Papa John's Announces First Quarter 2014 Results
First Quarter Comparable Sales Increases of 9.6% for
Highlights
-
First quarter earnings per diluted share of
$0.45 in 2014 compared to$0.42 in 2013 -
System-wide comparable sales increases of 9.6% for
North America and 6.4% for international - 2014 guidance reaffirmed
"I'd like to congratulate our operators on delivering another excellent
quarter, especially considering the commodity headwinds we've seen thus
far in 2014," said Papa John's founder, chairman and CEO,
First quarter 2014 revenues were
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First Quarter | ||||||
2014 |
2013 |
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Global restaurant sales growth (a) | 12.5 | % | 6.1 | % | ||
Global restaurant sales growth, excluding the impact of foreign currency (a) |
13.2 | % | 6.5 | % | ||
Comparable sales growth (b) | ||||||
Domestic company-owned restaurants | 11.4 | % | 3.9 | % | ||
|
8.9 | % | 0.8 | % | ||
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9.6 | % | 1.6 | % | ||
System-wide international restaurants | 6.4 | % | 8.2 | % | ||
(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
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
Revenue and Operating Highlights
All revenue and operating highlights below are compared to the same period of the prior year, unless otherwise noted.
Revenue Highlights
Consolidated revenues were
-
Domestic company-owned restaurant sales increased
$20.3 million , or 12.9%, primarily due to an increase of 11.4% in comparable sales during the first quarter of 2014. -
North America franchise royalty revenue increased$1.9 million , or 9.1%, primarily due to an increase of 8.9% in comparable sales during the first quarter of 2014. -
Domestic commissary sales increased
$20.2 million , or 14.0%, due to increases in the prices of certain commodities, primarily cheese, and an increase in sales volumes. -
International revenues increased
$3.7 million , or 18.6%, primarily due to an increase in the number of restaurants and an increase in comparable sales of 6.4%, calculated on a constant dollar basis.
Operating Highlights
The table below summarizes income before income taxes on a reporting segment basis:
First Quarter | |||||||||||||
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Increase | |||||||||||
(In thousands) | 2014 | 2013 | (Decrease) | ||||||||||
Domestic company-owned restaurants | $ | 13,285 | $ | 10,956 | $ | 2,329 | |||||||
Domestic commissaries | 10,431 | 10,163 | 268 | ||||||||||
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19,484 | 18,222 | 1,262 | ||||||||||
International | 732 | 341 | 391 | ||||||||||
All others | 590 | 659 | (69 | ) | |||||||||
Unallocated corporate expenses | (12,461 | ) | (9,518 | ) | (2,943 | ) | |||||||
Elimination of intersegment profits | (651 | ) | (526 | ) | (125 | ) | |||||||
Total income before income taxes | $ | 31,410 | $ | 30,297 | $ | 1,113 | |||||||
First quarter 2014 income before income taxes increased approximately
-
Domestic company-owned restaurants increased approximately
$2.3 million primarily due to the 11.4% increase in comparable sales, partially offset by lower profits from higher commodity costs. The market price for cheese averaged$2.21 per pound for the first quarter of 2014, compared to$1.66 per pound in the prior year. -
Domestic commissaries income increased approximately
$300,000 as the incremental profits from higher sales were partially offset by higher costs resulting from the transition to in-house distribution from a third party provider at certain of our commissaries. We manage commissary results on a full year basis and anticipate the 2014 full year profit margin will approximate 2013. -
North America franchising increased approximately$1.3 million primarily due to higher royalties attributable to the strong 8.9% comparable sales. -
International income increased approximately
$400,000 primarily due to the increase in units and comparable sales of 6.4%, which resulted in both higher royalties and an increase inUnited Kingdom profits.
These increases were partially offset by higher unallocated corporate
expenses of approximately
-
the prior year included an
$800,000 benefit from a decrease in the redemption value of a mandatorily redeemable noncontrolling interest in a joint venture; -
interest costs were approximately
$400,000 higher due to both a higher average outstanding debt balance and a higher effective interest rate; and - an increase in general and administrative costs, including higher salaries, benefits and long-term performance-based incentive compensation.
The first quarter 2014 effective income tax rate was 34.6%, representing an increase of 1.7% from the prior year rate of 32.9%. Our effective income tax rate may fluctuate from quarter to quarter for various reasons. The higher tax rate in the first quarter of 2014 was primarily due to the prior year period including both the benefit of the reinstatement of certain 2012 tax credits under the American Taxpayer Relief Act of 2012 and favorable state tax settlements.
The company's free cash flow, a non-GAAP financial measure, for the first quarters of 2014 and 2013, was as follows (in thousands):
First Quarter | ||||||||
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2014 | 2013 | |||||||
Net cash provided by operating activities (a) | $ | 26,678 | $ | 29,914 | ||||
Purchases of property and equipment | (11,137 | ) | (13,248 | ) | ||||
Free cash flow | $ | 15,541 | $ | 16,666 | ||||
(a) The decrease of approximately
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 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 Company- owned |
Franchised North America |
Total North America |
International | System-wide | |||||||||||
First Quarter |
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Beginning - |
665 | 2,621 | 3,286 | 1,142 | 4,428 | ||||||||||
Opened | 2 | 21 | 23 | 23 | 46 | ||||||||||
Closed | (1 | ) | (27 | ) | (28 | ) | (6 | ) | (34 | ) | |||||
Ending - |
666 | 2,615 | 3,281 | 1,159 | 4,440 | ||||||||||
Unit growth (decline) | 1 | (6 | ) | (5 | ) | 17 | 12 | ||||||||
% increase (decrease) | 0.2 | % | -0.2 | % | -0.2 | % | 1.5 | % | 0.3 | % | |||||
Our development pipeline as of
Share Repurchase Activity
The following table reflects our repurchases for the first quarter of
2014 and subsequent repurchases through
Period |
Number of Shares |
Cost | |||
First Quarter 2014 | 651 | $ | 32,800 | ||
|
338 | $ | 16,988 | ||
There were 42.7 million diluted weighted average shares outstanding for
the first quarter, representing a decrease of 6.4% over the prior year
first quarter. Diluted earnings per share increased
2014 Guidance Update
The company is reaffirming all 2014 guidance.
Conference Call
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," "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:
- aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales; and new product and concept developments by food industry competitors;
- changes in consumer preferences or consumer buying habits, including the impact of adverse general economic conditions, such as increasing tax rates;
- the impact that product recalls, food quality or safety issues, incidences of foodborne illness and other general public health concerns could have system-wide on our restaurants or our results;
- failure to maintain our brand strength and quality reputation;
- the ability of the company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably;
- increases in or sustained high costs of food ingredients or other restaurant costs. This could include increased employee compensation, benefits, insurance, tax rates, regulatory compliance and similar costs, including increased costs resulting from federal health care legislation;
- disruption of our supply chain or our commissary operations which could be caused by sole or limited source of suppliers or weather, drought, disease or other disruptions beyond our control;
-
increased risks associated with our international operations,
including economic and political conditions and instability in our
international markets and difficulty in meeting planned sales targets
and new store growth. This could include our expansion into emerging
or underpenetrated markets, such as
China , where we have a company-owned presence. Based on prior experience in underpenetrated markets, operating losses are likely to occur as the market is being established; - the credit performance of our franchise loan program;
- the impact of the resolution of current or future claims and litigation;
- current or proposed legislation impacting our business;
- the impact of changes in currency exchange and interest rates;
- failure to effectively execute succession planning, and our reliance on the services of our Founder and Chief Executive Officer, who also serves as our brand spokesperson;
- disruption of critical business or information technology systems, and risks associated with data privacy and security breaches, including theft of company and customer information. This would include the increased risk associated with the planned rollout of our new domestic point-of-sale system. If prolonged and widespread technological problems are experienced during the rollout, our domestic corporate and franchise operations could be disrupted, which could adversely impact sales.
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.
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Condensed Consolidated Statements of Income | ||||||||||
Three Months Ended | ||||||||||
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(In thousands, except per share amounts) | (Unaudited) | (Unaudited) | ||||||||
Revenues: | ||||||||||
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Domestic company-owned restaurant sales | $ | 178,193 | $ | 157,898 | ||||||
Franchise royalties | 22,614 | 20,733 | ||||||||
Franchise and development fees | 144 | 546 | ||||||||
Domestic commissary sales | 164,047 | 143,894 | ||||||||
Other sales | 12,750 | 12,607 | ||||||||
International: | ||||||||||
Royalties and franchise and development fees | 5,779 | 5,067 | ||||||||
Restaurant and commissary sales | 17,850 | 14,859 | ||||||||
Total revenues | 401,377 | 355,604 | ||||||||
Costs and expenses: | ||||||||||
Domestic company-owned restaurant expenses: | ||||||||||
Cost of sales | 45,156 | 37,073 | ||||||||
Salaries and benefits | 47,583 | 43,272 | ||||||||
Advertising and related costs | 16,256 | 14,793 | ||||||||
Occupancy costs | 9,311 | 8,711 | ||||||||
Other restaurant operating expenses | 25,287 | 22,745 | ||||||||
Total domestic company-owned restaurant expenses | 143,593 | 126,594 | ||||||||
Domestic commissary expenses: | ||||||||||
Cost of sales | 128,924 | 110,923 | ||||||||
Salaries and benefits | 7,024 | 6,016 | ||||||||
Other commissary operating expenses | 15,855 | 15,461 | ||||||||
Total domestic commissary expenses | 151,803 | 132,400 | ||||||||
Other operating expenses | 11,431 | 11,452 | ||||||||
International restaurant and commissary expenses | 14,885 | 12,653 | ||||||||
General and administrative expenses | 36,966 | 33,158 | ||||||||
Other general expenses | 1,533 | 1,185 | ||||||||
Depreciation and amortization | 9,164 | 8,537 | ||||||||
Total costs and expenses | 369,375 | 325,979 | ||||||||
Operating income | 32,002 | 29,625 | ||||||||
Net interest (expense) income | (592 | ) | 672 | |||||||
Income before income taxes | 31,410 | 30,297 | ||||||||
Income tax expense | 10,869 | 9,978 | ||||||||
Net income before attribution to noncontrolling interests | 20,541 | 20,319 | ||||||||
Income attributable to noncontrolling interests | (1,230 | ) | (1,013 | ) | ||||||
Net income attributable to the company | $ | 19,311 | $ | 19,306 | ||||||
Calculation of income for earnings per share: | ||||||||||
Net income attributable to the company | $ | 19,311 | $ | 19,306 | ||||||
Increase in noncontrolling interest redemption value | (8 | ) | - | |||||||
Net income attributable to participating securities | (137 | ) | - | |||||||
Net income attributable to common shareholders | $ | 19,166 | $ | 19,306 | ||||||
Basic earnings per common share | $ | 0.46 | $ | 0.43 | ||||||
Diluted earnings per common share | $ | 0.45 | $ | 0.42 | ||||||
Basic weighted average common shares outstanding | 41,778 | 44,512 | ||||||||
Diluted weighted average common shares outstanding | 42,696 | 45,612 | ||||||||
Dividends declared per common share | $ | 0.125 | $ | - |
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Condensed Consolidated Balance Sheets | |||||||
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2014 | 2013 | ||||||
(In thousands) | (Unaudited) | (Note) | |||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 14,388 | $ | 13,670 | |||
Accounts receivable, net | 53,682 | 53,203 | |||||
Notes receivable, net | 5,825 | 3,566 | |||||
Inventories | 27,767 | 23,035 | |||||
Deferred income taxes | 5,830 | 8,004 | |||||
Prepaid expenses and other current assets | 21,847 | 23,562 | |||||
Total current assets | 129,339 | 125,040 | |||||
Property and equipment, net | 213,427 | 212,097 | |||||
Notes receivable, less current portion, net | 11,852 | 13,239 | |||||
Goodwill | 79,430 | 79,391 | |||||
Other assets | 34,551 | 34,524 | |||||
Total assets | $ | 468,599 | $ | 464,291 | |||
Liabilities and stockholders' equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 34,342 | $ | 35,653 | |||
Income and other taxes payable | 7,669 | 4,401 | |||||
Accrued expenses and other current liabilities | 51,876 | 57,807 | |||||
Total current liabilities | 93,887 | 97,861 | |||||
Deferred revenue | 5,953 | 5,827 | |||||
Long-term debt | 177,167 | 157,900 | |||||
Deferred income taxes | 13,729 | 14,660 | |||||
Other long-term liabilities | 43,589 | 42,835 | |||||
Total liabilities | 334,325 | 319,083 | |||||
Redeemable noncontrolling interests | 7,789 | 7,024 | |||||
Total stockholders' equity | 126,485 | 138,184 | |||||
Total liabilities, redeemable noncontrolling interests and stockholders' equity | $ | 468,599 | $ | 464,291 | |||
Note: The Condensed Consolidated Balance Sheet has been derived from
the audited consolidated financial statements, but does not include
all information and footnotes required by accounting principles
generally accepted in |
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Consolidated Statements of Cash Flows | ||||||||
Three Months Ended | ||||||||
(In thousands) |
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(Unaudited) | (Unaudited) | |||||||
Operating activities | ||||||||
Net income before attribution to noncontrolling interests | $ | 20,541 | $ | 20,319 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for uncollectible accounts and notes receivable | 145 | 314 | ||||||
Depreciation and amortization | 9,164 | 8,537 | ||||||
Deferred income taxes | 6,170 | 3,325 | ||||||
Stock-based compensation expense | 2,190 | 1,681 | ||||||
Excess tax benefit on equity awards | (4,900 | ) | (1,142 | ) | ||||
Other | 1,110 | (180 | ) | |||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||
Accounts receivable | (854 | ) | (627 | ) | ||||
Inventories | (3,210 | ) | (1,744 | ) | ||||
Prepaid expenses and other current assets | 1,715 | 3,380 | ||||||
Other assets and liabilities | (795 | ) | 38 | |||||
Accounts payable | (1,311 | ) | (406 | ) | ||||
Income and other taxes payable | 3,268 | 1,243 | ||||||
Accrued expenses and other current liabilities | (6,958 | ) | (4,641 | ) | ||||
Deferred revenue | 403 | (183 | ) | |||||
Net cash provided by operating activities | 26,678 | 29,914 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (11,137 | ) | (13,248 | ) | ||||
Loans issued | (1,758 | ) | (1,748 | ) | ||||
Repayments of loans issued | 1,164 | 1,916 | ||||||
Other | 7 | 319 | ||||||
Net cash used in investing activities | (11,724 | ) | (12,761 | ) | ||||
Financing activities | ||||||||
Net proceeds on line of credit facility | 19,267 | 20,652 | ||||||
Cash dividends paid | (5,240 | ) | - | |||||
Excess tax benefit on equity awards | 4,900 | 1,142 | ||||||
Tax payments for equity award issuances | (3,233 | ) | (843 | ) | ||||
Proceeds from exercise of stock options | 2,989 | 2,704 | ||||||
Acquisition of Company common stock | (32,800 | ) | (32,122 | ) | ||||
Contributions from noncontrolling interest holders | - | 350 | ||||||
Distributions to noncontrolling interest holders | (300 | ) | (1,000 | ) | ||||
Other | 223 | 112 | ||||||
Net cash used in financing activities | (14,194 | ) | (9,005 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (42 | ) | 7 | |||||
Change in cash and cash equivalents | 718 | 8,155 | ||||||
Cash and cash equivalents at beginning of period | 13,670 | 16,396 | ||||||
Cash and cash equivalents at end of period | $ | 14,388 | $ | 24,551 |
Papa John's
Chief
Financial Officer
Source: Papa John's
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