Papa John’s International, Inc. (NASDAQ: PZZA) today announced financial results for the first quarter ended March 31, 2019.
- First quarter 2019 loss per diluted share of ($0.12)
- Excluding Special charges, adjusted earnings per diluted share of $0.31 compared to $0.52 for first quarter of 2018
- System-wide North America comparable sales decrease of 6.9%
- International comparable sales decrease of 0.1%; international franchise sales increase of 10.5%, excluding the impact of foreign currency
- 33 net unit openings in the first quarter of 2019 driven by International operations
- The company issued $252.5 million of Series B Preferred Stock to certain funds affiliated with, or managed by, Starboard Value LP (collectively “Starboard”) and certain franchisees during the quarter
Steve Ritchie, President and CEO of Papa John’s, said, “The first quarter was a time of promise for Papa John’s. We made further progress in transforming the culture, thinking and momentum within the company. We have significantly strengthened and refreshed the company’s leadership, adding talented members to the senior management team and highly-qualified directors to the board this year. At the same time, we continued reevaluating all aspects of our go-to-market strategy, identifying multiple opportunities to improve the customer experience, customer value proposition and franchisee unit economics. Last quarter, we made several improvements in the key drivers of our business. Substantial, positive change takes time and effort, but with the passion and dedication of our team members and franchise partners, I am very excited about the future of Papa John’s.”
As more fully described within this press release, beginning this quarter, the company consolidated the financial results of the Papa John’s Marketing Fund, Inc. (“PJMF). The financial statements for the first quarter of 2018 have been restated to reflect the consolidation of PJMF. The consolidation of PJMF is not expected to have a material impact on the company’s annual consolidated financial results, including the income (loss) before income taxes, as PJMF operates at or near break-even results annually. The consolidation of PJMF also did not have a material impact on the company’s 2018 financial statements.
Operating highlights, including restated data for the first quarter of 2018, are as follow:
|(In thousands, except per share amounts)||First Quarter|
|Mar. 31, |
|Apr. 1, |
|(Loss) income before income taxes||(767||)||23,064||(103.3||%)|
|Net (loss) income||(1,731||)||17,443||(109.9||%)|
|Diluted (loss) earnings per share||(0.12||)||0.52||(123.1||%)|
|Adjusted diluted earnings per share (c)||0.31||0.52||(40.4||%)|
The consolidation of PJMF resulted in revenues of $23.5 million, income before income taxes and net income of approximately $600,000 and diluted earnings per share of $0.02.
The consolidation of PJMF resulted in revenues of $22.8 million, income before income taxes and net income of approximately $700,000 and diluted earnings per share of $0.02.
Adjusted to exclude special charges in 2019, which impact comparability. The reconciliation of GAAP to non-GAAP financial results is included in the table below.
Adjusted financial results excluding Special charges, which impact comparability, are summarized in the following reconciliation. The table reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures. All highlights are compared to the same period of the prior year, unless otherwise noted.
|Mar. 31,||Apr. 1,|
|(In thousands, except per share amounts)||2019||2018 (1)|
|GAAP (loss) income before income taxes||$||(767||)|| |
|Special charges (2)||15,854||-|
|Adjusted income before income taxes||$||15,087|| |
|GAAP net (loss) income attributable to common shareholders||$||(3,801||)||$||17,368|
|Special charges (2)||13,548||-|
|Adjusted net income attributable to common shareholders||$||9,747||$||17,368|
|GAAP diluted (loss) earnings per share||$||(0.12||)||$||0.52|
|Special charges (2)||0.43||-|
|Adjusted diluted earnings per share||$||0.31||$||0.52|
|(1)||The first quarter of 2018 has been restated to include PJMF.|
|(2)||The company incurred $15.9 million of costs (defined as “Special charges”) in the first quarter of 2019, including the following (in thousands):|
|Loss Before||After Tax||Diluted Loss|
|Income taxes||Net Loss (d)||per Share|
|Royalty relief (a)||$||4,873||$||3,742||$||0.12|
|Legal and advisory fees (b)||5,067||3,892||0.12|
|Mark-to-market adjustment on option valuation (c)||5,914||5,914||0.19|
|Total Special charges||$||15,854||$||13,548||$||0.43|
|(a)||Represents financial assistance provided to the entire North America system in the form of short-term royalty reductions.|
|(b)||Represents costs associated with the activities of the Special Committee of the Board of Directors, including legal costs associated with legal proceedings initiated by John H. Schnatter and advisory costs associated with the review of a wide range of strategic opportunities that culminated in Starboard’s strategic investment in the company by affiliates of Starboard.|
|(c)||The company recorded a one-time mark-to-market adjustment of $5.9 million ($5.6 million in general and administrative expenses and $300,000 as a reduction in royalties) related to the increase in the Starboard and franchisee options to purchase Series B preferred stock that culminated in the purchase of $52.5 million of preferred stock in late March.|
|(d)||The tax effect was calculated using the company’s marginal rate of 23.2%, excluding the mark-to-market adjustment on the Series B Preferred stock option valuation, which was not tax deductible.|
The non-GAAP adjusted results shown above and within this document, which exclude Special charges, 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 charges 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 analyze trends.
Consolidated revenues decreased $51.7 million, or 11.5%, for the first quarter of 2019. Excluding the impact of refranchising 62 company-owned restaurants in North America and the company-owned restaurants and a quality control center in China during 2018, consolidated revenues decreased $36.4 million, or 8.1%, for the first quarter of 2019, primarily due to the following:
- Negative 9.0% comparable sales for domestic company-owned restaurants and negative 6.1% for North America franchised restaurants, which resulted in lower company-owned restaurant revenues, royalties and North American commissary sales.
- Short-term royalty reductions of approximately $4.9 million which are part of our franchise assistance program and are included in the previously mentioned Special charges.
- International revenues, excluding refranchising, were approximately $0.5 million lower as unfavorable foreign exchange rates of approximately $1.7 million were substantially offset by higher royalties from increased equivalent units.
The company reported a consolidated loss before income taxes of $0.8 million for the first quarter of 2019, compared to consolidated income before income taxes of $23.1 million for the first quarter of 2018, a decrease of $23.9 million. Excluding the impact of the previously mentioned Special charges, consolidated income before income taxes was $15.1 million, or a decrease of $8.0 million from the first quarter of 2018. Significant changes in income before income taxes are as follows:
- Domestic Company-owned restaurants operating margin decreased $3.9 million, or a decrease of 0.6% as a percentage of related revenues, primarily due to lower comparable sales, partially offset by favorable commodities costs and favorable workers’ compensation and non-owned automobile insurance costs.
- North America franchise royalties and fees decreased $7.3 million, or 29.3%, compared to the first quarter of 2018, primarily due to the $4.9 million of short-term royalty reductions granted to the entire North America system as part of the franchise assistance program, which is included in the Special charges. Excluding the short-term royalty relief, royalties were $2.4 million lower than the corresponding quarter in 2018 due to negative comparable sales of 6.1% and an increase in royalty waivers provided to certain franchisees.
- North America commissary operating margin increased $0.3 million, or 0.7% as a percentage of related revenues, as the lower North America sales volumes were offset by favorable commodities costs and reductions in certain operating costs, including labor.
- International operating margin increased $0.3 million primarily due to higher royalties from increased equivalent units, partially offset by the unfavorable impact of foreign exchange rates.
- General and administrative (“G&A”) costs increased $11.1 million, or 27.9%, primarily due to costs associated with the Special charges of approximately $10.7 million, including $5.1 million of legal and advisory fees and the one-time mark- to-market adjustment for the Series B Preferred stock option valuation of $5.6 million, as previously noted.
- Net interest expense increased $1.2 million primarily due to an increase in interest rates as compared to the first quarter of 2018 on lower outstanding debt. Total debt outstanding was $380.0 million as of March 31, 2019, which was a reduction of $245.0 million from December 30, 2018. The decrease in outstanding debt was funded primarily from the proceeds of the issuance of Series B Preferred Stock to Starboard.
Operating margin (loss) is not a measure defined by GAAP and should not be considered in isolation, or as an alternative to evaluation of the company’s financial performance. In addition to an evaluation of GAAP consolidated (loss) income before income taxes, we believe the presentation of operating margin (loss) is beneficial as it represents an additional measure used by the company to further evaluate operating efficiency and performance of the various business units. Additionally, operating margin (loss) discussion may be helpful for comparison within the industry. The operating margin (loss) results detailed herein can be calculated by business unit based on the specific revenue and operating expense line items on the face of the Consolidated Statements of Operations. Consolidated (loss) income before income taxes reported includes G&A expenses, depreciation and amortization, refranchising and impairment gains/(losses), net, and net interest expense that have been excluded from this operating margin (loss) calculation.
We expect our annual tax rate to be in the range of 21% to 24%. As previously noted, there is not a tax deduction for the $5.9 million expense associated with the one-time mark-to-market valuation of the Series B Preferred stock option.
Diluted loss per share was $0.12 for the first quarter of 2019, compared to diluted earnings per share of $0.52 for the prior year period. Adjusted diluted earnings per share was $0.31 for the first quarter of 2019, as compared to $0.52 for the first quarter of 2018.
Global Restaurant and Comparable Sales Information
|Global restaurant sales (decline) / growth (a)||(5.5||%)||(1.3||%)|
Global restaurant sales (decline) /growth, excluding the impact of foreign currency (a)
|Comparable sales (decline) / growth (b)|
|Domestic company-owned restaurants||(9.0||%)||(6.1||%)|
|North America franchised restaurants||(6.1||%)||(5.0||%)|
|System-wide North America restaurants||(6.9||%)||(5.3||%)|
|System-wide international restaurants||(0.1||%)||0.3||%|
|(a)||Includes both company-owned and franchised restaurant sales.|
|(b)||Represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. Comparable sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation.|
We believe North America, international and global restaurant and comparable sales growth information, as defined in the table above, is useful in analyzing our results since our franchisees pay royalties that are based on a percentage of franchise sales. Franchise sales also generate commissary revenue in the United States and in certain international markets. Franchise restaurant and comparable sales growth information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of franchise restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in company revenues.
Free Cash Flow
The company’s free cash flow, a non-GAAP financial measure, for the first quarter of 2019 and 2018 were as follows (in thousands):
|Mar. 31,||Apr. 1,|
|Net cash provided by operating activities (a)||$||13,813||$||36,731|
|Purchases of property and equipment||(8,658||)||(9,320||)|
|Dividends paid to preferred shareholders||(2,040||)||-|
|Free cash flow||$||3,115||$||27,411|
|(a)||The decrease of $22.9 million was primarily due to lower net income and unfavorable changes in working capital items, including PJMF.|
|(b)||The first quarter of 2018 has been restated to include PJMF.|
Global Restaurant Unit Data
At March 31, 2019, there were 5,336 Papa John’s restaurants operating in all 50 states and in 47 international countries and territories, as follows:
|Beginning - December 30, 2018||645||2,692||3,337||1,966||5,303|
|Ending - March 31, 2019||645||2,691||3,336||2,000||5,336|
|Unit growth (decline)||-||(1||)||(1||)||34||33|
|% increase (decrease)||-||(0.0||%)||(0.0||%)||1.7||%||0.6||%|
The company has added 124 net worldwide units over the trailing four quarters ended March 31, 2019. Our development pipeline as of March 31, 2019 included approximately 1,015 restaurants (115 units in North America and 900 units internationally), the majority of which are scheduled to open over the next six years.
The company paid cash dividends of $9.1 million in the first quarter of 2019 and declared second quarter cash dividends of approximately $10.6 million on April 30, 2019 to be paid to common and preferred shareholders. The dividends are as follows (in thousands):
|Common stock dividends ($0.225 per share)||$||7,060||$||7,190|
|Common stock dividends to preferred shareholders ($0.225 per share) (a)||900||1,140|
|Preferred dividends (3.6% of the investment per annum)||1,140||2,270|
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 Stock holders are guaranteed quarterly preferred dividends and common stock dividends on an as-converted to common stock basis.
Consolidation of the Papa John’s Marketing Fund, Inc.
Papa John’s domestic restaurants, both Company-owned and franchised, participate in PJMF, a nonstock corporation that is designed to break even as it spends all annual contributions received from the system. PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States for the purpose of designing and administering advertising and promotional programs. PJMF is a variable interest entity (“VIE”) that funds its operations with ongoing financial support and contributions from the domestic restaurants, of which approximately 80% are franchised.
During the first quarter of 2019, we reassessed the governance structure and the operating procedures of PJMF and determined that the company has the power to control certain significant activities of PJMF, based on the applicable accounting guidance. Prior to 2019, the Company did not consolidate PJMF. The company has concluded the previous accounting policy to not consolidate PJMF was an immaterial error and has determined that PJMF should be consolidated. The company has corrected this immaterial error by restating the comparative 2018 condensed consolidated financial statements. The revenues and expenses of PJMF are included in Other revenues and Other expenses, where other consolidated marketing funds are reported, in the Condensed Consolidated Statements of Operations.
The consolidation of PJMF is not expected to have a material impact on the company’s annual consolidated financial statements, including the income (loss) before income taxes as PJMF operates at or near break-even results annually. The consolidation of PJMF also did not have a material impact on the company’s 2018 financial statements.
Additional detail on the consolidation of PJMF can be found in our Form 10-Q for the three months ended March 31, 2019 filed with the SEC.
Adoption of ASC 842: Leases
On December 31, 2018, we adopted Accounting Standards Update (“ASU”) 2016-02, Topic 842, which requires companies to recognize a right-of-use asset and a lease liability on the balance sheet for contracts that meet the definition of a lease. The guidance also requires additional disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. We adopted Topic 842 prospectively using the optional transition method with no cumulative effect adjustment recorded as of December 31, 2018. The adoption resulted in a $157.0 million operating lease liability and a $154.1 million right-of-use asset as of March 31, 2019. There was no significant impact on our operating results, diluted earnings per share or debt compliance and covenant calculations from the adoption of this new accounting standard.
Additional detail of the adoption and 2019 impact of the new leasing standard can be found in our Form 10-Q for the three months ended March 31, 2019 filed with the SEC.
Other Business Matters
On February 3, 2019, the company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Starboard pursuant to which Starboard made a $200 million strategic investment in the company’s newly designated Series B convertible preferred stock, $1,000 stated value per share (the “Series B Preferred Stock”). In addition, on March 29, 2019, Starboard made an additional $50 million investment in the Series B Preferred Stock pursuant to an option that was included in the Securities Purchase Agreement. The company also issued $2.5 million of Series B Preferred stock on the same terms as Starboard to certain Papa John’s franchisees who satisfied accredited investor requirements under the federal securities laws. The initial preferred dividend rate is 3.6% per annum of the stated value, payable quarterly in arrears. The Series B Preferred Stock also participates on an as-converted basis in any regular or special dividends paid to common shareholders. If at any time, the company reduces the regular dividend paid to common shareholders, the Series B Preferred Stock dividend will remain the same as if the common stock dividend had not been reduced.
The company recorded a one-time mark-to-market adjustment of $5.9 million for the time between the grant dates and the purchase dates for both the $50 million option exercised by Starboard and the shares purchased by franchisees. As previously noted, the mark-to-market adjustment was recorded in G&A expenses for $5.6 million (Starboard) and as a reduction to North America franchise royalties and fees of $0.3 million (franchisees) within the Condensed Consolidated Statements of Operations with no associated tax benefit.
The company is reaffirming its previously issued 2019 outlook, as we expect the initiatives we are implementing will result in improved sales and operating results in the last half of the year.
|Papa John's International, Inc. and Subsidiaries|
|Condensed Consolidated Statements of Operations|
|Three Months Ended|
|March 31, 2019||April 1, 2018|
|(In thousands, except per share amounts)||(Unaudited)||(Note)|
|Domestic Company-owned restaurant sales||$||161,803||$||190,242|
|North America franchise royalties and fees||17,530||24,806|
|North America commissary||148,904||161,713|
|Costs and expenses:|
Operating costs (excluding depreciation and amortization shown separately below):
|Domestic company-owned restaurant expenses||133,053||157,574|
|North America commissary||138,557||151,681|
|General and administrative expenses||51,135||39,996|
|Depreciation and amortization||11,749||11,539|
|Total costs and expenses||392,896||422,187|
|Refranchising and impairment gains/(losses), net||-||204|
|Net interest expense||(6,276||)||(5,075||)|
|(Loss) Income before income taxes||(767||)||23,064|
|Income tax expense||831||4,978|
|Net (loss) income before attribution to noncontrolling interests||(1,598||)||18,086|
|Income attributable to noncontrolling interests||(133||)||(643||)|
|Net (loss) income attributable to the company||$||(1,731||)||$||17,443|
|Calculation of (loss) income for (loss) earnings per share:|
|Net (loss) income attributable to the Company||$||(1,731||)||$||17,443|
|Preferred stock dividends||(2,070||)||-|
|Net income attributable to participating securities||-||(75||)|
|Net (loss) income attributable to common shareholders||$||(3,801||)||$||17,368|
|Basic (loss) earnings per common share||$||(0.12||)||$||0.52|
|Diluted (loss) earnings per common share||$||(0.12||)||$||0.52|
|Basic weighted average common shares outstanding||31,554||33,279|
|Diluted weighted average common shares outstanding||31,554||33,552|
|Dividends declared per common share||$||0.225||$||0.225|
|Note: The Condensed Consolidated Statement of Operations is unaudited and has been restated to reflect the consolidation of Papa John's Marketing Fund, Inc.|
|Papa John's International, Inc. and Subsidiaries|
|Condensed Consolidated Balance Sheets|
|March 31,||December 30,|
|Cash and cash equivalents||$||29,273||$||33,258|
|Accounts receivable, net||80,748||78,118|
|Notes receivable, net||5,983||5,498|
|Income tax receivable||5,431||16,146|
|Prepaid expenses and other current assets||41,070||36,054|
|Assets held for sale||10,765||-|
|Total current assets||199,414||196,277|
|Property and equipment, net||217,437||226,894|
|Notes receivable, less current portion, net||23,607||23,259|
|Deferred income taxes, net||1,244||1,137|
|Liabilities and stockholders' equity (deficit)|
|Income and other taxes payable||7,336||6,590|
|Accrued expenses and other current liabilities||120,975||129,167|
|Deferred revenue current||2,516||2,598|
|Current lease liabilities||22,546||-|
|Current portion of long-term debt||29,982||20,009|
|Total current liabilities||218,569||185,470|
|Long-term lease liabilities||130,391||-|
|Long-term debt, less current portion, net||346,433||601,126|
|Deferred income taxes, net||5,835||7,852|
|Other long-term liabilities||75,887||79,324|
|Series B Convertible Preferred Stock||251,303||-|
|Redeemable noncontrolling interests||5,346||5,464|
|Total stockholders' (deficit)||(313,258||)||(304,013||)|
|Total liabilities, redeemable noncontrolling interests, Series B stock and stockholders' (deficit)||$||739,068||$||595,897|
|Note: The Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements, restated to reflect the consolidation of Papa John's Marketing Fund, Inc., but does not include all information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements.|
|Papa John's International, Inc. and Subsidiaries|
|Condensed Consolidated Statements of Cash Flows|
|(In thousands)||March 31, 2019||April 1, 2018|
|Net (loss) income before attribution to noncontrolling interests||$||(1,598||)||$||18,086|
Adjustments to reconcile net income to net cash provided by operating activities:
|Provision (credit) for uncollectible accounts and notes receivable||(50||)||1,539|
|Depreciation and amortization||11,749||11,539|
|Deferred income taxes||(1,309||)||(2,004||)|
|Preferred stock option mark-to-market adjustment||5,914||-|
|Stock-based compensation expense||3,731||2,475|
|Gain on refranchising||-||(204||)|
|Changes in operating assets and liabilities, net of acquisitions:|
|Income tax receivable||10,715||3,899|
|Other current assets||(13,855||)||(1,264||)|
|Other assets and liabilities||(3,258||)||475|
|Income and other taxes payable||746||(466||)|
|Accrued expenses and other current liabilities||(11,003||)||(3,759||)|
|Net cash provided by operating activities||13,813||36,731|
|Purchases of property and equipment||(8,658||)||(9,320||)|
|Repayments of loans issued||925||1,636|
|Proceeds from divestitures of restaurants||-||3,690|
|Net cash used in investing activities||(8,263||)||(4,443||)|
|Proceeds from issuance of preferred stock||252,530||-|
|Repayments of term loan||(5,000||)||(5,000||)|
|Net proceeds (repayments) of revolving credit facilities||(240,026||)||140,308|
|Dividends paid to common stockholders||(7,125||)||(7,565||)|
|Dividends paid to preferred stockholders||(2,040||)||-|
|Issuance costs associated with preferred stock||(7,179||)||-|
|Tax payments for equity award issuances||(869||)||(1,342||)|
|Proceeds from exercise of stock options||51||1,770|
|Acquisition of Company common stock||-||(141,736||)|
|Distributions to noncontrolling interest holders||(19||)||(432||)|
|Net cash used in financing activities||(9,627||)||(13,814||)|
|Effect of exchange rate changes on cash and cash equivalents||92||119|
|Change in cash and cash equivalents||(3,985||)||18,593|
|Cash and cash equivalents at beginning of period||33,258||27,891|
|Cash and cash equivalents at end of period||$||29,273||$||46,484|
|Note: The Condensed Consolidated Statement of Cash Flows is unaudited and has been restated to reflect the consolidation of Papa John's Marketing Fund, Inc.|
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