Papa John‘s International, Inc.
Nov 4, 2014

Papa John's Announces Third Quarter 2014 Results

Third Quarter Comparable Sales Increases of 7.4% for North America and 5.5% 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 28, 2014.

Highlights

"I'd like to congratulate our corporate and franchise operators for continuing to drive excellent sales and bottom line results," said Papa John's Founder, Chairman, CEO and President John Schnatter. "Our focus on driving quality, digital innovation, and a better customer experience provides the foundation from which we will continue to consistently grow units and profitability."

Third quarter 2014 revenues were $390.4 million, a 12.7% increase from third quarter 2013 revenues of $346.3 million. Third quarter 2014 net income was $16.1 million, compared to third quarter 2013 net income of $14.3 million. Third quarter 2014 diluted earnings per share were $0.39, compared to third quarter 2013 diluted earnings per share of $0.32.

Revenues were $1.17 billion for the nine months ended September 28, 2014, an 11.6% increase from revenues of $1.05 billion for the same period in 2013. Net income was $52.1 million for the nine months ended September 28, 2014, compared to $50.7 million for the same period in 2013. Diluted earnings per share were $1.23 for the nine months ended September 28, 2014, compared to $1.13 for the same period in 2013.

Global Restaurant and Comparable Sales Information

       
Three Months Ended Nine Months Ended

Sept. 28,
2014

   

Sept. 29,
2013

 

Sept. 28,
2014

   

Sept. 29,
2013

   
Global restaurant sales growth (a) 10.2% 6.9% 11.0% 6.7%
 

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

10.7% 7.5% 11.5% 7.2%
 
Comparable sales growth (b)
Domestic company-owned restaurants 8.3% 5.1% 9.1% 5.0%
North America franchised restaurants 7.1% 0.6% 7.2% 1.3%
System-wide North America restaurants 7.4% 1.8% 7.7% 2.3%
 
System-wide international restaurants 5.5% 8.1% 6.9% 7.7%
 
(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. Franchise restaurant sales are not included in company revenues.

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 increased $44.1 million, or 12.7%, for the third quarter of 2014 and increased $121.5 million, or 11.6%, for the nine months ended September 28, 2014. 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:

      Three Months Ended     Nine Months Ended
    Sept. 28,     Sept. 29,     Increase     Sept. 28,     Sept. 29,     Increase
(In thousands)     2014     2013     (Decrease)     2014     2013     (Decrease)
 
Domestic company-owned restaurants $ 8,133 $ 5,535 $ 2,598 $ 32,069 $ 24,666 $ 7,403
Domestic commissaries 8,897 6,473 2,424 26,174 26,278 (104 )
North America franchising 19,023 16,516 2,507 56,389 52,134 4,255
International 1,436 945 491 4,071 2,152 1,919
All others (298 ) 590 (888 ) (150 ) 2,402 (2,552 )
Unallocated corporate expenses (12,242 ) (8,544 ) (3,698 ) (35,405 ) (28,475 ) (6,930 )
Elimination of intersegment losses (profits)       (731 )       (252 )       (479 )         (1,284 )       (989 )       (295 )
Total income before income taxes (a)     $ 24,218       $ 21,263      

$

2,955

        $ 81,864       $ 78,168      

$

3,696

 
 
(a) Includes FOCUS system rollout costs of approximately $1.2 million and $2.3 million for the three and nine months ended September 28, 2014, respectively. See the FOCUS Update section of this press release and the Quarterly Report on Form 10-Q for the three and nine months ended September 28, 2014 for additional information.
 
Total income before income taxes and other measures excluding FOCUS system rollout costs included within this press release are not measures defined by accounting principles generally accepted in the United States ("GAAP"). These non-GAAP measures should not be construed as substitutes for or better indicators of the company's performance than the company's GAAP results. Management believes presenting income before income taxes and other measures excluding the FOCUS system rollout costs is important for purposes of comparison to prior year results and analyzing each segment's operating results. In addition, management uses these non-GAAP measures to allocate resources and analyze trends and underlying operating performance of the company.
 

Third quarter 2014 income before income taxes increased $3.0 million, or 13.9%. Excluding FOCUS rollout costs of approximately $1.2 million, income before income taxes increased approximately $4.1 million, or 19.5%. Significant results by segment are detailed as follows:

Income before income taxes increased $3.7 million, or 4.7%, for the nine-month period ended September 28, 2014. Excluding FOCUS system rollout costs of approximately $2.3 million, income before income taxes increased by approximately $6.0 million, or 7.7% for the nine-month period. The increase was primarily due to the same reasons as noted above, except the domestic commissaries segment which decreased approximately $100,000 due to higher insurance costs of approximately $1.1 million and higher costs associated with ongoing commissary initiatives. These decreases were substantially offset by a higher margin.

The effective income tax rates were 30.0% and 32.4% for the three and nine months ended September 28, 2014, representing a decrease of 0.1% for the three-month period and an increase of 0.5% for the nine-month period. Our effective income tax rate may fluctuate from quarter to quarter for various reasons. The higher tax rate for the nine months of 2014 was primarily due to the prior year including both favorable state tax settlements and the reinstatement of certain 2012 tax credits under the American Taxpayer Relief Act of 2012.

The company's free cash flow, a non-GAAP financial measure, was as follows (in thousands):

        Nine Months Ended
Sept. 28,         Sept. 29,
2014 2013
 
Net cash provided by operating activities (a) $ 84,826 $ 74,833
Purchases of property and equipment (b)   (37,700 )   (38,537 )
Free cash flow $ 47,126   $ 36,296  
 
(a) The increase of approximately $10.0 million was primarily due to higher net income and favorable changes in working capital and other operating activities including higher depreciation and amortization expense.
(b) Purchases of property and equipment were relatively consistent for the nine-month periods. The current year period includes FOCUS hardware costs for domestic company-owned restaurants. The prior year period includes expenditures on equipment for New Jersey commissary dough production as well as technology investments, including FOCUS software development costs.
 

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, dividends or share repurchases. 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 (SEC) for additional information concerning our operating results and cash flow for the three and nine months ended September 28, 2014.

FOCUS Update

As previously disclosed, the company is implementing a new, proprietary point-of-sale system ("FOCUS") in substantially all domestic system-wide restaurants. As of September 28, 2014, we had installed FOCUS in almost 50% of our domestic restaurants, including all company-owned restaurants and almost 800 franchised restaurants. Substantial completion is expected to occur by the end of the first quarter of 2015.

The costs related to implementing FOCUS are projected to decrease income before income taxes by approximately $4.0 million in 2014, or a $0.06 negative impact on diluted earnings per share, as compared to 2013. For the three and nine months ended September 28, 2014, the impact was a $1.2 million and $2.3 million reduction in income before income taxes, or a $0.02 and $0.04 reduction in diluted earnings per share, respectively. For additional information, see the Quarterly Report on Form 10-Q for the three- and nine-month periods ended September 28, 2014.

Global Restaurant Unit Data

At September 28, 2014, there were 4,537 Papa John's restaurants operating in all 50 states and in 36 international countries and territories, as follows:

                   

Domestic
Company-
owned

   

Franchised
North
America

   

Total North
America

    International     System-wide

Third Quarter

Beginning - June 29, 2014 672 2,614 3,286 1,201 4,487
Opened 5 37 42 54 96
Closed (1 ) (14 ) (15 ) (31 ) (46 )
Acquired (divested) 7       (7 )     -       -       -  
Ending - September 28, 2014 683       2,630       3,313       1,224       4,537  
 

Year-to-date

Beginning - December 29, 2013 665 2,621 3,286 1,142 4,428
Opened 9 86 95 124 219
Closed (3 ) (65 ) (68 ) (42 ) (110 )
Acquired (divested) 12       (12 )     -       -       -  
Ending - September 28, 2014 683       2,630       3,313       1,224       4,537  
 
Unit growth 18       9       27       82       109  
 
% increase 2.7 %     0.3 %     0.8 %     7.2 %     2.5 %
 

Our development pipeline as of September 28, 2014 included approximately 1,300 restaurants (300 units in North America and 1,000 units internationally), the majority of which are scheduled to open over the next six years.

Share Repurchase Activity

In October 2014, the company's Board of Directors approved a $125 million increase in the amount of common stock that may be purchased under the company's share repurchase program through December 31, 2015, bringing the total authorized under the program to $1.325 billion since its inception in 1999. Approximately $142.9 million remains available under the company's share repurchase program as of October 28, 2014.

The following table reflects our repurchases for the three and nine months ended September 28, 2014 and subsequent repurchases through October 28, 2014 (in thousands):

Period        

Number
of Shares

        Cost
               
Three Months Ended September 28, 2014 756 $ 30,848
 
Nine Months Ended September 28, 2014 2,060 $ 94,152
 
September 29, 2014 through October 28, 2014 240 $ 9,851
 

There were 41.4 million and 42.0 million diluted weighted average shares outstanding for the three and nine months ended September 28, 2014, representing decreases of 6.3% and 6.1%, respectively, over the prior year comparable periods. Diluted earnings per share increased $0.03 and $0.08, respectively, for the three and nine months ended September 28, 2014 due to the reduction in shares outstanding, primarily resulting from the share repurchase program. Approximately 40.4 million actual shares of the company's common stock were outstanding as of September 28, 2014.

2014 Guidance Update

The company provided the following 2014 guidance updates:

      Updated Guidance       Previous Guidance
 
Diluted earnings per share (a) $1.68 to $1.74 $1.64 to $1.72
 
North America comparable sales +5.0% to +7.0% +4.0% to +6.0%
 

(a)

Includes the approximate $0.06 per share impact of implementing FOCUS, which was previously estimated to be $0.08 per share.

 

Conference Call

A conference call is scheduled for November 5, 2014 at 8:00 a.m. Eastern Time to review our third quarter 2014 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 17449361.

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," "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" in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013. 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 Nine Months Ended

Sept. 28, 2014

    Sept. 29, 2013 Sept. 28, 2014     Sept. 29, 2013
(In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
North America:
Domestic company-owned restaurant sales $ 169,076 $ 152,662 $ 517,269 $ 465,713
Franchise royalties 22,131 19,419 65,728 60,382
Franchise and development fees 217 263 493 1,028
Domestic commissary sales 149,224 138,044 463,852 421,941
Other sales 23,359 13,566 49,704 38,617
International:
Royalties and franchise and development fees 6,673 5,454 18,769 15,912
Restaurant and commissary sales   19,719         16,934     56,825         47,539  
Total revenues 390,399 346,342 1,172,640 1,051,132
 
Costs and expenses:
Domestic company-owned restaurant expenses:
Cost of sales 42,460 38,233 129,646 113,131
Salaries and benefits 45,835 41,701 139,223 127,026
Advertising and related costs 15,369 14,424 46,979 43,894
Occupancy costs 10,344 9,583 29,101 27,233
Other restaurant operating expenses   25,343         23,061     75,850         68,237  
Total domestic company-owned restaurant expenses 139,351 127,002 420,799 379,521
 
Domestic commissary expenses:
Cost of sales 116,908 107,930 364,302 326,529
Salaries and benefits 7,208 6,173 21,079 18,273
Other commissary operating expenses   15,013         15,262     47,083         45,908  
Total domestic commissary expenses 139,129 129,365 432,464 390,710
 
Other operating expenses 22,794 12,510 47,446 35,094
International restaurant and commissary expenses 16,605 14,372 47,366 40,008
General and administrative expenses 33,671 31,780 104,199 98,064
Other general expenses 3,143 1,260 6,640 4,042
Depreciation and amortization   10,520         8,605     29,539         25,672  
Total costs and expenses   365,213         324,894     1,088,453         973,111  
 
Operating income 25,186 21,448 84,187 78,021
Net interest (expense) income   (968 )       (185 )   (2,323 )       147  
Income before income taxes 24,218 21,263 81,864 78,168
Income tax expense   7,256         6,385     26,522         24,926  
Net income before attribution to noncontrolling interests 16,962 14,878 55,342 53,242
Income attributable to noncontrolling interests   (887 )       (602 )   (3,208 )       (2,510 )
Net income attributable to the company $ 16,075       $ 14,276   $ 52,134       $ 50,732  
 
Calculation of income for earnings per share:
Net income attributable to the company $ 16,075 $ 14,276 $ 52,134 $ 50,732
Increase in noncontrolling interest redemption value (42 ) - (81 ) -
Net income attributable to participating securities   (77 )       -     (295 )       -  
Net income attributable to common shareholders $ 15,956       $ 14,276   $ 51,758       $ 50,732  
 
Basic earnings per common share $ 0.39       $ 0.33   $ 1.25       $ 1.16  
Diluted earnings per common share $ 0.39       $ 0.32   $ 1.23       $ 1.13  
 
Basic weighted average common shares outstanding   40,739         43,182     41,248         43,710  
Diluted weighted average common shares outstanding   41,386         44,168     42,021         44,762  
 
Dividends declared per common share $ 0.14 $ 0.125 $ 0.39 $ 0.375
 

     
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
 
 
September 28, December 29,
2014   2013
(In thousands) (Unaudited) (Note)
 
Assets
Current assets:
Cash and cash equivalents $ 17,148 $ 13,670
Accounts receivable, net 57,262 53,203
Notes receivable, net 6,064 3,566
Inventories 34,428 23,035
Deferred income taxes 6,924 8,004
Prepaid expenses and other current assets   21,696   23,562
Total current assets 143,522 125,040
 
Property and equipment, net 218,453 212,097
Notes receivable, less current portion, net 12,359 13,239
Goodwill 82,689 79,391
Other assets   35,158   34,524
Total assets $ 492,181 $ 464,291
 
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 34,273 $ 35,653
Income and other taxes payable 10,837 4,401
Accrued expenses and other current liabilities   52,866   57,807
Total current liabilities 97,976 97,861
 
Deferred revenue 4,887 5,827
Long-term debt 224,684 157,900
Deferred income taxes 12,604 14,660
Other long-term liabilities   39,180   42,835
Total liabilities 379,331 319,083
 
Redeemable noncontrolling interests 8,970 7,024
 
Total stockholders' equity   103,880   138,184
Total liabilities, redeemable noncontrolling interests and stockholders' equity $ 492,181 $ 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 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 28, 2014       September 29, 2013
(Unaudited) (Unaudited)
Operating activities
Net income before attribution to noncontrolling interests $ 55,342 $ 53,242

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

Provision for uncollectible accounts and notes receivable 1,714 1,130
Depreciation and amortization 29,539 25,672
Deferred income taxes 7,687 6,994
Stock-based compensation expense 5,958 5,642
Excess tax benefit on equity awards (8,493 ) (4,108 )
Other 3,916 1,260
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (6,861 ) (4,666 )
Inventories (9,792 ) (740 )
Prepaid expenses and other current assets 2,148 281
Other assets and liabilities 3,887 (3,254 )
Accounts payable (1,380 ) 1,457
Income and other taxes payable 6,434 (4,511 )
Accrued expenses and other current liabilities (5,163 ) (3,217 )
Deferred revenue   (110 )   (349 )
Net cash provided by operating activities 84,826 74,833
 
Investing activities
Purchases of property and equipment (37,700 ) (38,537 )
Loans issued (5,221 ) (3,830 )
Repayments of loans issued 3,371 3,687
Acquisitions, net of cash acquired (4,264 ) -
Other   25     324  
Net cash used in investing activities (43,789 ) (38,356 )
 
Financing activities
Net proceeds on line of credit facility 66,784 31,742
Cash dividends paid (16,119 ) (5,414 )
Excess tax benefit on equity awards 8,493 4,108
Tax payments for equity award issuances (7,540 ) (1,862 )
Proceeds from exercise of stock options 4,752 4,193
Acquisition of Company common stock (94,152 ) (69,137 )
Contributions from noncontrolling interest holders 1,086 850
Distributions to noncontrolling interest holders (1,200 ) (3,200 )
Other   423     (501 )
Net cash used in financing activities (37,473 ) (39,221 )
 
Effect of exchange rate changes on cash and cash equivalents   (86 )   37  
Change in cash and cash equivalents 3,478 (2,707 )
Cash and cash equivalents at beginning of period   13,670     16,396  
 
Cash and cash equivalents at end of period $ 17,148   $ 13,689  

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

Source: Papa John's International, Inc.

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