Papa John’s Announces Third Quarter 2019 Results
Highlights
- Third quarter 2019 loss per diluted share of
($0.10) as compared to third quarter 2018 loss per diluted share of($0.42) - Excluding Special items, adjusted earnings per diluted share of
$0.21 compared to$0.19 for the third quarter of 2018 - Third quarter system-wide
North America comparable sales increase of 1.0% - Third quarter international comparable sales increase of 1.6%; international franchise sales increase of 10.1%, excluding the impact of foreign currency
- Refranchised 44 restaurants in the third and fourth quarters
- 2019 outlook revised for comparable sales and net global unit development
Global restaurant and comparable sales information and operating highlights for the three and nine months ended
Three Months Ended | Nine Months Ended | |||||||||||
Sept. 29, 2019 |
Sept. 30, 2018 |
Sept. 29, 2019 |
Sept. 30, 2018 |
|||||||||
Global restaurant sales growth / (decline) (a) |
2.3 |
% |
(6.6 |
%) |
(2.5 |
%) |
(3.3 |
%) |
||||
Global restaurant sales growth / (decline), excluding the impact of foreign currency (a) |
3.3 |
% |
(5.9 |
%) |
(1.2 |
%) |
(3.2 |
%) |
||||
Comparable sales growth / (decline) (b) | ||||||||||||
Domestic company-owned restaurants |
2.2 |
% |
(13.2 |
%) |
(4.8 |
%) |
(8.7 |
%) |
||||
North America franchised restaurants |
0.6 |
% |
(8.6 |
%) |
(3.7 |
%) |
(6.4 |
%) |
||||
System-wide North America restaurants |
1.0 |
% |
(9.8 |
%) |
(4.0 |
%) |
(7.0 |
%) |
||||
System-wide international restaurants |
1.6 |
% |
(3.3 |
%) |
0.6 |
% |
(1.3 |
%) |
||||
|
|
|||||||||||
(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
Revenue and Operating Highlights
Three Months Ended |
|
Nine Months Ended |
||||||||||||||
In thousands, except per share amounts |
Sept. 29, |
Sept. 30, |
Increase / |
|
Sept. 29, |
Sept. 30, |
(Decrease) |
|||||||||
Total revenue |
$ |
403,706 |
|
$ |
385,231 |
|
4.8 |
% |
$ |
1,201,734 |
|
$ |
1,265,305 |
(5.0 |
%) |
|
Income (loss) before income taxes |
|
678 |
|
|
(20,228 |
) |
103.4 |
% |
|
9,870 |
|
|
21,949 |
(55.0 |
%) |
|
Net income (loss) |
|
385 |
|
|
(13,300 |
) |
102.9 |
% |
|
7,008 |
|
|
15,342 |
(54.3 |
%) |
|
Diluted earnings (loss) per share |
|
(0.10 |
) |
|
(0.42 |
) |
76.2 |
% |
|
(0.06 |
) |
|
0.47 |
(112.8 |
%) |
|
Adjusted diluted earnings per share (b) |
|
0.21 |
|
|
0.19 |
|
10.5 |
% |
|
0.80 |
|
|
1.18 |
(32.2 |
%) |
|
(a) Our 2019 financial results include the consolidation of the operations of the Papa John’s Marketing Fund (“PJMF”). Our 2018 financial results have also been restated to include the PJMF results, as a correction of an immaterial error. The consolidation of PJMF is not expected to have a material impact on the company’s annual financial results as PJMF operates at or near break-even annually. Additional detail on the consolidation of PJMF can be found in our Quarterly Report on Form 10-Q for the three and nine months ended September 29, 2019 filed with the Securities and Exchange Commission (“SEC”). |
||||||||||||||||
(b) Adjusted to exclude Special items, which impact comparability. The reconciliation of GAAP to non-GAAP financial results is included in the table below. |
Adjusted financial results excluding Special items are summarized in the following reconciliation. We present these non-GAAP measures because we believe the Special items impact the comparability of our results of operations. The table below reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures. All highlights are compared to the same period of the prior year, unless otherwise noted.
Three Months Ended |
|
Nine Months Ended |
||||||||||||||
Sept. 29, |
|
Sept. 30, |
|
Sept. 29, |
|
Sept. 30, |
||||||||||
(In thousands, except per share amounts) |
2019 |
|
2018 (1) |
|
2019 |
|
2018 (1) |
|||||||||
GAAP income (loss) before income taxes |
$ |
678 |
|
$ |
(20,228 |
) |
$ |
9,870 |
|
$ |
21,949 |
|
||||
Special Items: | ||||||||||||||||
Special charges (2) |
|
14,197 |
|
|
24,833 |
|
|
35,413 |
|
|
24,833 |
|
||||
Refranchising (gains) losses, net (3) |
|
(1,726 |
) |
|
- |
|
|
(1,889 |
) |
|
1,918 |
|
||||
Adjusted income before income taxes |
$ |
13,149 |
|
$ |
4,605 |
|
$ |
43,394 |
|
$ |
48,700 |
|
||||
GAAP net income (loss) attributable to common shareholders |
$ |
(3,088 |
) |
$ |
(13,300 |
) |
$ |
(2,021 |
) |
$ |
15,195 |
|
||||
Special Items, net of income taxes: | ||||||||||||||||
Special charges (2) |
|
10,988 |
|
|
19,270 |
|
|
28,745 |
|
|
19,270 |
|
||||
Refranchising (gains) losses, net (3) |
|
(1,337 |
) |
|
- |
|
|
(1,462 |
) |
|
1,488 |
|
||||
Tax impact of China refranchising (3) |
|
- |
|
|
- |
|
|
- |
|
|
2,435 |
|
||||
Adjusted net income attributable to common shareholders |
$ |
6,563 |
|
$ |
5,970 |
|
$ |
25,262 |
|
$ |
38,388 |
|
||||
GAAP diluted earnings (loss) per share |
$ |
(0.10 |
) |
$ |
(0.42 |
) |
$ |
(0.06 |
) |
$ |
0.47 |
|
||||
Special items: | ||||||||||||||||
Special charges (2) |
|
0.35 |
|
|
0.61 |
|
|
0.91 |
|
|
0.59 |
|
||||
Refranchising (gains) losses, net (3) |
|
(0.04 |
) |
|
- |
|
|
(0.05 |
) |
|
0.05 |
|
||||
Tax impact of China refranchising (3) |
|
- |
|
|
- |
|
|
- |
|
|
0.07 |
|
||||
Adjusted diluted earnings per share |
$ |
0.21 |
|
$ |
0.19 |
|
$ |
0.80 |
|
$ |
1.18 |
|
||||
(1) The three and nine months ended September 30, 2018 have been restated to reflect the correction of an immaterial error to consolidate the operations of PJMF. |
||||||||||||||||
(2) The company incurred special costs (defined as “Special charges”) of $14.2 million and $35.4 million for the three and nine months ended September 29, 2019, respectively, and $24.8 million for the three and nine months ended September 30, 2018, including the following (in thousands, except per share amounts): |
Three Months Ended |
|
Nine Months Ended |
|||||||
Sept. 29, |
Sept. 30, |
|
Sept. 29, |
Sept. 30, |
|||||
(In thousands) |
2019 |
2018 |
|
2019 |
2018 |
||||
Special charges before income taxes: | |||||||||
Royalty relief (a) |
$ |
6,353 |
$ |
9,884 |
$ |
13,692 |
$ |
9,884 |
|
Marketing fund investments (b) |
|
5,000 |
|
- |
|
7,500 |
|
- |
|
Legal and advisory fees (c) |
|
459 |
|
11,349 |
|
5,922 |
|
11,349 |
|
Reimaging costs and write-off of branded assets (d) |
|
- |
|
3,600 |
|
- |
|
3,600 |
|
Other costs (e) |
|
2,385 |
|
- |
|
2,385 |
|
- |
|
Mark to market adjustment on option valuation (f) |
|
- |
|
- |
|
5,914 |
|
- |
|
Total Special charges before income taxes |
$ |
14,197 |
$ |
24,833 |
$ |
35,413 |
$ |
24,833 |
|
(a) Represents financial assistance provided to the North America system in the form of royalty reductions. |
|||||||||
(b) Represents marketing fund investments as part of our support package to our franchisees. |
|||||||||
(c) Represents advisory and legal costs primarily associated with the review of a wide range of strategic opportunities that culminated in the strategic investment in the company by affiliates of Starboard Value LP (“Starboard”). The costs in 2018 also include a third-party audit of the culture at Papa John’s commissioned by the Special Committee of the Board of Directors. |
|||||||||
(d) Represents re-imaging costs at nearly all domestic restaurants and costs to replace or write-off certain branded assets. |
|||||||||
(e) Includes severance costs for our former CEO and costs related to the termination of a license agreement for intellectual property no longer being utilized. |
|||||||||
(f) Represents a one-time mark-to-market adjustment of $5.9 million related to the increase in the fair value of the Starboard and franchisee options to purchase Series B preferred stock that culminated in the purchase of an additional $52.5 million of preferred stock in late March 2019. |
|||||||||
|
|||||||||
(3) The refranchising gains in 2019 are primarily associated with the refranchise of 21 domestic restaurants, including 19 restaurants in Georgia. The refranchising losses in 2018 are primarily associated with the June 2018 refranchise of our China operations, which included 34 restaurants and a quality control center, and the related tax impact. The additional tax expense is primarily attributable to the required recapture of China operating losses previously taken by the company. |
The non-GAAP adjusted results shown above and within this document, which exclude Special items, 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 certain financial information excluding the Special items is important for purposes of comparison to prior year results. In addition, management uses these metrics to evaluate the company’s underlying operating performance and to analyze trends.
Revenue Highlights
Consolidated revenues increased
- Company-owned restaurant revenues benefited from positive comparable sales of 2.2% and the favorable impact of the expiration of customer rewards associated with our Papa Rewards loyalty program.
North America commissary revenues increased primarily due to higher pricing associated with higher commodities costs.North America royalties and fees increased due to lower royalty relief related to the franchise assistance program, as detailed in the previously noted Special charges.- International revenues approximated the prior year as higher royalties and higher
United Kingdom commissary revenues from increased equivalent units were offset by unfavorable foreign exchange rates of$1.1 million .
Consolidated revenues decreased
- Negative comparable sales for
North America restaurants for the nine months endedSeptember 29, 2019 resulted in lower company-owned restaurant revenues, royalties andNorth America commissary sales. - Royalty relief of approximately
$13.7 million for the nine months endedSeptember 29, 2019 was$3.8 million higher than the prior year comparable period, as detailed in the previously discussed Special charges. - International revenues, excluding the impact of refranchising, were consistent with the prior year as higher royalties and
United Kingdom commissary revenues from increased equivalent units were offset by unfavorable foreign exchange rates of approximately$4.1 million .
Operating Highlights
The tables below summarize income before income taxes on a reporting segment basis. Alongside the GAAP income before income taxes data, we have included “adjusted” income before income taxes for the three- and nine-month periods of 2019 to exclude Special Items. We believe this non-GAAP measure is important for purposes of comparison to prior year results.
Three Months Ended |
|||||||||||||||||||||||||||
Reported |
|
Adjusted |
|
Reported |
|
Adjusted |
|
|
|||||||||||||||||||
Sept. 29, |
Special |
Sept. 29, |
|
Sept. 30, |
Special |
Sept. 30, |
|
Increase |
|||||||||||||||||||
(In thousands) |
2019 |
Items |
2019 |
|
2018 |
Items |
2018 |
|
(Decrease) |
||||||||||||||||||
Domestic Company-owned restaurants |
$ |
9,162 |
|
$ |
(1,726 |
) |
$ |
7,436 |
|
$ |
(183 |
) |
$ |
- |
$ |
(183 |
) |
$ |
7,619 |
|
|||||||
North America commissaries |
|
6,790 |
|
|
- |
|
|
6,790 |
|
|
6,195 |
|
|
- |
|
6,195 |
|
|
595 |
|
|||||||
North America franchising |
|
14,092 |
|
|
6,353 |
|
|
20,445 |
|
|
9,394 |
|
|
9,884 |
|
19,278 |
|
|
1,167 |
|
|||||||
International |
|
4,195 |
|
|
- |
|
|
4,195 |
|
|
4,519 |
|
|
- |
|
4,519 |
|
|
(324 |
) |
|||||||
All others |
|
(866 |
) |
|
- |
|
|
(866 |
) |
|
(2,776 |
) |
|
- |
|
(2,776 |
) |
|
1,910 |
|
|||||||
Unallocated corporate expenses |
|
(32,329 |
) |
|
7,844 |
|
|
(24,485 |
) |
|
(37,046 |
) |
|
14,949 |
|
(22,097 |
) |
|
(2,388 |
) |
|||||||
Elimination of intersegment profits |
|
(366 |
) |
|
- |
|
|
(366 |
) |
|
(331 |
) |
|
- |
|
(331 |
) |
|
(35 |
) |
|||||||
Total income before income taxes |
$ |
678 |
|
$ |
12,471 |
|
$ |
13,149 |
|
$ |
(20,228 |
) |
$ |
24,833 |
$ |
4,605 |
|
$ |
8,544 |
|
Nine Months Ended |
|||||||||||||||||||||||||||
Reported |
|
Adjusted |
|
Reported |
|
Adjusted |
|
|
|||||||||||||||||||
Sept. 29, |
Special |
Sept. 29, |
|
Sept. 30, |
Special |
Sept. 30, |
|
Increase |
|||||||||||||||||||
(In thousands) |
2019 |
Items |
2019 |
|
2018 |
Items |
2018 |
|
(Decrease) |
||||||||||||||||||
Domestic Company-owned restaurants |
$ |
21,471 |
|
$ |
(1,889 |
) |
$ |
19,582 |
|
$ |
15,350 |
|
$ |
- |
$ |
15,350 |
|
$ |
4,232 |
|
|||||||
North America commissaries |
|
22,094 |
|
|
- |
|
|
22,094 |
|
|
23,535 |
|
|
- |
|
23,535 |
|
|
(1,441 |
) |
|||||||
North America franchising |
|
47,693 |
|
|
13,693 |
|
|
61,386 |
|
|
53,133 |
|
|
9,884 |
|
63,017 |
|
|
(1,631 |
) |
|||||||
International |
|
14,915 |
|
|
- |
|
|
14,915 |
|
|
10,334 |
|
|
1,918 |
|
12,252 |
|
|
2,663 |
|
|||||||
All others |
|
(2,581 |
) |
|
- |
|
|
(2,581 |
) |
|
(5,304 |
) |
|
- |
|
(5,304 |
) |
|
2,723 |
|
|||||||
Unallocated corporate expenses |
|
(92,685 |
) |
|
21,720 |
|
|
(70,965 |
) |
|
(74,500 |
) |
|
14,949 |
|
(59,551 |
) |
|
(11,414 |
) |
|||||||
Elimination of intersegment profits |
|
(1,037 |
) |
|
- |
|
|
(1,037 |
) |
|
(599 |
) |
|
- |
|
(599 |
) |
|
(438 |
) |
|||||||
Total income before income taxes |
$ |
9,870 |
|
$ |
33,524 |
|
$ |
43,394 |
|
$ |
21,949 |
|
$ |
26,751 |
$ |
48,700 |
|
$ |
(5,306 |
) |
Consolidated income before income taxes of
Domestic Company -owned restaurants income before income taxes increased$7.6 million primarily due to positive comparable sales of 2.2%, lower workers’ compensation and automobile insurance costs and the favorable impact of the expiration of rewards associated with our Papa Rewards loyalty program.North America commissaries income before income taxes increased$595,000 primarily due to higher pricing, partially offset by franchise new equipment incentives costs that were previously reported in the North America Franchising segment.- North America Franchising income before income taxes was
$1.2 million higher primarily due to favorable general and administrative (G&A) costs, including the favorable impact of franchise new equipment incentives costs that are now reported in the North America Commissaries segment. This increase was partially offset by lower royalty revenue due to a reduction in equivalent units and an increase in targeted royalty relief. - International income before income taxes decreased
$324,000 compared to the corresponding prior year period primarily due to higher G&A costs, unfavorable foreign exchange rates and higherUnited Kingdom marketing fund expenses, partially offset by increased royalties due to an increase in equivalent units. - All others income before income taxes, which primarily includes our online and mobile ordering business, our wholly-owned print and promotions subsidiary, Preferred Marketing Solutions and our North America Marketing funds, increased
$1.9 million primarily due to higher online revenues and the timing of marketing spend. - Unallocated corporate expenses increased
$2.4 million primarily due to higher management incentive costs and an increase in professional fees, partially offset by a shift in the timing of our operators’ conference from the third quarter in 2018 to the second quarter in 2019. Additionally, interest expense decreased$1.8 million due to a lower outstanding debt balance. Total debt outstanding was$378.1 million as ofSeptember 29, 2019 , including$9.1 million associated with PJMF. Outstanding debt decreased$246.9 million fromDecember 30, 2018 , primarily due to the use of proceeds from the issuance of Series B preferred stock to Starboard to repay debt.
For the nine months ended
Domestic Company -owned restaurants’ income before income taxes increased approximately$4.2 million for the nine months endedSeptember 29, 2019 due to lower workers’ compensation and automobile insurance costs, and the favorable impact of the expiration of rewards associated with the Papa Rewards loyalty program, partially offset by lower comparable sales of 4.8%.North America commissaries income before income taxes decreased$1.4 million due to lowerNorth America sales volumes and franchise new equipment incentives costs.- North America Franchising income before income taxes decreased
$1.6 million due to a decrease in comparable sales of 3.7%, partially offset by favorable G&A costs, including franchise new equipment incentives costs in the prior year. - International income before income taxes increased
$2.7 million primarily due to increased royalties, lower marketing fund spend in theUnited Kingdom and lower G&A costs. These increases were partially offset by unfavorable foreign exchange rates. - All others income before income taxes increased
$2.7 million primarily due to higher online revenues and the timing of marketing spend. - Unallocated corporate expenses increased
$11.4 million primarily due to higher management incentive costs and an increase in professional fees. These increases were partially offset by a$2.1 million decrease in interest expense due to a lower outstanding debt balance.
Income tax expense was
The effective income tax rate for the nine months ended
- The effective income tax rate for the nine months ended
September 29, 2019 includes the impact of the$5.9 million mark-to-market fair value adjustment of the options to purchase Series B preferred stock, which was not tax deductible. - The tax rate for the nine months ended
September 30, 2018 includes$2.4 million of additional income tax expense related to the refranchising of ourChina operations, as previously discussed.
Diluted loss per share was
Free Cash Flow
The company’s free cash flow, a non-GAAP financial measure, for the first nine months of 2019 and 2018 were as follows (in thousands):
Nine Months Ended |
||||||||
Sept. 29, |
|
Sept. 30, |
||||||
2019 |
|
2018 (b) |
||||||
Net cash provided by operating activities (a) |
$ |
49,999 |
|
$ |
105,032 |
|
||
Purchases of property and equipment |
|
(27,547 |
) |
|
(30,593 |
) |
||
Dividends paid to preferred shareholders |
|
(6,608 |
) |
|
- |
|
||
Free cash flow |
$ |
15,844 |
|
$ |
74,439 |
|
||
(a) The decrease of $55.0 million was primarily due to lower net income and unfavorable changes in working capital items, including the impact of PJMF. |
||||||||
(b) The nine-month period ended September 30, 2018 has been restated to reflect the correction of an immaterial error to consolidate the operations of PJMF. |
We define free cash flow as net cash provided by operating activities (from the Consolidated Statements of Cash Flows) less the purchases of property and equipment and dividends paid to preferred shareholders. We view free cash flow as an important measure because it is one 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 |
Franchised |
Total North |
International |
System-wide |
||||||
Third Quarter | ||||||||||
Beginning - June 30, 2019 |
643 |
|
2,676 |
|
3,319 |
|
2,026 |
|
5,345 |
|
Opened |
- |
|
15 |
|
15 |
|
60 |
|
75 |
|
Closed |
(1 |
) |
(37 |
) |
(38 |
) |
(39 |
) |
(77 |
) |
Acquired |
- |
|
21 |
|
21 |
|
- |
|
21 |
|
Sold |
(21 |
) |
- |
|
(21 |
) |
- |
|
(21 |
) |
Ending - September 29, 2019 |
621 |
|
2,675 |
|
3,296 |
|
2,047 |
|
5,343 |
|
Year-to-date | ||||||||||
Beginning - December 30, 2018 |
645 |
|
2,692 |
|
3,337 |
|
1,966 |
|
5,303 |
|
Opened |
2 |
|
58 |
|
60 |
|
143 |
|
203 |
|
Closed |
(3 |
) |
(98 |
) |
(101 |
) |
(62 |
) |
(163 |
) |
Acquired |
- |
|
23 |
|
23 |
|
- |
|
23 |
|
Sold |
(23 |
) |
- |
|
(23 |
) |
- |
|
(23 |
) |
Ending - September 29, 2019 |
621 |
|
2,675 |
|
3,296 |
|
2,047 |
|
5,343 |
|
Unit growth (decline) |
(24 |
) |
(17 |
) |
(41 |
) |
81 |
|
40 |
|
% increase (decrease) |
(3.7 |
%) |
(0.6 |
%) |
(1.2 |
%) |
4.1 |
% |
0.8 |
% |
The company has added 96 net worldwide units over the trailing four quarters ended
Cash Dividend
The company declared common stock dividends of
Third |
Fourth |
||||
Common stock dividends ($0.225 per share) |
$ |
7,100 |
$ |
7,200 |
|
Common stock dividends to preferred shareholders ($0.225 per share) (a) |
|
1,140 |
|
1,140 |
|
Preferred dividends (3.6% of the investment per annum) |
|
2,270 |
|
2,270 |
|
Total dividends |
$ |
10,510 |
$ |
10,610 |
|
(a) Common stock dividends payable to holders of Series B Preferred Stock are on an as-converted to common stock basis |
The declaration and payment of any future dividends on our common stock will be at the discretion of our Board of Directors, subject to the company’s financial results, cash requirements, and other factors deemed relevant by our Board of Directors. The Series B preferred stockholders receive quarterly preferred dividends and common stock dividends on an as-converted to common stock basis.
2019 Outlook
The company narrowed its
Updated Outlook | Previous Outlook | |||
GAAP diluted earnings (loss) per share | ($0.40) to ($0.10) | ($0.40) to ($0.10) | ||
Adjusted diluted earnings per share* | $1.00 to $1.20 | $1.00 to $1.20 | ||
Special Charges | $50 to $60 million | $50 to $60 million | ||
North America comparable sales | (1.5%) to (3.5%) | (1.0%) to (4.0%) | ||
International comparable sales | 0.0% to 2.0% | 0.0% to 3.0% | ||
Net global unit growth | 85 to 115 | 100 to 150 | ||
Block cheese price | mid to upper $1.70's | low $1.70's | ||
Capital expenditures | $45 to $50 million | $45 to $50 million |
*Adjusted diluted earnings per share outlook excludes the impact of the Special items mentioned above, which have an estimated impact of approximately
Refranchise of Company-owned Restaurants
In the third quarter of 2019, the company refranchised 21 company-owned restaurants, including 19 restaurants in
Conference Call and Website Information
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,” “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, earnings per share, contingent liabilities, resolution of litigation, commodity costs, currency fluctuations, profit margins, unit growth, unit level performance, capital expenditures, restaurant and franchise development, royalty relief, the strategic investment by Starboard and use of the proceeds, the ability of the company to mitigate negative consumer sentiment through advertising, marketing and promotional activity, the effectiveness of our strategic turnaround efforts and other business initiatives, corporate governance, future costs related to the company’s response to negative consumer sentiment and business challenges, management reorganizations, compliance with debt covenants, stockholder and other stakeholder engagement, strategic decisions and actions, share repurchases, dividends, effective tax rates, regulatory changes and impacts, the impact of the 2017 Tax Cuts and Jobs Act and the adoption of new accounting standards, 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:
- increased costs for branding initiatives and launching new advertising and marketing campaigns and promotions to improve consumer sentiment and sales trends;
- the ability of the company to ensure the long-term success of the brand through significant investments committed to our U.S. franchise system, including marketing fund investments and royalty relief;
- the ability of the company to improve consumer sentiment and sales trends through advertising, marketing and promotional activities;
- aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors;
- changes in consumer preferences or consumer buying habits, including the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending;
- the adverse impact on the company or our results caused by product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our company-owned or franchised restaurants or others in the restaurant industry;
- the effectiveness of our technology investments and changes in unit-level operations;
- the ability of the company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, store level employees or suitable sites;
- increases in food costs or sustained higher other operating costs. This could include increased employee compensation, benefits, insurance, tax rates, new regulatory requirements or increasing compliance costs;
- increases in insurance claims and related costs for programs funded by the company up to certain retention limits, including medical, owned and non-owned vehicles, workers’ compensation, general liability and property;
- disruption of our supply chain or commissary operations which could be caused by our sole source of supply of cheese or limited source of suppliers for other key ingredients or more generally due to weather, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control;
- increased risks associated with our international operations, including economic and political conditions, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new store growth;
- the impact of the sale of Series B preferred stock to Starboard, which dilutes the economic and relative voting power of holders of our common stock and may adversely affect the market price of our common stock, affect our liquidity and financial condition, or delay or prevent an attempt to take over the company;
- Starboard’s ability to exercise influence over us, including its ability to designate up to two members of our Board of Directors;
- failure to raise the funds necessary to finance a required repurchase of our Series B preferred stock;
- failure to realize the anticipated benefits from our investment of the proceeds of the Series B preferred stock in our strategic priorities;
- the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business including compliance with the European Union General Data Protection Regulation;
- the company's ability to continue to pay dividends to shareholders based upon profitability, cash flows and capital adequacy if restaurant sales and operating results continue to decline;
- failure to effectively manage recent transitions within our executive leadership team or to otherwise successfully execute succession planning;
- disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and security breaches, including theft of confidential company, employee and customer information, including payment cards;
- changes in Federal or state income, general and other tax laws, rules and regulations, including changes from the 2017 Tax Cuts and Jobs Act and any related Treasury regulations, rules or interpretations if and when issued; and
- changes in generally accepted accounting principles.
These and other risk factors are discussed in detail in “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K/A for the fiscal year ended
* * * *
For more information about the company, please visit www.papajohns.com.
Papa John's International, Inc. and Subsidiaries | |||||||
Condensed Consolidated Balance Sheets | |||||||
September 29, |
December 30, |
||||||
2019 |
2018 |
||||||
(In thousands) |
(Unaudited) |
(Note) |
|||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents |
$ |
28,368 |
|
$ |
33,258 |
|
|
Accounts receivable, net |
|
82,401 |
|
|
78,118 |
|
|
Notes receivable |
|
5,806 |
|
|
5,498 |
|
|
Income tax receivable |
|
5,905 |
|
|
16,146 |
|
|
Inventories |
|
25,190 |
|
|
27,203 |
|
|
Prepaid expenses and other current assets |
|
39,575 |
|
|
36,054 |
|
|
Assets held for sale |
|
7,139 |
|
|
- |
|
|
Total current assets |
|
194,384 |
|
|
196,277 |
|
|
Property and equipment, net |
|
212,313 |
|
|
226,894 |
|
|
Finance lease right-of-use assets, net |
|
9,870 |
|
|
- |
|
|
Operating lease right-of-use assets |
|
144,881 |
|
|
- |
|
|
Notes receivable, less current portion, net |
|
27,841 |
|
|
23,259 |
|
|
Goodwill |
|
79,457 |
|
|
84,516 |
|
|
Deferred income taxes, net |
|
1,197 |
|
|
1,137 |
|
|
Other assets |
|
60,622 |
|
|
63,814 |
|
|
Total assets |
$ |
730,565 |
|
$ |
595,897 |
|
|
Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders' deficit | |||||||
Current liabilities: | |||||||
Accounts payable |
$ |
42,027 |
|
$ |
27,106 |
|
|
Income and other taxes payable |
|
7,875 |
|
|
6,590 |
|
|
Accrued expenses and other current liabilities |
|
115,026 |
|
|
129,167 |
|
|
Current deferred revenue |
|
2,461 |
|
|
2,598 |
|
|
Current finance lease liabilities |
|
1,748 |
|
|
- |
|
|
Current operating lease liabilities |
|
23,701 |
|
|
- |
|
|
Current portion of long-term debt |
|
29,051 |
|
|
20,009 |
|
|
Total current liabilities |
|
221,889 |
|
|
185,470 |
|
|
Deferred revenue |
|
16,671 |
|
|
20,674 |
|
|
Long-term finance lease liabilities |
|
8,083 |
|
|
- |
|
|
Long-term operating lease liabilities |
|
121,320 |
|
|
- |
|
|
Long-term debt, less current portion, net |
|
346,064 |
|
|
601,126 |
|
|
Deferred income taxes, net |
|
2,318 |
|
|
7,852 |
|
|
Other long-term liabilities |
|
83,664 |
|
|
79,324 |
|
|
Total liabilities |
|
800,009 |
|
|
894,446 |
|
|
Series B Convertible Preferred Stock |
|
251,074 |
|
|
- |
|
|
Redeemable noncontrolling interests |
|
5,848 |
|
|
5,464 |
|
|
Total Stockholders' deficit |
|
(326,366 |
) |
|
(304,013 |
) |
|
Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders' deficit |
$ |
730,565 |
|
$ |
595,897 |
|
|
Note: The Condensed Consolidated Balance Sheets have been derived from the audited consolidated financial statements, restated to reflect the correction of an immaterial error to consolidate the Papa John's Marketing Fund, Inc., 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 | |||||||||||||||
Condensed Consolidated Statements of Operations | |||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||
Sept. 29, 2019 | Sept. 30, 2018 | Sept. 29, 2019 | Sept. 30, 2018 | ||||||||||||
(In thousands, except per share amounts) | (Unaudited) | (Note) | (Unaudited) | (Note) | |||||||||||
Revenues: | |||||||||||||||
Domestic Company-owned restaurant sales |
$ |
165,135 |
|
$ |
158,285 |
|
$ |
490,594 |
|
$ |
529,906 |
|
|||
North America franchise royalties and fees |
|
15,924 |
|
|
12,806 |
|
|
53,215 |
|
|
61,524 |
|
|||
North America commissary revenues |
|
154,703 |
|
|
146,240 |
|
|
450,735 |
|
|
461,408 |
|
|||
International revenues |
|
24,679 |
|
|
25,653 |
|
|
75,843 |
|
|
84,836 |
|
|||
Other revenues |
|
43,265 |
|
|
42,247 |
|
|
131,347 |
|
|
127,631 |
|
|||
Total revenues |
|
403,706 |
|
|
385,231 |
|
|
1,201,734 |
|
|
1,265,305 |
|
|||
Costs and expenses: | |||||||||||||||
Operating costs (excluding depreciation and amortization shown separately below): | |||||||||||||||
Domestic company-owned restaurant expenses |
|
134,037 |
|
|
136,257 |
|
|
399,040 |
|
|
441,699 |
|
|||
North America commissary expenses |
|
144,624 |
|
|
137,928 |
|
|
419,925 |
|
|
432,909 |
|
|||
International expenses |
|
13,557 |
|
|
15,184 |
|
|
42,514 |
|
|
52,462 |
|
|||
Other expenses |
|
42,952 |
|
|
42,736 |
|
|
129,019 |
|
|
127,904 |
|
|||
General and administrative expenses |
|
53,503 |
|
|
55,711 |
|
|
153,356 |
|
|
134,679 |
|
|||
Depreciation and amortization |
|
11,832 |
|
|
11,585 |
|
|
35,102 |
|
|
34,855 |
|
|||
Total costs and expenses |
|
400,505 |
|
|
399,401 |
|
|
1,178,956 |
|
|
1,224,508 |
|
|||
Refranchising gains (losses), net |
|
1,726 |
|
|
- |
|
|
1,889 |
|
|
(1,918 |
) |
|||
Operating income (loss) |
|
4,927 |
|
|
(14,170 |
) |
|
24,667 |
|
|
38,879 |
|
|||
Net interest expense |
|
(4,249 |
) |
|
(6,058 |
) |
|
(14,797 |
) |
|
(16,930 |
) |
|||
Income (loss) before income taxes |
|
678 |
|
|
(20,228 |
) |
|
9,870 |
|
|
21,949 |
|
|||
Income tax expense (benefit) |
|
421 |
|
|
(7,367 |
) |
|
2,535 |
|
|
4,651 |
|
|||
Net income (loss) before attribution to noncontrolling interests |
|
257 |
|
|
(12,861 |
) |
|
7,335 |
|
|
17,298 |
|
|||
Net loss (income) attributable to noncontrolling interests |
|
128 |
|
|
(439 |
) |
|
(327 |
) |
|
(1,956 |
) |
|||
Net income (loss) attributable to the company |
$ |
385 |
|
$ |
(13,300 |
) |
$ |
7,008 |
|
$ |
15,342 |
|
|||
Calculation of (loss) income for earnings per share: | |||||||||||||||
Net income (loss) attributable to the Company |
$ |
385 |
|
$ |
(13,300 |
) |
$ |
7,008 |
|
$ |
15,342 |
|
|||
Preferred stock dividends and accretion |
|
(3,473 |
) |
|
- |
|
|
(9,029 |
) |
|
- |
|
|||
Net income attributable to participating securities |
|
- |
|
|
- |
|
|
- |
|
|
(147 |
) |
|||
Net (loss) income attributable to common shareholders |
$ |
(3,088 |
) |
$ |
(13,300 |
) |
$ |
(2,021 |
) |
$ |
15,195 |
|
|||
Basic (loss) earnings per common share |
$ |
(0.10 |
) |
$ |
(0.42 |
) |
$ |
(0.06 |
) |
$ |
0.47 |
|
|||
Diluted (loss) earnings per common share |
$ |
(0.10 |
) |
$ |
(0.42 |
) |
$ |
(0.06 |
) |
$ |
0.47 |
|
|||
Basic weighted average common shares outstanding |
|
31,601 |
|
|
31,573 |
|
|
31,581 |
|
|
32,265 |
|
|||
Diluted weighted average common shares outstanding |
|
31,601 |
|
|
31,573 |
|
|
31,581 |
|
|
32,489 |
|
|||
Dividends declared per common share |
$ |
0.225 |
|
$ |
0.225 |
|
$ |
0.675 |
|
$ |
0.675 |
|
|||
Note: The Condensed Consolidated Statements of Operations are unaudited and have been restated to reflect the correction of an immaterial error to consolidate the Papa John's Marketing Fund, Inc. |
Papa John's International, Inc. and Subsidiaries | |||||||
Condensed Consolidated Statements of Cash Flows | |||||||
Nine Months Ended | |||||||
(In thousands) | Sept. 29, 2019 | Sept. 30, 2018 | |||||
(Unaudited) | (Note) | ||||||
Operating activities | |||||||
Net income before attribution to noncontrolling interests |
$ |
7,335 |
|
$ |
17,298 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Provision for uncollectible accounts and notes receivable |
|
1,646 |
|
|
4,047 |
|
|
Depreciation and amortization |
|
35,102 |
|
|
34,855 |
|
|
Deferred income taxes |
|
(2,386 |
) |
|
(227 |
) |
|
Preferred stock option mark-to-market adjustment |
|
5,914 |
|
|
- |
|
|
Stock-based compensation expense |
|
12,295 |
|
|
7,073 |
|
|
(Gain) loss on refranchising |
|
(1,889 |
) |
|
1,918 |
|
|
Other |
|
3,618 |
|
|
6,952 |
|
|
Changes in operating assets and liabilities: | |||||||
Accounts receivable |
|
(8,156 |
) |
|
11,083 |
|
|
Income tax receivable |
|
10,241 |
|
|
(7,423 |
) |
|
Inventories |
|
1,891 |
|
|
986 |
|
|
Prepaid expenses |
|
11,926 |
|
|
8,097 |
|
|
Other current assets |
|
(17,289 |
) |
|
3,534 |
|
|
Other assets and liabilities |
|
(3,245 |
) |
|
(4,910 |
) |
|
Accounts payable |
|
14,921 |
|
|
2,101 |
|
|
Income and other taxes payable |
|
1,285 |
|
|
(1,597 |
) |
|
Accrued expenses and other current liabilities |
|
(19,149 |
) |
|
23,105 |
|
|
Deferred revenue |
|
(4,061 |
) |
|
(1,860 |
) |
|
Net cash provided by operating activities |
|
49,999 |
|
|
105,032 |
|
|
Investing activities | |||||||
Purchases of property and equipment |
|
(27,547 |
) |
|
(30,593 |
) |
|
Loans issued |
|
(7,073 |
) |
|
(3,511 |
) |
|
Repayments of loans issued |
|
3,415 |
|
|
3,872 |
|
|
Proceeds from divestitures of restaurants |
|
5,995 |
|
|
7,707 |
|
|
Other |
|
1,068 |
|
|
160 |
|
|
Net cash used in investing activities |
|
(24,142 |
) |
|
(22,365 |
) |
|
Financing activities | |||||||
Proceeds from issuance of preferred stock |
|
252,530 |
|
|
- |
|
|
Repayments of term loan |
|
(10,000 |
) |
|
(15,000 |
) |
|
Net (repayments) proceeds of revolving credit facilities |
|
(236,966 |
) |
|
121,476 |
|
|
Dividends paid to common stockholders |
|
(21,371 |
) |
|
(21,861 |
) |
|
Dividends paid to preferred stockholders |
|
(6,608 |
) |
|
- |
|
|
Issuance costs associated with preferred stock |
|
(7,535 |
) |
|
- |
|
|
Tax payments for equity award issuances |
|
(1,150 |
) |
|
(1,474 |
) |
|
Proceeds from exercise of stock options |
|
332 |
|
|
2,592 |
|
|
Acquisition of Company common stock |
|
- |
|
|
(158,049 |
) |
|
Contributions from noncontrolling interest holders |
|
840 |
|
|
- |
|
|
Distributions to noncontrolling interest holders |
|
(645 |
) |
|
(3,928 |
) |
|
Other |
|
(101 |
) |
|
276 |
|
|
Net cash used in financing activities |
|
(30,674 |
) |
|
(75,968 |
) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
(73 |
) |
|
(68 |
) |
|
Change in cash and cash equivalents |
|
(4,890 |
) |
|
6,631 |
|
|
Cash and cash equivalents at beginning of period |
|
33,258 |
|
|
27,891 |
|
|
Cash and cash equivalents at end of period |
$ |
28,368 |
|
$ |
34,522 |
|
|
Note: The Condensed Consolidated Statements of Cash Flows are unaudited and have been restated to reflect the correction of an immaterial error to consolidate the Papa John's Marketing Fund, Inc. |
View source version on businesswire.com: https://www.businesswire.com/news/home/20191106005166/en/
Source: Papa John’s
Joe Smith
Senior Vice President, Chief Financial Officer
502-261-7272