Papa John’s Announces Second Quarter Results
International franchise system sales increased 12% for the second quarter
“We had a solid second quarter with our system posting positive transaction growth for the fifth consecutive quarter, as well as positive comp sales this quarter”
Papa John’s International, Inc. (NASDAQ: PZZA) announced revenues of $280.6 million for the second quarter of 2010, representing an increase of 4.5% from revenues of $268.5 million for the second quarter of 2009. Net income for the second quarter of 2010 was $13.2 million, or $0.49 per diluted share (including after-tax income of $1.7 million, or $0.06 per diluted share, from the consolidation of the results of the franchisee-owned cheese purchasing company, BIBP Commodities, Inc. (“BIBP”), a variable interest entity), compared to 2009 second quarter net income of $14.2 million, or $0.51 per diluted share (including after-tax income of $4.2 million, or $0.15 per diluted share, from the consolidation of BIBP).
Revenues were $566.4 million for the six months ended June 27, 2010, representing an increase of 3.1% from revenues of $549.4 million for the same period in 2009. Net income for the six months ended June 27, 2010 was $30.1 million, or $1.11 per diluted share (including after-tax income of $3.9 million, or $0.14 per diluted share, from the consolidation of BIBP), compared to net income of $32.0 million, or $1.15 per diluted share, for the comparable period of 2009 (including after-tax income of $10.0 million, or $0.36 per diluted share, from the consolidation of BIBP).
“During the second quarter, we were proud that Papa John’s earned the highest rating among all limited service restaurants in the prestigious American Customer Service Index (ACSI),” commented Papa John’s Founder, Chairman and Co-Chief Executive Officer, John Schnatter. “This marks the 10th time in 11 years that Papa John’s has received the highest ACSI rating among all pizza chains, confirming that the consumer values our long-term commitment to quality.”
“We had a solid second quarter with our system posting positive transaction growth for the fifth consecutive quarter, as well as positive comp sales this quarter,” said Papa John’s President and Co-Chief Executive Officer, Jude Thompson. “We are pleased with our system’s performance in what continues to be a challenging competitive environment.”
Non-GAAP Measures
Certain components of the financial information we present in this press release exclude the impact of the consolidation of BIBP, which is not a measure that is defined in accordance with 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 measures. Management believes the financial information excluding the impact of BIBP is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. Management analyzes the company’s business performance and trends excluding the impact of BIBP because they are not indicative of our principal operating activities. In addition, annual cash bonuses, and certain long-term incentive programs for various levels of management, are based on financial measures that exclude the impact of the consolidation of BIBP. The presentation of the non-GAAP measures in this press release is made alongside the most directly comparable GAAP measures.
Revenues Comparison
Consolidated revenues were $280.6 million for the second quarter of 2010, an increase of $12.1 million, or 4.5%, over the corresponding 2009 period. The increase in revenues was primarily due to the following:
- Franchise royalties revenue increased $2.5 million primarily due to an increase in the royalty rate (the standard royalty rate for the majority of domestic franchise restaurants was 4.25% in the second quarter of 2009 and 4.75% in the second quarter of 2010 as provided for in the franchise agreement).
- Domestic commissary sales increased $9.4 million primarily due to an increase in sales volumes.
- International revenues increased $1.6 million reflecting an increase in the number of our company-owned and franchised restaurants.
- Other sales decreased $1.0 million primarily due to a decline in sales at our print and promotions subsidiary, Preferred Marketing Solutions.
Operating Results and Cash Flow
Operating Results
Our pre-tax income, net of noncontrolling interests, for the second quarter of 2010 was $20.8 million, compared to $22.2 million for the corresponding period in 2009. For the six months ended June 27, 2010, pre-tax income, net of noncontrolling interests, was $46.6 million compared to $50.4 million for the corresponding period in 2009. Excluding the impact of BIBP, as shown in the previous table, second-quarter 2010 pre-tax income, net of noncontrolling interests, was $18.1 million, an increase of $2.7 million or 17.7%, from the 2009 comparable results of $15.4 million. For the six months ended June 27, 2010, pre-tax income excluding BIBP was $40.4 million, an increase of $6.0 million or 17.3% from the 2009 comparable results of $34.5 million. An analysis of the changes in pre-tax income, net of noncontrolling interests, for the second quarter and six months ended June 27, 2010, respectively (excluding the consolidation of BIBP), is summarized as follows (analyzed on a segment basis -- see the Summary Financial Data table that follows for the reconciliation of segment income to consolidated income below):
- Domestic Company-owned Restaurant Segment. Domestic company-owned restaurants’ operating income was $8.7 million for the second quarter of 2010 as compared to $10.2 million in the comparable 2009 period. For the six months ended June 27, 2010, operating income was $20.1 million compared to $20.5 million in the comparable 2009 period. The decreases of $1.5 million and $400,000 in the second quarter and six-month period of 2010, respectively, were primarily due to a decline in operating margin from a lower average ticket price, partially offset by increased customer traffic. Commodity costs were favorable for both the three- and six-month periods, with the most favorable impact in the first three months of 2010.
- Domestic Commissary Segment. Domestic commissaries’ operating income increased approximately $550,000 for the second quarter of 2010 and decreased $1.7 million for the six-month period ended June 27, 2010. The improvement in operating income for the second quarter was primarily due to increased sales volumes and the prior year included management transition costs of approximately $700,000. The decrease for the first six months of 2010, as compared to the corresponding 2009 period, was primarily due to a lower gross margin as we reduced the prices charged to restaurants for certain products and absorbed both commodity cost increases for certain vegetable products resulting from harsh Florida winter weather and increased fuel costs, partially offset by the previously mentioned prior-year impact of $700,000 in management transition costs.
- Domestic Franchising Segment. Domestic franchising operating income increased approximately $2.6 million to $15.4 million for the second quarter of 2010, as compared to $12.8 million in the corresponding 2009 period, and increased $4.9 million to $31.4 million for the six months ended June 27, 2010, as compared to $26.5 million in the corresponding 2009 period. The increases were primarily due to an increase in franchise royalties (the standard rate was 4.25% in 2009 and 4.75% in 2010). The impact of the royalty rate increase was partially offset by the impact of development incentive programs offered by the company in 2009 and 2010. Franchise and development fees were approximately $20,000 higher and $160,000 lower than the prior year quarter and six-month period, respectively, even though we had 34 and 51 additional domestic unit openings during the three- and six-month periods, respectively, in 2010. Additionally, we incurred incentive payment costs of $128,000 in the second quarter of 2010 and $271,000 for the six months ended June 27, 2010, compared to $30,000 and $60,000 in the comparable periods of the prior year.
- International Segment. The international segment reported operating losses of approximately $1.1 million and $2.2 million for the three and six months ended June 27, 2010, respectively, compared to losses of $850,000 and $1.6 million, respectively, in the same periods in 2009. The declines in the operating results in both periods were primarily due to increased personnel and franchise support costs, and start-up costs associated with our company-owned commissary in the United Kingdom, which opened in the second quarter of 2010. The increase in costs was partially offset by increased revenues due to the growth in the number of international units.
- All Others Segment. Operating income for the “All others” reporting segment decreased approximately $400,000 for the second quarter of 2010 and increased approximately $100,000 for the six-month period of 2010, as compared to the corresponding 2009 periods. The decline in the second quarter was primarily due to an increase in infrastructure and support costs associated with our online ordering business unit. We expect to recoup these and future enhancement costs from ongoing online ordering fees charged to domestic restaurants over time. For the six-month period, the decline in operating income related to the online ordering business unit was more than offset by an improvement in operating income at our print and promotions subsidiary, Preferred Marketing Solutions.
- Unallocated Corporate Segment. Unallocated corporate expenses decreased approximately $1.5 million and $3.7 million for the three- and six-month periods ended June 27, 2010, respectively, as compared to the corresponding periods in the prior year.
Our net debt position, defined as total debt less cash and cash equivalents, was $61.3 million at June 27, 2010, compared to $73.6 million at December 27, 2009.
Form 10-Q Filing
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 six-month periods ended June 27, 2010.
Domestic Comparable Sales and Unit Count
Domestic system-wide comparable sales for the second quarter of 2010 increased 0.4% (comprised of a 1.1% decrease at company-owned restaurants and a 0.9% increase at franchised restaurants). Domestic system-wide comparable sales for the six months ended June 27, 2010 were even (comprised of a 1.5% decrease at company-owned restaurants and a 0.5% increase at franchised restaurants). An increase in customer traffic for both the second quarter and six-month results in 2010 was offset by a decline in the average ticket price due to increased levels of discounting. The comparable sales percentage represents the change in year-over-year sales for the same base of restaurants for the same calendar period.
During the second quarter of 2010, 45 domestic franchised restaurants were opened and 16 domestic restaurants were closed (one company-owned and 15 franchised). During the first six months of 2010, we opened 80 domestic restaurants (four company-owned and 76 franchised) and closed 47 restaurants (two company-owned and 45 franchised). Our total domestic development pipeline as of June 27, 2010 included approximately 270 restaurants, two-thirds of which are scheduled to open over the next two to three years.
At June 27, 2010, there were 3,516 domestic and international Papa John’s restaurants (619 company-owned and 2,897 franchised) operating in all 50 states and in 28 countries. The company-owned restaurants include 127 restaurants operated in majority-owned domestic joint venture arrangements, the operating results of which are fully consolidated into the company’s results.
International Update
Highlights:
- International franchise system sales increased approximately 12% to $71.8 million in the second quarter of 2010, from $63.9 million in the comparable period in 2009 and increased approximately 14% to $139.5 million for the six months ended June 27, 2010, from $122.0 million. The impact of foreign exchange rates was not material to the three- and six-month periods.
- During the second quarter of 2010, 28 international restaurants were opened (four company-owned and 24 franchised) while 32 international franchised restaurants were closed, including all of the 25 franchised restaurants in one country. We expect to begin reopening restaurants in that country later this year under a new franchise ownership and management structure. For the six-month period ended June 27, 2010, 57 international restaurants were opened (four company-owned and 53 franchised) while 43 international franchised restaurants were closed.
- During the second quarter, the first two Papa John’s restaurants in Chile were opened by our franchisee in that country.
- We anticipate opening restaurants in three or four additional new countries during the last six months of 2010.
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