Papa John‘s International, Inc.
Nov 5, 2013

Papa John's Announces Third Quarter 2013 Results

Earnings Guidance Increased;

Two-for-One Stock Split Declared

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the three and nine months ended September 29, 2013.

Highlights

"I'd like to congratulate our operators on yet another solid quarter," said Papa John's Founder, Chairman and Chief Executive Officer, John Schnatter. "Papa John's brand promise of delivering Better Ingredients, Better Pizza is resonating with customers around the world reflected by our strong international comp sales and unit growth. Having just initiated a regular cash dividend, today's announcement of a two-for-one stock split demonstrates our Company's sustained commitment to building value for our shareholders and our confidence in the fundamentals and growth potential of our business."

Third quarter 2013 revenues were $346.3 million, a 6.4% increase from third quarter 2012 revenues of $325.5 million. Third quarter 2013 net income was $14.3 million, compared to third quarter 2012 net income of $13.0 million. Third quarter 2013 diluted earnings per share were $0.65 compared to third quarter 2012 diluted earnings per share of $0.55.

Revenues were $1.05 billion for the nine months ended September 29, 2013, a 7.8% increase from revenues of $975.4 million for the same period in 2012. Net income was $50.7 million for the nine months ended September 29, 2013, compared to $44.3 million for the same period in 2012 ($50.2 million and $46.4 million, for the nine-month periods in 2013 and 2012, respectively, excluding the impact of the previously disclosed 2012 Incentive Contribution). Diluted earnings per share were $2.27 for the nine months ended September 29, 2013, compared to $1.84 for the same period in 2012 ($2.24 and $1.93, for the nine-month periods in 2013 and 2012, respectively, excluding the impact of the 2012 Incentive Contribution).

 

Global Restaurant and Comparable Sales Information

         
Three Months Ended   Nine Months Ended

Sept. 29,
2013

   

Sept. 23,
2012

 

Sept. 29,
2013

   

Sept. 23,
2012

   
Global restaurant sales growth (a) 6.9 % 7.1 % 6.7 % 7.6 %
 

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

7.5 % 7.4 % 7.2 % 8.0 %
 
Comparable sales growth (b)
Domestic company-owned restaurants 5.1 % 5.0 % 5.0 % 5.1 %
North America franchised restaurants 0.6 % 1.7 % 1.3 % 2.4 %
System-wide North America restaurants 1.8 % 2.5 % 2.3 % 3.0 %
 
System-wide international restaurants 8.1 % 6.9 % 7.7 % 7.1 %
 

(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 conversion.

 

Management believes 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. Franchise restaurant sales are not included in company revenues.

Revenue and Operating Highlights

All revenues and operating highlights below are compared to the same period of the prior year and exclude the Incentive Contribution, unless otherwise noted.

Revenues

Consolidated revenues increased $20.8 million, or 6.4%, for the third quarter of 2013 and increased $75.8 million, or 7.8%, for the nine months ended September 29, 2013. The increases in revenues were primarily due to the following:

Operating Highlights

The table below summarizes income before income taxes on a reporting segment basis, excluding the Incentive Contribution:

             
        Three Months Ended     Nine Months Ended
Sept. 29,     Sept. 23, Increase Sept. 29,     Sept. 23,     Increase
(In thousands)       2013     2012     (Decrease)     2013     2012     (Decrease)
 
Domestic company-owned restaurants $ 5,535 $ 5,549 $ (14 ) $ 24,666 $ 27,228 $ (2,562 )
Less: Incentive Contribution (a)         -         -         -         -         1,029         (1,029 )

Domestic company-owned restaurants, excluding Incentive Contribution

5,535 5,549 (14 ) 24,666 26,199 (1,533 )
 
Domestic commissaries 6,473 6,846 (373 ) 26,278 25,990 288
North America franchising 16,516 16,070 446 52,134 50,829 1,305
International 945 625 320 2,152 1,217 935
All others 590 732 (142 ) 2,402 1,598 804
Unallocated corporate expenses (8,544 ) (9,201 ) 657 (28,475 ) (34,784 ) 6,309
Less: Incentive Contribution (a)         250         250         -         750         (4,250 )       5,000  

Unallocated corporate expenses, excluding Incentive Contribution

(8,794 ) (9,451 ) 657 (29,225 ) (30,534 ) 1,309
 
Elimination of intersegment losses (profits)         (252 )       242         (494 )       (989 )       (229 )       (760 )

Total income before income taxes, excluding Incentive Contribution (a)

      $ 21,013       $ 20,613       $ 400       $ 77,418       $ 75,070       $ 2,348  
 

(a) Income before income taxes and other financial measures excluding the Incentive Contribution are non-GAAP financial measures. See Marketing Incentive Contribution table below for additional details and a reconciliation to our GAAP financial measures.

 

Third quarter 2013 income before income taxes increased approximately $400,000, or 1.9%, primarily due to the following:

These increases were partially offset by the following decrease:

Domestic company-owned restaurants income before income taxes approximated the prior year as the incremental profits associated with higher comparable sales of 5.1% were offset by a lower gross margin.

The increase in income before income taxes for the nine months ended September 29, 2013 of $2.3 million, or 3.1%, was primarily due to the same reasons as the increases noted above for the three month period. In addition, All others increased primarily due to an improvement in our online operating results due to higher online sales volumes. These increases were partially offset by a decrease in income before income taxes at our domestic company-owned restaurants primarily due to higher commodity costs, somewhat offset by incremental profits associated with higher comparable sales of 5.0%.

The effective income tax rates were 30.0% and 31.9% for the three and nine months ended September 29, 2013, respectively, representing decreases of 3.7% and 1.9% from the prior year rates. The lower tax rates were due to various credits earned and the settlement or resolution of specific tax issues in 2013.

The company's free cash flow for the first nine months of 2013 and 2012 was as follows (in thousands):

     
Nine Months Ended
Sept. 29,     Sept. 23,
2013 2012
 
Net cash provided by operating activities (a) $ 74,833 $ 94,773
Purchase of property and equipment (b)   (38,537 )   (26,425 )
Free cash flow $ 36,296   $ 68,348  
 

 

(a) The decrease of approximately $19.9 million was primarily due to unfavorable changes in working capital, including the timing of income tax and other payments, partially offset by an increase in net income.

(b) The increased purchases of property and equipment primarily relate to expenditures on equipment for the New Jersey dough production as well as technology investments.

We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less 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 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 for additional information concerning our operating results and cash flow for the three- and nine-month periods ended September 29, 2013.

Global Restaurant Unit Data

At September 29, 2013, there were 4,296 Papa John's restaurants operating in all 50 states and in 35 countries, as follows:

                     

Domestic
Company-
owned

   

Franchised
North
America

   

Total North
America

    International     System-wide

Third Quarter

Beginning - June 30, 2013 654 2,588 3,242 1,010 4,252
Opened 2 48 50 40 90
Closed -       (41 )     (41 )     (5 )     (46 )
Ending - September 29, 2013 656       2,595       3,251       1,045       4,296  
 

Year-to-date

Beginning - December 30, 2012 648 2,556 3,204 959 4,163
Opened 8 111 119 112 231
Closed -       (72 )     (72 )     (26 )     (98 )
Ending - September 29, 2013 656       2,595       3,251       1,045       4,296  
 
Restaurant unit growth 8       39       47       86       133  
 
% increase 1.2 %     1.5 %     1.5 %     9.0 %     3.2 %
 

Our development pipeline as of September 29, 2013 included approximately 1,300 restaurants (250 units in North America and 1,050 units internationally), the majority of which are scheduled to open over the next six years.

Marketing Incentive Contribution

The following table reconciles our GAAP financial results to our results excluding the Incentive Contribution for the three and nine months ended September 29, 2013 versus the same periods in 2012:

         
Three Months Ended Nine Months Ended
Sept. 29,     Sept. 23, Sept. 29,     Sept. 23,
(In thousands, except per share amounts) 2013 2012 2013 2012
 
Income before income taxes, as reported $ 21,263 $ 20,863 $ 78,168 $ 71,849
Incentive Contribution (a)   (250 )   (250 )   (750 )   3,221
Income before income taxes, excluding Incentive Contribution $ 21,013   $ 20,613   $ 77,418   $ 75,070
 
Net income, as reported $ 14,276 $ 13,031 $ 50,732 $ 44,301
Incentive Contribution (a)   (165 )   (159 )   (494 )   2,116
Net income, excluding Incentive Contribution $ 14,111   $ 12,872   $ 50,238   $ 46,417
 
Earnings per diluted share, as reported $ 0.65 $ 0.55 $ 2.27 $ 1.84
Incentive Contribution (a)   (0.01 )   (0.01 )   (0.03 )   0.09

Earnings per diluted share, excluding Incentive Contribution

$ 0.64   $ 0.54   $ 2.24   $ 1.93
 

(a) As previously disclosed, in connection with a 2012 multi-year supplier agreement, the Company received a $5.0 million supplier marketing payment in the first quarter of 2012. The Company is recognizing the supplier marketing payment evenly as income over the five-year term of the agreement ($250,000 per quarter). In 2012, the Company contributed the supplier marketing payment to the Papa John's Marketing Fund ("PJMF"), an unconsolidated, non-profit corporation, for the benefit of domestic restaurants. The Company's contribution to PJMF was fully expensed in the first quarter of 2012. PJMF elected to distribute the $5.0 million supplier marketing payment to the domestic system as advertising credits in the first quarter of 2012. Our domestic company-owned restaurants' portion resulted in an increase in income before income taxes of approximately $1.0 million in the first quarter of 2012. These transactions together are referred to as the "Incentive Contribution."

 

The results shown in the table and elsewhere in this press release, which exclude the Incentive Contribution, are not measures defined by accounting principles generally accepted in the United States ("GAAP"). These non-GAAP measures should not be construed as a substitute for or a better indicator of the company's performance than the company's GAAP results. Management believes presenting the financial information excluding the impact of the Incentive Contribution is important for purposes of comparison to prior year results. In addition, management uses these non-GAAP measures to allocate resources, and analyze trends and underlying operating performance. Annual cash bonuses, and certain long-term incentive programs for various levels of management, were based on financial measures that excluded the Incentive Contribution.

Share Repurchase Activity

The following table reflects our repurchases for the three and nine months ended September 29, 2013 and subsequent repurchases through October 28, 2013 (in thousands):

         
Period      

Number of
Shares

    Cost
 
Three Months Ended September 29, 2013 150 $ 10,331
 
Nine Months Ended September 29, 2013 1,128 $ 69,137
 
September 30, 2013 through October 28, 2013 74 $ 5,260
 

There were 22.1 million and 22.4 million diluted weighted average shares outstanding for the three and nine months ended September 29, 2013, representing decreases of 6.9% and 7.2% over the prior year comparable periods. Diluted earnings per share increased $0.05 and $0.17 for the three and nine months ended September 29, 2013 due to the reduction in shares outstanding resulting from the share repurchase program. Approximately 21.5 million actual shares of the company's common stock were outstanding as of September 29, 2013.

Regular Quarterly Dividend and Two-for-One Stock Split

As previously announced, the Board of Directors declared a regular quarterly cash dividend of $0.25 per share; the dividend will be paid on November 22, 2013 to shareholders of record as of the close of business on November 11, 2013.

The Board of Directors also declared a two-for-one split of the company's outstanding shares of common stock, which will be effected in the form of a stock dividend. The stock dividend entitles each shareholder of record at the close of business on December 12, 2013 to receive one additional share for every outstanding share of common stock held on such record date. The stock dividend will be distributed on December 27, 2013.

2013 Guidance Update

The company provided the following 2013 guidance updates:

         

Updated
Guidance

Previous
Guidance

 
Diluted earnings per share $3.02 to $3.10 $2.92 to $3.00
 
North America comparables sales +2.5% to +3.5% +1.5% to +2.5%
 
International comparable sales +7.0% to +8.0% +5.0% to +7.0%
 
Worldwide net unit growth 245 to 275 230 to 260
North America 85 to 95 110 to 125
International 160 to 180 120 to 135
 

Conference Call

A conference call is scheduled for November 6, 2013 at 10:00 a.m. Eastern Time to review our third quarter 2013 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 63215634.

Forward-Looking Statements

Certain matters discussed in this press release constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as "expect," "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, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, 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" of the Annual Report on Form 10-K for the fiscal year ended December 30, 2012. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.

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

 
Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Income
 
 
      Three Months Ended     Nine Months Ended
September 29, 2013     September 23, 2012 September 29, 2013     September 23, 2012
(Unaudited)     (Unaudited) (Unaudited)     (Unaudited)
(In thousands, except per share amounts)
Revenues:
North America:
Domestic Company-owned restaurant sales $ 152,662 $ 143,299 $ 465,713 $ 430,641
Franchise royalties 19,419 18,777 60,382 58,396
Franchise and development fees 263 160 1,028 588
Domestic commissary sales 138,044 132,666 421,941 396,869
Other sales 13,566 12,581 38,617 36,610
International:
Royalties and franchise and development fees 5,454 4,582 15,912 13,769
Restaurant and commissary sales   16,934         13,449     47,539         38,496  
Total revenues 346,342 325,514 1,051,132 975,369
 
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales 38,233 34,054 113,131 99,391
Salaries and benefits 41,701 39,587 127,026 118,239
Advertising and related costs 14,424 13,920 43,894 39,897
Occupancy costs 9,583 9,185 27,233 25,702
Other operating expenses   23,061         21,490     68,237         62,738  
Total domestic Company-owned restaurant expenses 127,002 118,236 379,521 345,967
 
Domestic commissary and other expenses:
Cost of sales 115,563 111,114 347,386 328,364
Salaries and benefits 10,347 9,654 30,678 27,875
Other operating expenses   15,965         14,082     47,740         41,886  
Total domestic commissary and other expenses 141,875 134,850 425,804 398,125
 
International restaurant and commissary expenses 14,372 11,394 40,008 32,761
General and administrative expenses 31,780 30,426 98,064 93,485
Other general expenses 1,260 1,211 4,042 8,020
Depreciation and amortization   8,605         8,192     25,672         24,223  
Total costs and expenses   324,894         304,309     973,111         902,581  
 
Operating income 21,448 21,205 78,021 72,788
Net interest (expense) income   (185 )       (342 )   147         (939 )
Income before income taxes 21,263 20,863 78,168 71,849
Income tax expense   6,385         7,038     24,926         24,256  
Net income, including redeemable noncontrolling interests 14,878 13,825 53,242 47,593
Income attributable to redeemable noncontrolling interests   (602 )       (794 )   (2,510 )       (3,292 )
Net income, net of redeemable noncontrolling interests $ 14,276       $ 13,031   $ 50,732       $ 44,301  
 
Basic earnings per common share $ 0.66       $ 0.56   $ 2.32       $ 1.87  
Earnings per common share - assuming dilution $ 0.65       $ 0.55   $ 2.27       $ 1.84  
 
Basic weighted average shares outstanding   21,591         23,268     21,855         23,685  
Diluted weighted average shares outstanding   22,084         23,721     22,381         24,107  
 
Dividends declared per common share $ 0.25 $ - $ 0.25 $ -
 

 
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
 
 
      September 29,     December 30,
2013 2012
(In thousands) (Unaudited) (Note)
 
Assets
Current assets:
Cash and cash equivalents $ 13,689 $ 16,396
Accounts receivable, net 47,642 44,647
Notes receivable 5,506 4,577
Inventories 22,918 22,178
Deferred income taxes 9,263 10,279
Prepaid expenses and other current assets   20,269   20,549
Total current assets 119,287 118,626
 
Property and equipment, net 207,415 196,661
Notes receivable, less current portion, net 12,305 12,536
Goodwill 79,024 78,958
Other assets   33,408   31,627
Total assets $ 451,439 $ 438,408
 
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 34,081 $ 32,624
Income and other taxes payable 5,918 10,429
Accrued expenses and other current liabilities   55,192   60,528
Total current liabilities 95,191 103,581
 
Deferred revenue 6,215 7,329
Long-term debt 120,000 88,258
Deferred income taxes 12,471 10,672
Other long-term liabilities   41,118   40,674
Total liabilities 274,995 250,514
 
Redeemable noncontrolling interests 6,948 6,380
 
Total stockholders' equity   169,496   181,514
Total liabilities, redeemable noncontrolling interests and stockholders' equity $ 451,439 $ 438,408
 
 

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
 
 
      Nine Months Ended
(In thousands) September 29, 2013     September 23, 2012
(Unaudited)   (Unaudited)
Operating activities
Net income, including redeemable noncontrolling interests $ 53,242 $ 47,593

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

Provision for uncollectible accounts and notes receivable 1,130 1,250
Depreciation and amortization 25,672 24,223
Deferred income taxes 6,994 424
Stock-based compensation expense 5,642 4,932
Excess tax benefit on equity awards (4,108 ) (1,717 )
Other 1,260 4,375
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (4,666 ) (6,018 )
Inventories (740 ) (1,188 )
Prepaid expenses and other current assets 281 3,138
Other assets and liabilities (3,254 ) (840 )
Accounts payable 1,457 1,106
Income and other taxes payable (4,511 ) 6,248
Accrued expenses and other current liabilities (3,217 ) 7,258
Deferred revenue   (349 )   3,989  
Net cash provided by operating activities 74,833 94,773
 
Investing activities
Purchases of property and equipment (38,537 ) (26,425 )
Loans issued (3,830 ) (3,951 )
Repayments of loans issued 3,687 2,620
Acquisitions, net of cash acquired - (6,175 )
Proceeds from divestitures of restaurants - 1,068
Other   324     4  
Net cash used in investing activities (38,356 ) (32,859 )
 
Financing activities
Net proceeds (repayments) on line of credit facility 31,742 (1,489 )
Cash dividends paid on common stock (5,414 ) -
Excess tax benefit on equity awards 4,108 1,717
Tax payments for restricted stock issuances (1,862 ) (846 )
Proceeds from exercise of stock options 4,193 11,399
Acquisition of Company common stock (69,137 ) (64,146 )
Contributions from redeemable noncontrolling interest holders 850 -
Distributions to redeemable noncontrolling interest holders (3,200 ) (2,431 )
Other   (501 )   174  
Net cash used in financing activities (39,221 ) (55,622 )
 
Effect of exchange rate changes on cash and cash equivalents   37     119  
Change in cash and cash equivalents (2,707 ) 6,411
Cash and cash equivalents at beginning of period   16,396     18,942  
 
Cash and cash equivalents at end of period $ 13,689   $ 25,353  
 

Papa John's International, Inc.
Lance Tucker, 502-261-4218
Chief Financial Officer

Source: Papa John's International, Inc.

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