 6.3 % 5.1 % 5.0 %
North America franchised restaurants 1.7 % 4.9 % 2.4 % 3.6 %
System-wide North America restaurants 2.5 % 5.3 % 3.0 % 3.9 %
 
System-wide international restaurants 6.9 % 4.7 % 7.1 % 5.0 %
 

(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.

 

Management believes global restaurant and comparable sales 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 information is also useful in analyzing industry trends and the strength of our brand. Franchise restaurant sales are not included in company revenues.

Revenue and Operating Highlights

Revenues

Consolidated revenues increased $19.8 million, or 6.5%, for the third quarter of 2012 and increased $63.7 million, or 7.0%, for the nine months ended September 23, 2012 compared to the same periods in the prior year. The increases in revenues were primarily due to the following:

  • Domestic company-owned restaurant sales increased $14.5 million, or 11.3%, and $35.5 million, or 9.0%, for the three and nine months ended September 23, 2012, respectively, due to increases in comparable sales of 5.0% and 5.1% and the net acquisition of 50 restaurants in the Denver and Minneapolis markets from a franchisee in the second quarter of 2012.
  • North America franchise royalty revenue increased approximately $800,000, or 4.5%, and $2.6 million, or 4.7%, for the three and nine months ended September 23, 2012, respectively, primarily due to increases in comparable sales of 1.7% and 2.4% and increases in net franchise restaurants over the prior year. Royalty revenue increases were slightly offset by reduced royalties attributable to the company's net acquisition of the 50 restaurants noted above.
  • Domestic commissary sales increased $1.8 million, or 1.4%, and $17.3 million, or 4.6%, for the three and nine months ended September 23, 2012, respectively, primarily due to higher commissary product volumes resulting from increases in the volume of restaurant sales, partially offset by lower revenues due to lower commodity costs.
  • International revenues increased $2.5 million, or 16.2%, and increased $9.7 million, or 22.8%, for the three and nine months ended September 23, 2012, respectively, primarily due to increases in the number of restaurants and increases in comparable sales of 6.9% and 7.1%, calculated on a constant dollar basis.

Operating Highlights

All comparisons below are versus the same period of the prior year unless otherwise noted and exclude the Incentive Contribution. See "Marketing Incentive Contribution" below for further information.

Third quarter 2012 income before income taxes was $21.1 million, compared to $16.8 million, or a 25.0% increase. Income before income taxes was $72.4 million for the nine months ended September 23, 2012, compared to $62.7 million, or a 15.5% increase.

Income before income taxes is summarized in the following table on a reporting segment basis (in thousands):

 
      Three Months Ended   Nine Months Ended
    Sept. 23,   Sept. 25,   Increase   Sept. 23,   Sept. 25,   Increase
      2012   2011   (Decrease)   2012   2011   (Decrease)
 

Domestic company-owned restaurants (a)

$ 5,549 $ 4,273 $ 1,276 $ 27,228 $ 22,577 $ 4,651
Domestic commissaries 6,846 7,237 (391 ) 25,990 21,112 4,878
North America franchising 16,070 15,941 129 50,829 50,190 639
International 625 249 376 1,217 (817 ) 2,034
All others 732 (66 ) 798 1,598 (742 ) 2,340
Unallocated corporate expenses (b) (9,007 ) (11,085 ) 2,078 (34,198 ) (29,371 ) (4,827 )

Elimination of intersegment losses (profits)

    242       297       (55 )     (229 )     (256 )     27  
Income before income taxes 21,057 16,846 4,211 72,435 62,693 9,742

Incentive Contribution (income) expense

    (250 )     -       (250 )     3,221       -       3,221  

Income before income taxes, excluding Incentive Contribution

  $ 20,807     $ 16,846     $ 3,961     $ 75,656     $ 62,693     $ 12,963  
 

(a) The nine months ended September 23, 2012 includes the benefit of a $1.0 million advertising credit from the Papa John's Marketing Fund related to the Incentive Contribution.

 

(b) Includes the impact of the Incentive Contribution in 2012 ($250,000 increase for the three-month period and a $4.3 million reduction for the nine-month period).

 

The increase in income before income taxes for the three months ended September 23, 2012, of $4.0 million is primarily due to the following:

  • Domestic company-owned restaurants income improved approximately $1.3 million primarily due to comparable sales increases as well as favorable commodity costs.
  • North America Franchising and International improved due to the previously mentioned increase in net restaurants and strong comparable sales results.
  • All others improved approximately $800,000 primarily due to an improvement in our eCommerce operations due to higher online sales.
  • Unallocated corporate expenses decreased due to the prior year including higher franchise incentives and a charge of approximately $800,000 related to lease obligations associated with our former Perfect Pizza operations in the United Kingdom, partially offset by higher legal and insurance costs.
  • These increases were partially offset by a decrease in Domestic commissaries operating results of approximately $400,000. The decrease was due to lower margins resulting from lower prices charged to restaurants, slightly offset by increased profits from higher restaurant sales.

The increase in income before income taxes for the nine months ended September 23, 2012, of $13.0 million is primarily due to the following:

  • Domestic company-owned restaurants operating income improved approximately $4.7 million primarily due to comparable sales increases as well as favorable commodity costs.
  • Domestic commissaries income improved approximately $4.9 million primarily due to the increase in net restaurants and comparable sales.
  • North America Franchising and International improved due to the previously mentioned increase in net restaurants and strong comparable sales results.
  • All others improved approximately $2.3 million primarily due to an improvement in our eCommerce operations due to higher online sales.
  • These increases were slightly offset by higher unallocated corporate expenses primarily due to an increase in short-term management incentives, legal and insurance costs and higher costs related to our operators' conference, partially offset by the prior year including franchise incentives and a charge of approximately $800,000 related to lease obligations associated with our former Perfect Pizza operations in the United Kingdom.

The effective tax rates were 33.8% for both the three and nine months ended September 23, 2012, representing increases of 4.7% and 1.7% from the prior year rates. Our effective income tax rate may fluctuate from quarter to quarter for various reasons, including the settlement or resolution of specific federal and state issues. The prior year included significant favorable tax resolution items.

The company's free cash flow for the first nine months of 2012 and 2011 was as follows (in thousands):

 
  Sept. 23,   Sept. 25,
2012 2011
 
Net cash provided by operating activities* $ 94,773 $ 87,216
Purchase of property and equipment


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