Papa John’s Announces Second Quarter 2014 Results

2014-08-06
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  • Papa John’s Second quarter earnings per diluted share of $0.40 in 2014 compared to $0.39 in 2013 - Second quarter system-wide comparable sales increases of 6.0% for North America and 8.6% for international

    Papa John’s International, Inc. (NASDAQ: PZZA) today announced financial results for the three and six months ended June 29, 2014.

    Highlights

    • Second quarter earnings per diluted share of $0.40 in 2014 compared to $0.39 in 2013
    • Second quarter system-wide comparable sales increases of 6.0% for North America and 8.6% for international
    • Regular dividend increased 12% to $0.56 from $0.50 annually
    • Increased comparable sales guidance to 4.0% - 6.0% for North America and 6.0% - 8.0% for international

    “Papa John’s sustained focus on delivering superior quality product continues to drive shareholder value, as seen in our strong global sales in Q2 and in Papa John’s attaining the top ranking in the American Customer Satisfaction Index for the 13th time,” said Papa John's Founder, Chairman, CEO, and President John Schnatter. “The investments we are making to further enhance our industry-leading quality position and build upon our strong digital capabilities will drive growth of the Papa John's brand for years to come.”

    Second quarter 2014 revenues were $380.9 million, a 9.1% increase from second quarter 2013 revenues of $349.2 million. Second quarter 2014 net income was $16.7 million, compared to second quarter 2013 net income of $17.2 million. Second quarter 2014 diluted earnings per share were $0.40, compared to second quarter 2013 diluted earnings per share of $0.39.

    Revenues were $782.2 million for the six months ended June 29, 2014, an 11.0% increase from revenues of $704.8 million for the same period in 2013. Net income was $36.1 million for the six months ended June 29, 2014, compared to $36.5 million for the same period in 2013. Diluted earnings per share were $0.85 for the six months ended June 29, 2014, compared to $0.81 for the same period in 2013.

    Global Restaurant and Comparable Sales Information

          Three Months Ended     Six Months Ended
         

    June 29,

    2014

       

    June 30,

    2013

       

    June 29,

    2014

       

    June 30,

    2013

                             
    Global restaurant sales growth (a)     10.2%     7.2%     11.4%     6.6%
                             

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

        10.4%     7.6%     11.8%     7.0%
                             
    Comparable sales growth (b)                        
    Domestic company-owned restaurants     7.5%     6.0%     9.5%     4.9%
    North America franchised restaurants     5.4%     2.6%     7.2%     1.7%
    System-wide North America restaurants     6.0%     3.4%     7.8%     2.5%
                             
    System-wide international restaurants     8.6%     6.8%     7.6%     7.5%
                             
    (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 $31.7 million, or 9.1%, for the second quarter of 2014 and increased $77.5 million, or 11.0%, for the six months ended June 29, 2014. The increases in revenues were primarily due to the following:

    • Domestic company-owned restaurant sales increased $14.8 million, or 9.6%, and $35.1 million, or 11.2%, for the three and six months, respectively, primarily due to increases of 7.5% and 9.5% in comparable sales.
    • North America franchise royalty revenue increased approximately $750,000, or 3.7%, and $2.6 million, or 6.4%, for the three and six months, respectively, primarily due to increases of 5.4% and 7.2% in comparable sales, partially offset by increases in royalty incentives to franchisees for meeting certain development and performance targets.
    • Domestic commissary sales increased $10.6 million, or 7.6%, and $30.7 million, or 10.8%, for the three and six months, respectively, due to increases in the prices of certain commodities, primarily cheese, and increases in sales volumes for the six-month period.
    • International revenues increased $4.4 million, or 21.0%, and $8.1 million, or 19.8%, for the three and six months, primarily due to increases in the number of restaurants and increases in comparable sales of 8.6% and 7.6%, calculated on a constant dollar basis.

    Operating Highlights

    The table below summarizes income before income taxes on a reporting segment basis:

            Three Months Ended     Six Months Ended
            June 29,     June 30,     Increase     June 29,     June 30,     Increase
    (In thousands)     2014     2013     (Decrease)     2014     2013     (Decrease)
                                           
    Domestic company-owned restaurants     $ 10,651       $ 8,175       $ 2,476       $ 23,936       $ 19,131       $ 4,805  
    Domestic commissaries       6,846         9,642         (2,796 )       17,277         19,805         (2,528 )
    North America franchising       17,882         17,396         486         37,366         35,618         1,748  
    International       1,903         866         1,037         2,635         1,207         1,428  
    All others       (442 )       1,153         (1,595 )       148         1,812         (1,664 )
    Unallocated corporate expenses       (10,702 )       (10,413 )       (289 )       (23,163 )       (19,931 )       (3,232 )
    Elimination of intersegment losses (profits)       98         (211 )       309         (553 )       (737 )       184  
    Total income before income taxes     $ 26,236       $ 26,608       $ (372 )     $ 57,646       $ 56,905       $ 741  
    FOCUS system rollout costs (a)       868         -         868  

     

        1,095         -         1,095  

    Total income before income taxes, excluding FOCUS system rollout costs (b)

        $ 27,104       $ 26,608       $ 496       $ 58,741       $ 56,905       $ 1,836  
                                         
    (a) See the FOCUS Update section of this press release and the Quarterly Report on Form 10-Q for the three and six months ended June 29, 2014 for additional information.
       
    (b) 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.
       

     

    Second quarter 2014 income before income taxes decreased $372,000, or 1.4%. Excluding our proprietary point-of-sale system (“FOCUS”) rollout costs of $868,000, income before income taxes increased by $496,000, or 1.9%. The additional income produced by both domestic and international restaurants, primarily attributable to sales growth, was substantially offset by lower income from the domestic commissaries and “All others” segments. Significant results by segment are detailed as follows:

    • Domestic company-owned restaurants results increased approximately $2.5 million primarily due to the 7.5% increase in comparable sales, partially offset by the impact of higher commodity costs. The market price for cheese averaged $2.13 per pound for the second quarter of 2014, compared to $1.78 per pound in the prior year.
    • Domestic commissaries results decreased approximately $2.8 million primarily due to a lower margin of approximately $800,000, higher insurance claims costs of approximately $1.1 million and higher costs associated with various ongoing commissary initiatives. We manage commissary results on a full year basis and anticipate the 2014 full year profit margin percentage will approximate 2013.
    • North America franchising increased $486,000 primarily due to higher royalties attributable to the 5.4% increase in comparable sales, which was partially offset by the previously mentioned increase in royalty incentives.
    • International income increased approximately $1.0 million primarily due to an increase in units and comparable sales of 8.6%, which resulted in both higher royalties and an increase in United Kingdom profits. These increases were partially offset by unfavorable results at our China Company-owned restaurant operations.
    • The results for the “All others” segment decreased $1.6 million. The decrease was primarily due to higher infrastructure costs to support our digital ordering business and a lower margin at our print and promotions business from a discounted direct mail campaign provided to domestic franchised restaurants.

    Income before income taxes increased $741,000, or 1.3%, for the six-month period ended June 29, 2014. Excluding FOCUS system rollout costs of approximately $1.1 million, income before income taxes increased by approximately $1.8 million, or 3.2%. The increases in domestic company-owned restaurants, North America franchising and international income were primarily due to the same reasons as noted above for the three-month period. These increases were partially offset by decreases in the following segments:

    • Domestic commissaries income decreased $2.5 million as the incremental profits from higher sales were more than offset by the higher insurance claims costs of approximately $1.1 million and higher costs associated with various ongoing commissary initiatives.
    • The “All others” segment decreased $1.7 million for the same reasons as noted above in the three-month period.
    • Unallocated corporate expenses increased approximately $2.6 million, excluding FOCUS system rollout costs, primarily due to the following:
      • The prior year included an approximate $800,000 benefit from a decrease in the redemption value of a mandatorily redeemable noncontrolling interest in a joint venture.
      • Interest costs were approximately $900,000 higher due to both a higher average outstanding debt balance and a higher effective interest rate.
      • General and administrative costs increased due to higher salaries, benefits and equity compensation costs.

    The effective income tax rates were 32.0% and 33.4% for the three and six months ended June 29, 2014, representing a decrease of 0.2% for the three-month period and an increase of 0.8% for the six-month period. Our effective income tax rate may fluctuate from quarter to quarter for various reasons. The higher tax rate for the first six 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, for the first six months of 2014 and 2013, was as follows (in thousands):

            Six Months Ended
            June 29,       June 30,
            2014       2013
                     
    Net cash provided by operating activities (a)       $ 54,565         $ 47,232  
    Purchases of property and equipment (b)         (26,239 )         (25,493 )
    Free cash flow       $ 28,326         $ 21,739  
                             
        (a) The increase of approximately $7.3 million is primarily due to favorable changes in working capital.
        (b) Purchases of property and equipment were relatively consistent for the six-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 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. 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 six months ended June 29, 2014.

    FOCUS Update

    As previously communicated, the Company is implementing a new, proprietary point-of-sale system (“FOCUS”) in substantially all domestic system-wide restaurants. As of June 29, 2014, we had installed FOCUS in 383 restaurants (369 company-owned and 14 franchised), with the majority of the installations expected to occur by the end of 2014.

    The costs related to implementing FOCUS are projected to decrease income before income taxes by approximately $5.0 million in 2014, or an $0.08 negative impact on diluted earnings per share, as compared to 2013. For the six months ended June 29, 2014, the impact was a $0.02 reduction in diluted earnings per share. For additional information, see the Quarterly Report on Form 10-Q for the three- and six-month periods ended June 29, 2014.

    Global Restaurant Unit Data

    At June 29, 2014, there were 4,487 Papa John’s restaurants operating in all 50 states and in 37 international countries and territories, as follows:

         

    Domestic

    Company-

    owned

       

    Franchised

    North

    America

       

    Total North

    America

        International     System-wide

    Second Quarter

                                 
    Beginning - March 30, 2014     666       2,615       3,281       1,159       4,440  
    Opened     2       28       30       47       77  
    Closed     (1 )     (24 )     (25 )     (5 )     (30 )
    Acquired (divested)     5       (5 )     -       -       -  
    Ending - June 29, 2014     672       2,614       3,286       1,201       4,487  
                                   

    Year-to-date

                                 
    Beginning - December 29, 2013     665       2,621       3,286       1,142       4,428  
    Opened     4       49       53       70       123  
    Closed     (2 )     (51 )     (53 )     (11 )     (64 )
    Acquired (divested)     5       (5 )     -       -       -  
    Ending - June 29, 2014     672       2,614       3,286       1,201       4,487  
                                   
    Unit growth (decline)     7       (7 )     -       59       59  
                                   
    % increase (decrease)     1.1 %     (0.3 %)     -       5.2 %     1.3 %
                                   

     

    Our development pipeline as of June 29, 2014 included approximately 1,400 restaurants (300 units in North America and 1,100 units internationally), the majority of which are scheduled to open over the next six years.

    Share Repurchase Activity

    The following table reflects our repurchases for the three and six months ended June 29, 2014 and subsequent repurchases through July 29, 2014 (in thousands):

    Period        

    Number

    of Shares

          Cost
                       
    Three Months Ended June 29, 2014         653       $ 30,503
                       
    Six Months Ended June 29, 2014         1,304       $ 63,304
                       
    June 30, 2014 through July 29, 2014         202       $ 8,515
                         

    There were 42.0 million and 42.3 million diluted weighted average shares outstanding for the three and six months ended June 29, 2014, representing decreases of 5.7% and 6.1%, respectively, over the prior year comparable periods. Diluted earnings per share increased $0.02 and $0.05, respectively, for the three and six months ended June 29, 2014 due to the reduction in shares outstanding, primarily resulting from the share repurchase program. Approximately 41.0 million actual shares of the company’s common stock were outstanding as of June 29, 2014.

    Cash Dividend

    We paid a cash dividend of approximately $5.2 million ($0.125 per common share) during the second quarter of 2014. Subsequent to the second quarter, on July 31, 2014, our Board of Directors approved a 12% increase in the Company’s dividend rate per common share, from $0.50 on an annual basis to $0.56 on an annual basis, and declared a third quarter dividend of $0.14 per common share (approximately $5.7 million based on current shareholders of record). The dividend will be paid on August 22, 2014 to shareholders of record as of the close of business on August 13, 2014. The declaration and payment of any future dividends 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.

    2014 Guidance Update

    The company reaffirmed its diluted earnings per share guidance of $1.64 to $1.72 and is providing the following 2014 guidance updates:

            Updated Guidance     Previous Guidance
                   
      North America comparables sales     +4.0% to +6.0%     +2.0% to +4.5%
                   
      International comparable sales     +6.0% to +8.0%     +5.0% to +7.0%
                   
      Worldwide net unit growth (a)     220 to 235     220 to 250
                   
      Consolidated revenues     +8% to +10%     +5% to +7%
       

    (a)

    Approximately 80% of the net unit growth is projected to come from international markets (previously 70%).

       

     

                   
    Papa John's International, Inc. and Subsidiaries
    Condensed Consolidated Statements of Income
       
     
    Three Months Ended Six Months Ended
    June 29, 2014     June 30, 2013 June 29, 2014     June 30, 2013
    (In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
    Revenues:
    North America:
    Domestic company-owned restaurant sales $ 170,000 $ 155,153 $ 348,193 $ 313,051
    Franchise royalties 20,983 20,230 43,597 40,963
    Franchise and development fees 132 219 276 765
    Domestic commissary sales 150,581 140,003 314,628 283,897
    Other sales 13,595 12,444 26,345 25,051
    International:
    Royalties and franchise and development fees 6,317 5,391 12,096 10,458
    Restaurant and commissary sales   19,256         15,746     37,106         30,605  
    Total revenues 380,864 349,186 782,241 704,790
     
    Costs and expenses:
    Domestic company-owned restaurant expenses:
    Cost of sales 42,030 37,825 87,186 74,898
    Salaries and benefits 45,805 42,053 93,388 85,325
    Advertising and related costs 15,354 14,677 31,610 29,470
    Occupancy costs 9,446 8,939 18,757 17,650
    Other restaurant operating expenses   25,220         22,431     50,507         45,176  
    Total domestic company-owned restaurant expenses 137,855 125,925 281,448 252,519
     
    Domestic commissary expenses:
    Cost of sales 118,470 107,676 247,394 218,599
    Salaries and benefits 6,847 6,084 13,871 12,100
    Other commissary operating expenses   16,215         15,185     32,070         30,646  
    Total domestic commissary expenses 141,532 128,945 293,335 261,345
     
    Other operating expenses 13,221 11,132 24,652 22,584
    International restaurant and commissary expenses 15,876 12,983 30,761 25,636
    General and administrative expenses 33,562 33,126 70,528 66,284
    Other general expenses 1,964 1,597 3,497 2,782
    Depreciation and amortization   9,855         8,530     19,019         17,067  
    Total costs and expenses   353,865         322,238     723,240         648,217  
     
    Operating income 26,999 26,948 59,001 56,573
    Net interest (expense) income   (763 )       (340 )   (1,355 )       332  
    Income before income taxes 26,236 26,608 57,646 56,905
    Income tax expense   8,397         8,563     19,266         18,541  
    Net income before attribution to noncontrolling interests 17,839 18,045 38,380 38,364
    Income attributable to noncontrolling interests   (1,091 )       (895 )   (2,321 )       (1,908 )
    Net income attributable to the company $ 16,748       $ 17,150   $ 36,059       $ 36,456  
     
    Calculation of income for earnings per share:
    Net income attributable to the company $ 16,748 $ 17,150 $ 36,059 $ 36,456
    Increase in noncontrolling interest redemption value (31 ) - (39 ) -
    Net income attributable to participating securities   (81 )       -     (218 )       -  
    Net income attributable to common shareholders $ 16,636       $ 17,150   $ 35,802       $ 36,456  
     
    Basic earnings per common share $ 0.40       $ 0.39   $ 0.86       $ 0.83  
    Diluted earnings per common share $ 0.40       $ 0.39   $ 0.85       $ 0.81  
     
    Basic weighted average common shares outstanding   41,225         43,484     41,501         43,996  
    Diluted weighted average common shares outstanding   41,970         44,500     42,332         45,086  
     
    Dividends declared per common share $ 0.125 $ - $ 0.250 $ -
     

     

           
    Papa John's International, Inc. and Subsidiaries
    Condensed Consolidated Balance Sheets
     
     
    June 29, December 29,
    2014   2013
    (In thousands) (Unaudited) (Note)
     
    Assets
    Current assets:
    Cash and cash equivalents $ 19,971 $ 13,670
    Accounts receivable, net 48,377 53,203
    Notes receivable, net 5,862 3,566
    Inventories 31,895 23,035
    Deferred income taxes 7,673 8,004
    Prepaid expenses and other current assets   23,802   23,562
    Total current assets 137,580 125,040
     
    Property and equipment, net 218,448 212,097
    Notes receivable, less current portion, net 11,534 13,239
    Goodwill 82,106 79,391
    Other assets   35,532   34,524
    Total assets $ 485,200 $ 464,291
     
     
    Liabilities and stockholders' equity
    Current liabilities:
    Accounts payable $ 33,719 $ 35,653
    Income and other taxes payable 5,824 4,401
    Accrued expenses and other current liabilities   54,468   57,807
    Total current liabilities 94,011 97,861
     
    Deferred revenue 5,579 5,827
    Long-term debt 210,000 157,900
    Deferred income taxes 12,928 14,660
    Other long-term liabilities   45,644   42,835
    Total liabilities 368,162 319,083
     
    Redeemable noncontrolling interests 8,433 7,024
     
    Total stockholders' equity   108,605   138,184
    Total liabilities, redeemable noncontrolling interests and stockholders' equity $ 485,200 $ 464,291
     



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