Papa John’s Announces Fourth Quarter and Full Year 2013 Results

2014-02-26
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  • Papa John’s System-wide comparable sales increased 9.0% for North America and 7.0% for International for the fourth quarter; System-wide comparable sales increased 4.0% for North America and 7.5% for International for the full year

    Papa John’s International, Inc. (NASDAQ: PZZA) announced financial results for the fourth quarter and fiscal year ended December 29, 2013.

    Highlights

    • System-wide comparable sales increased 9.0% for North America and 7.0% for International for the fourth quarter; System-wide comparable sales increased 4.0% for North America and 7.5% for International for the full year
    • Fourth quarter earnings per diluted common share of $0.41 increased 10.8% over 2012, or increased 32.3% when excluding the impact of the 53rd week in 2012; Earnings per diluted common share of $1.55 for the full year increased 20.2% over earnings per diluted common share of $1.29 for 2012
    • The Company opened 132 net global restaurants for the fourth quarter and 265 for the full year, of which 183 were International and 82 were in North America

    “I’d like to congratulate our operators on delivering a great year for Papa John’s, with several notable milestones and accomplishments including the opening of our 1,000th International restaurant and continued strong growth in sales, earnings and units,” said Papa John’s founder, chairman and CEO, John Schnatter. “As we celebrate our 30th anniversary in 2014, we expect to build upon our momentum by focusing on what got us here – growing the Papa John’s brand globally by consistently delivering a demonstrably better pizza.”

    Compared to the fourth quarter of 2012, which included an additional week of operations, we reported the following results:

    • Fourth quarter 2013 revenues were $387.9 million compared to fourth quarter 2012 revenues of $367.3 million, an increase of 5.6%
    • Fourth quarter 2013 net income was $18.8 million compared to fourth quarter 2012 net income of $17.4 million, an increase of 8.3%
    • Fourth quarter 2013 diluted earnings per common share (“EPS”) were $0.41, compared to fourth quarter 2012 EPS of $0.37, an increase of 10.8%

    Excluding the impact of the additional week in 2012, which provided approximately $21.5 million of additional revenues and approximately $4.1 million of additional income before income taxes, we reported the following results:

    • Fourth quarter 2013 revenues of $387.9 million represented a 12.2% increase
    • Fourth quarter 2013 net income of $18.8 million represented a 27.7% increase
    • Fourth quarter 2013 EPS of $0.41 represented a 32.3% increase

    Full year 2013 revenues were $1.4 billion, a 7.2% increase from 2012 revenues of $1.3 billion, or an increase of 8.9% excluding the 53rd week of operations in 2012. Full year 2013 net income was $69.5 million, compared to 2012 net income of $61.7 million, an increase of $7.9 million or 12.8%. Full year 2013 EPS was $1.55 compared to 2012 EPS of $1.29, an increase of 20.2%.

    As noted above, results include the benefit of a 53rd week of operations in 2012 as well as the Incentive Contribution, the impact of which is discussed in “Revenue and Operating Highlights” and “Items Impacting Comparability” below. The full year net income impact of the 53rd week of operations in 2012 was substantially offset by the impact of the Incentive Contribution.

    The company completed a two-for-one split of the company’s outstanding shares of stock in December 2013. Shareholders of record on December 12, 2013 received one additional share for every outstanding share of stock held on the record date. The stock dividend was distributed on December 27, 2013. All share and per-share amounts in this press release prior to the stock split have been adjusted.

    Global Restaurant and Comparable Sales Information

        Three Months Ended     Year Ended

    Dec. 29,

    2013

     

    Dec. 30,

    2012

    Dec. 29,

    2013

       

    Dec. 30,

    2012

     
    Global restaurant sales growth 4.8% 19.6% 6.2% 10.6%
     
     

    Global restaurant sales growth, excluding the impact of foreign currency and 53rd week

    12.9% 11.5% 8.7% 8.9%
     
    Comparable sales growth (a)
    Domestic company-owned restaurants 11.5% 6.9% 6.6% 5.6%
    North America franchised restaurants 8.1% 4.6% 3.1% 2.9%
    System-wide North America restaurants 9.0% 5.2% 4.0% 3.6%
     
    System-wide international restaurants 7.0% 7.0% 7.5% 7.1%
     

    (a)

    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 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. We believe global restaurant and comparable sales 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

    Revenue Highlights

    Consolidated revenues increased $20.6 million, or 5.6%, for the fourth quarter and increased $96.4 million, or 7.2%, for the full year. Excluding $21.5 million in revenues for the 53rd week of operations in 2012, revenues for the fourth quarter and full year of 2013 increased 12.2% and 8.9%, respectively. The following details the impact of the 53rd week of operations by operating segment. All revenue highlights discussed below are compared to the same period of the prior year and exclude the 53rd week of operations, unless otherwise noted.

          Three Months Ended
                    Adjusted     Adjusted
    Dec. 29, Dec. 30, 53rd Increase- Increase-
    (In thousands)     2013     2012     Week     $ (*)     % (*)
    13 weeks 14 weeks 13 weeks 13 weeks
     
    North America Revenues:
    Domestic company-owned restaurant sales $ 169,604 $ 161,562 $ 10,600 $ 18,642 12.3 %
    Franchise royalties 21,310 21,171 1,400 1,539 7.8 %
    Franchise and development fees 153 218 - (65 ) -29.8 %
    Domestic commissary sales 156,929 149,055 8,500 16,374 11.6 %
    Other sales 14,705 14,613 200 292 2.0 %

     

     

    International Revenues:
    Royalties and franchise and development fees 6,067 6,112 150 105 1.8 %
    Restaurant and commissary sales       19,122       14,553       650       5,219       37.5 %
    Total Revenues     $ 387,890     $ 367,284     $ 21,500     $ 42,106       12.2 %
     
                       
          Year Ended
    Adjusted Adjusted
    Dec. 29, Dec. 30, 53rd Increase- Increase-
    (In thousands)     2013     2012     Week     $ (*)     % (*)
    52 weeks 53 weeks 52 weeks 52 weeks
     
    North America Revenues:
    Domestic company-owned restaurant sales $ 635,317 $ 592,203 $ 10,600 $ 53,714 9.2%
    Franchise royalties 81,692 79,567 1,400 3,525 4.5%
    Franchise and development fees 1,181 806 - 375 46.5%
    Domestic commissary sales 578,870 545,924 8,500 41,446 7.7%
    Other sales 53,322 51,223 200 2,299 4.5%

     

     

    International Revenues:
    Royalties and franchise and development fees 21,979 19,881 150 2,248 11.4%
    Restaurant and commissary sales     66,661     53,049     650     14,262     27.2%
    Total Revenues     $ 1,439,022     $ 1,342,653     $ 21,500     $ 117,869     8.9%
     

    (*) “Adjusted Increase” columns exclude the impact of the 53rd week of operations in 2012. Revenues excluding the impact of the 53rd week of operations is a non-GAAP financial measure. See “Items Impacting Comparability” for additional details and a reconciliation of our GAAP financial measures.

    The increases in revenues for the fourth quarter and full year 2013 were primarily due to the following:

    • Domestic company-owned restaurant sales increased approximately $18.6 million, or 12.3%, and $53.7 million, or 9.2%, for the fourth quarter and full year 2013, respectively. The increases were primarily due to increases in comparable sales of 11.5% and 6.6%, respectively. The increase for the full year was also due to the net acquisition of 50 restaurants in the Denver and Minneapolis markets from a franchisee in the second quarter of 2012.
    • North America franchise royalty revenue increased $1.5 million, or 7.8%, and $3.5 million, or 4.5%, for the fourth quarter and full year 2013, respectively. The increases were primarily due to increases in net franchise units and increases in comparable sales of 8.1% and 3.1%, respectively, partially offset by royalty incentives offered to franchisees for meeting certain sales targets. The increase for the full year was partially offset by reduced royalties attributable to the company’s net acquisition of the 50 restaurants noted above.
    • Domestic commissary sales increased $16.4 million, or 11.6%, and $41.4 million, or 7.7%, for the fourth quarter and full year 2013, respectively. The increases were primarily due to increases in sales volumes, higher overall margins and increases in the prices of commodities.
    • International royalties and franchise and development fees increased $2.2 million or 11.4% for the full year. This was primarily due to an increase in units and comparable sales of 7.5%.
    • International restaurant and commissary sales increased $5.2 million, or 37.5%, and $14.3 million, or 27.2%, for the fourth quarter and full year 2013, respectively. The increases were primarily due to an increase in China company-owned restaurant sales due to the increased number of units. In addition, China reported an additional month of results in the fourth quarter of 2013 compared to the fourth quarter of 2012. The fourth quarter of 2013 includes September through December 2013 results whereas the fourth quarter of 2012 includes September through November 2012 results. The added month, which increased revenues approximately $2.1 million, puts China on the same reporting cycle as our Domestic operations. United Kingdom commissary revenues also increased due to both an increase in units and higher comparable sales.

    Operating Highlights

    The tables below summarize income before income taxes on a reporting segment basis, excluding the Incentive Contribution and the impact of the 53rd week of operations in 2012, which substantially offset each other on a full year basis. All operating highlights are compared to the same period of the prior year and exclude the Incentive Contribution and the 53rd week of operations, unless otherwise noted.

       
          Three Months Ended
                Incentive     Adjusted
    Dec. 29, Dec. 30, 53rd Contribution Increase/
    (In thousands)     2013     2012     Week (a)     (a)     (Decrease) (a)
    13 weeks 14 weeks 13 weeks 13 weeks
     
    Domestic company-owned restaurants $ 9,924 $ 10,887 $ 1,609 $ - $ 646
    Domestic commissaries 11,526 8,327 1,200 - 4,399
    North America franchising 18,067 18,502 1,414 - 979
    International 651 1,846 414 - (781 )
    All others 1,088 1,292 215 - 11
    Unallocated corporate expenses (12,550 ) (14,175 ) (707 ) - 918
    Elimination of intersegment profits       (765 )       (133 )       -         -       (632 )
    Total income before income taxes     $ 27,941       $ 26,546       $ 4,145       $ -     $ 5,540  
     
          Year Ended
                    Incentive     Adjusted
    Dec. 29, Dec. 30, 53rd Contribution Increase/
    (In thousands)     2013     2012     Week (a)     (a)     (Decrease) (a)
    52 weeks 53 weeks 52 weeks 52 weeks
     
    Domestic company-owned restaurants $ 34,590 $ 38,114 $ 1,609 $ 1,029 $ (886 )
    Domestic commissaries 37,804 34,317 1,200 - 4,687
    North America franchising 70,201 69,332 1,414 - 2,283
    International 2,803 3,063 414 - 154
    All others 3,490 2,889 215 - 816
    Unallocated corporate expenses (41,025 ) (48,958 ) (707 ) (5,000 ) 2,226
    Elimination of intersegment profits       (1,754 )       (362 )       -         -         (1,392 )
    Total income before income taxes     $ 106,109       $ 98,395         4,145         (3,971 )     $ 7,888  

    Fourth quarter 2013 income before income taxes increased approximately $5.5 million or 24.7% compared to the prior year period. The increase was primarily due to the following:

    • Domestic company-owned restaurants income increased approximately $650,000 as incremental profits from higher sales were partially offset by lower national promotion pricing, higher commodities and increased restaurant level bonuses.
    • Domestic commissaries operating results increased approximately $4.4 million due to incremental profits associated with higher sales and a higher margin.
    • North America franchising increased approximately $1.0 million due to the increase in net restaurants and comparable sales, partially offset by higher royalty incentives offered to franchisees for meeting certain sales targets.
    • Unallocated corporate expenses decreased approximately $900,000 primarily due to lower legal costs and short-term management incentive costs, partially offset by higher various other G&A costs including travel, operators’ conference costs and information technology costs. Legal costs were higher in 2012 primarily due to the costs associated with the previously disclosed Agne text messaging class action lawsuit.

    This increase was partially offset by an approximate $800,000 decrease in international results as the higher royalties attributable to the 7.0% comparable sales increase were more than offset by higher operating losses in our company-owned China market, including the $215,000 impact of the additional month in the fourth quarter, as previously discussed. The losses in the company-owned China market include a reduction in operating results at our company-owned restaurants, primarily associated with new stores, as well as write off costs associated with closing one location and the disposition of certain other assets. Additionally, 2013 includes higher infrastructure and support costs to expand in this underpenetrated market.

    The full year increase in income before income taxes of $7.9 million, or 8.0%, was primarily due to the same reasons as the increases noted above for the three month period. Additionally, the full year results include the following:

    • Domestic company-owned restaurants income decreased approximately $900,000 primarily due to higher commodity costs somewhat offset by incremental profits associated with higher comparable sales of 6.6%.
    • International income increased approximately $150,000 primarily due to the increase in units and comparable sales of 7.5% which provided both an improvement in our United Kingdom results and higher royalties. These increases were substantially offset by higher operating losses in our company-owned China market, as previously discussed.

    The effective tax rates were 29.4% and 31.2% for the three months and full year ended December 29, 2013, representing decreases of 1.3% and 1.7% from the rates in the comparable prior year periods. Our effective income tax rate may fluctuate from year to year for various reasons. The lower tax rates in 2013 included both higher levels of tax credits, including the Work Opportunity Tax Credit and state and federal research and experimentation tax credits, as well as favorable one–time settlements of specific state tax issues.

    The company’s free cash flow for the fiscal years ended 2013 and 2012 was as follows (in thousands):

    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 Annual Report on Form 10-K filed with the Securities and Exchange Commission for additional information concerning our operating results and cash flow for the fiscal year ended December 29, 2013.

    Global Restaurant Unit Data

    At December 29, 2013, there were 4,428 Papa John’s restaurants operating in all 50 states and in 34 countries, as follows:

       

    Domestic

    Company-

    owned

       

    Franchised

    North

    America

       

    Total North

    America

        International     System-wide

    Fourth Quarter

                   
    Beginning - September 29, 2013 656 2,595 3,251 1,045 4,296
    Opened 11 41 52 103 155
    Closed (2 )     (15 )     (17 )     (6 )     (23 )
    Ending - December 29, 2013 665       2,621       3,286       1,142       4,428  
     

    Year-to-date

    Beginning - December 30, 2012 648 2,556 3,204 959 4,163
    Opened 19 152 171 215 386
    Closed (2 )     (87 )     (89 )     (32 )     (121 )
    Ending - December 29, 2013 665       2,621       3,286       1,142       4,428  
     
    Year-over-year restaurant unit growth 17       65       82       183       265  
     
    % increase 2.6 %     2.5 %     2.6 %     19.1 %     6.4 %
     

    Our development pipeline as of December 29, 2013 included approximately 1,200 restaurants (200 restaurants in North America and 1,000 international restaurants), the majority of which are scheduled to open over the next six years.

    Items Impacting Comparability

    The following table reconciles our GAAP financial results to certain items impacting comparability, for the fourth quarter and fiscal year ended December 29, 2013. The impact of the Incentive Contribution was substantially offset by the impact of the 53rd week of operations for the full year ($7.7 million increase in income before income taxes, as reported, and a $7.9 million increase in income before income taxes, as adjusted):

           
    Three Months Ended Year Ended
    Dec. 29,     Dec. 30, Dec. 29,     Dec. 30,
    (In thousands, except per share amounts) 2013 2012 2013 2012
     
    Total Revenues, as reported $ 387,890 $ 367,284 $ 1,439,022 $ 1,342,653
    53rd week of operations (a) - (21,500) - (21,500)
    Total Revenues, as adjusted $ 387,890 $ 345,784 $ 1,439,022 $ 1,321,153
     
    Income before income taxes, as reported $ 27,941 $ 26,546 $ 106,109 $ 98,395
    53rd week of operations (a) - (4,145) - (4,145)
    Incentive Contribution (b) (250) (250) (1,000) 2,971
    Income before income taxes, as adjusted $ 27,691 $ 22,151 $ 105,109 $ 97,221
     
    Net income, as reported $ 18,805 $ 17,359 $ 69,537 $ 61,660
    53rd week of operations (a) - (2,634) - (2,634)
    Incentive Contribution (b) (166) (165) (660) 1,955
    Net income, as adjusted $ 18,639 $ 14,560 $ 68,877 $ 60,981
     
    Earnings per diluted common share, as reported $ 0.41 $ 0.37 $ 1.55 $ 1.29
    53rd week of operations (a) - (0.06) - (0.05)
    Incentive Contribution (b) - - (0.02) 0.04
    Earnings per diluted common share, as adjusted $ 0.41 $ 0.31 $ 1.53 $ 1.28

     

    The results shown in the table and elsewhere in this press release, which exclude the Incentive Contribution and the 53rd week of operations, are not measures defined by accounting principles generally accepted in the United States (“GAAP”). These non-GAAP measures should not be construed as a substitute for or a better indicator of the company’s performance than the company’s GAAP results. Management believes presenting the financial information excluding the Incentive Contribution and the impact of the 53rd week of operations 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. Annual cash bonuses, and certain long-term incentive programs for various levels of management, were based on financial measures that excluded the Incentive Contribution.

    Share Repurchase Activity

    In December 2013, the company’s Board of Directors approved a $100 million increase in the amount of common stock that may be purchased under the company’s share repurchase program through December 31, 2014, bringing the total authorized under the program to $1.2 billion since its inception in 1999. Approximately $110.9 million remains available under the company’s share repurchase program as of February 18, 2014. The following table reflects our repurchases for the fourth quarter and full year of 2013 as well as subsequent repurchases through February 18, 2014 (in thousands):

    Period      

    Number

    of Shares

          Cost
               
    Fourth Quarter 2013 1,281 $ 49,432
     
    Full Year 2013 3,538 $ 118,569
     
    December 30, 2013 through February 18, 2014 236 $ 11,008
     

    There were 43.3 million and 44.2 million diluted weighted average common shares outstanding for the fourth quarter and full year, respectively, representing decreases of 7.0% and 7.5% versus the prior year comparable periods. Diluted earnings per share increased $0.03 and $0.12 for the fourth quarter and full year, respectively, due to the reductions in shares outstanding, primarily resulting from the share repurchase program. Approximately 41.8 million shares of the company’s common stock were outstanding as of December 29, 2013.

    Regular Quarterly Dividend

    As announced on January 30, 2014, the Board of Directors declared a regular quarterly cash dividend of $0.125 per share. The dividend was paid on February 21, 2014 to shareholders of record as of the close of business on February 10, 2014.

    2014 Key Operating Assumptions and Earnings Guidance

    In 2014, the company expects another year of solid growth across all aspects of the Papa John’s business. We expect to continue the momentum we have in units, revenues, and EPS growth, with a notable improvement in International profitability. We and our franchisees plan to implement a new, proprietary POS system (“FOCUS”) in substantially all domestic system restaurants in 2014, which we expect will add efficiencies to our operations. The costs related to implementing FOCUS are projected to have a negative pre-tax earnings impact of approximately $5.0 million in 2014, or $0.08 of EPS, as compared to 2013.

    Earnings per Share – The company projects 2014 EPS to increase to a range of $1.64 to $1.72. Excluding the approximate $0.08 impact of implementing FOCUS, the range of $1.72 to $1.80 represents a 11% to 16% increase over 2013 EPS.

    Comparable Restaurant Sales – North America system-wide comparable sales are expected to increase 2.0% to 4.5% in 2014. International comparable sales, are expected to increase 5% to 7%, on a constant dollar basis, in 2014.

    Worldwide Net Unit Growth – Worldwide net unit growth in 2014 is expected to range between 220 and 250 units, with approximately 70% of the net unit growth in International markets.

    Revenues – Total consolidated revenues are expected to increase 5% to 7% in 2014, due to projected North America and International net unit and comparable sales growth.

    Income before Income Taxes Margin – Consolidated income before income taxes margin in 2014 is expected to approximate 2013 levels. Excluding the impact of FOCUS, we expect consolidated margin improvement of 0.20% to 0.40%. The biggest driver of increased margins is a projected improvement in International profitability, driven by improved financial performance in our corporate-owned China operations and continued strong unit growth and comparable sales in our other International markets. In North America, we are assuming full-year block cheese prices in the mid-to-high $1.80’s per pound; the persistence of elevated block cheese prices from this level will impact company-owned restaurant margins, and EPS, accordingly.

    Income Tax Rate – The income tax rate in 2014 is expected to range from 32.25% to 33.75%, up from 2013 due to several rate-reducing items in 2013 that are not expected to recur.

    Free Cash Flow – Free cash flow in 2014 is expected to approximate that of 2013. The company expects to continue its recurring dividend and to repurchase shares of its outstanding stock in a range of $75- $100 million. Debt is expected to range between 1.0x and 1.5x 2014 EBITDA.

    Capital Expenditures – Capital expenditures for 2014 are expected to approximate $50 to $55 million, consisting of company-owned unit development in the U.S. and Beijing, China, certain technology-related projects including costs associated with the FOCUS system, and routine capital replacement.

    Annual Meeting Date Scheduled

    The 2014 Annual Meeting of Stockholders will be held on Tuesday, April 29, 2014, at 11:00 am local time at the company’s corporate offices located at 2002 Papa John’s Boulevard, Louisville, Kentucky.

     

                   
    Papa John's International, Inc. and Subsidiaries
    Consolidated Statements of Income
       
     
    Three Months Ended Year Ended
    Dec. 29, 2013     Dec. 30, 2012 Dec. 29, 2013     Dec. 30, 2012
    13 weeks 14 weeks 52 weeks 53 weeks
    (In thousands, except per share amounts) (Unaudited) (Unaudited)
    Revenues:
    North America:
    Domestic Company-owned restaurant sales $ 169,604 $ 161,562 $ 635,317 $ 592,203
    Franchise royalties 21,310 21,171 81,692 79,567
    Franchise and development fees 153 218 1,181 806
    Domestic commissary sales 156,929 149,055 578,870 545,924
    Other sales 14,705 14,613 53,322 51,223
    International:
    Royalties and franchise and development fees 6,067 6,112 21,979 19,881
    Restaurant and commissary sales   19,122         14,553     66,661         53,049  
    Total revenues 387,890 367,284 1,439,022 1,342,653
     
    Costs and expenses:
    Domestic Company-owned restaurant expenses:
    Cost of sales 43,106 37,987 156,237 137,378
    Salaries and benefits 46,290 45,021 173,316 163,260
    Advertising and related costs 15,278 14,686 59,172 54,583
    Occupancy costs 9,313 9,032 36,546 34,734
    Other restaurant operating expenses



    Logos, product and company names mentioned are the property of their respective owners.

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