Papa Johnís Results

Papa Johnís Announces Second Quarter 2019 Results and Updates 2019 Outlook

Papa John’s International, Inc. (NASDAQ: PZZA) yesterday announced financial results for the three and six months ended June 30, 2019.

Highlights

  • Second quarter 2019 earnings per diluted share of $0.15
  • Excluding Special items, adjusted earnings per diluted share of $0.28 compared to $0.48 for the second quarter of 2018
  • Second quarter system-wide North America comparable sales decrease of 5.7%
  • Second quarter international comparable sales increase of 0.3%; international franchise sales increase of 9.6%, excluding the impact of foreign currency
  • 2019 outlook updated for investments in marketing and support for the domestic franchise system; diluted EPS outlook of ($0.40) to ($0.10) and no change to adjusted diluted EPS of $1.00 to $1.20

Steve Ritchie, President and CEO of Papa John’s, said, “Papa John’s made strong progress in the key pillars of its strategy in the second quarter, recording another sequential improvement in comparable sales. In addition to adding a highly experienced chief restaurant operations officer, we announced a significant, multi-quarter investment in the brand and our franchise system from Starboard’s investment earlier this year. The table is now set as we begin rolling out our new marketing campaigns and menu items in the second half of the year.”

Global restaurant and comparable sales information and operating highlights for the three and six months ended June 30, 2019, compared to the three and six months ended July 1, 2018 are as follows:

Global Restaurant and Comparable Sales Information

 

Three Months Ended

Six Months Ended

 

June 30,

2019

July 1,

2018

June 30,

2019

July 1,

2018

   
  Global restaurant sales (decline) / growth (a)

(3.8

%)

(2.3

%)

(4.7

%)

(1.8

%)

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

(2.6

%)

2.3

%

(3.2

%)

0.6

%

   
  Comparable sales (decline) / growth (b)
  Domestic company-owned restaurants

(6.8

%)

(7.2

%)

(7.9

%)

(6.7

%)

  North America franchised restaurants

(5.3

%)

(5.7

%)

(5.7

%)

(5.3

%)

  System-wide North America restaurants

(5.7

%)

(6.1

%)

(6.3

%)

(5.7

%)

   
  System-wide international restaurants

0.3

%

(0.8

%)

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 and marketing fund contributions 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.

Operating Highlights

 

Three Months Ended

 

Six Months Ended

  In thousands, except per share amounts

 

June 30,

2019

 

July 1,

2018 (a)

Decrease %

 

 

 

June 30,

2019

 

July 1,

2018 (a)

Decrease %

 

     
  Total revenue

$

399,623

$

429,952

(7.1

%)

 

$

798,028

$

880,074

(9.3

%)

  Income before income taxes

 

9,959

 

19,113

(47.9

%)

 

 

9,192

 

42,177

(78.2

%)

  Net income

 

8,354

 

11,199

(25.4

%)

 

 

6,623

 

28,642

(76.9

%)

  Diluted earnings per share

 

0.15

 

0.35

(57.1

%)

 

 

0.03

 

0.87

(96.6

%)

  Adjusted diluted earnings per share (b)

 

0.28

 

0.48

(41.7

%)

 

 

0.59

 

0.99

(40.4

%)

 

(a)

Our financial results for 2018 have been restated to reflect the correction of an immaterial error to consolidate the operations of the Papa John’s Marketing Fund (“PJMF”). 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 results annually. Additional detail on the consolidation of PJMF can be found in our Quarterly Report on Form 10-Q for the three and six months ended June 30, 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, 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.

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

 

 

July 1,

 

 

 

June 30,

 

 

 

July 1,

 

  (In thousands, except per share amounts)

 

2019

 

 

 

2018 (1)

 

 

 

2019

 

 

 

2018 (1)

 

   
  GAAP income before income taxes

$

9,959

 

$

19,113

 

$

9,192

 

$

42,177

 

  Special items:
  Special charges (2)

 

5,362

 

 

-

 

 

21,216

 

 

-

 

  Refranchising (gains) losses, net (3)

 

(163

)

 

2,122

 

 

(163

)

 

1,918

 

  Adjusted income before income taxes

$

15,158

 

$

21,235

 

$

30,245

 

$

44,095

 

   
  GAAP net income attributable to common shareholders

$

4,868

 

$

11,127

 

$

1,067

 

$

28,495

 

  Special items, net of income taxes:
  Special charges (2)

 

4,209

 

 

-

 

 

17,757

 

 

-

 

  Refranchising (gains) losses, net (3)

 

(125

)

 

1,647

 

 

(125

)

 

1,488

 

  Tax impact of China refranchising (3)

 

-

 

 

2,435

 

 

-

 

 

2,435

 

  Adjusted net income attributable to common shareholders

$

8,952

 

$

15,209

 

$

18,699

 

$

32,418

 

   
  GAAP diluted earnings per share

$

0.15

 

$

0.35

 

$

0.03

 

$

0.87

 

  Special items:
  Special charges (2)

 

0.13

 

 

-

 

 

0.56

 

 

-

 

  Refranchising (gains) losses, net (3)

 

-

 

 

0.05

 

 

-

 

 

0.05

 

  Tax impact of China refranchising (3)

 

-

 

 

0.08

 

 

-

 

 

0.07

 

  Adjusted diluted earnings per share

$

0.28

 

$

0.48

 

$

0.59

 

$

0.99

 

 

(1)

The three and six months ended July 1, 2018 have been restated to reflect the correction of an immaterial error to consolidate the operations of PJMF.

 

(2)

The company incurred $5.4 million and $21.2 million of special costs (defined as “Special charges”) for the three and six months ended June 30, 2019, respectively, including the following (in thousands, except per share amounts):

 

Three Months Ended

 

Six Months Ended

 

 

Special

Charges

 

Special

Charges,

Net of Tax (e)

 

Diluted

Loss per

Share

 

 

Special

Charges

 

Special

Charges,

Net of Tax (e)

 

Diluted

Loss per

Share

   
  Royalty relief (a)

$

2,466

$

1,938

$

0.06

$

7,339

$

5,680

$

0.18

  Marketing fund investments (b)

 

2,500

 

1,935

 

0.06

 

2,500

 

1,935

 

0.06

  Legal and advisory fees (c)

 

396

 

336

 

0.01

 

5,463

 

4,228

 

0.13

  Mark to market adjustment on option valuation (d)

 

-

 

-

 

-

 

5,914

 

5,914

 

0.19

  Total Special charges

$

5,362

$

4,209

$

0.13

$

21,216

$

17,757

$

0.56

 

(a)

 Represents financial assistance provided to the entire 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 Starboard’s strategic investment in the company by affiliates of Starboard.

(d)

 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.

(e)

The tax effect was calculated using the company’s full year marginal rate of 22.6%, excluding the mark-to-market adjustment on the Series B preferred stock option valuation, which was not tax deductible.

 

(3)

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.

 

Consolidated revenues decreased $30.3 million, or 7.1%, for the second quarter of 2019 and decreased $82.0 million, or 9.3%, for the six months ended June 30, 2019. Excluding the impact of refranchising 62 company-owned restaurants in North America and the China operations in 2018 and a quality control center in Mexico in 2019, consolidated revenues decreased $16.8 million, or 4.0%, for the second quarter of 2019 and decreased $56.2 million, or 6.6% for the six months ended June 30, 2019, primarily due to the following:

  • Negative comparable sales for North America restaurants for the three and six months ended June 30, 2019 that resulted in lower company-owned restaurant revenues, royalties and North America commissary sales.
  • Royalty reductions of approximately $2.5 million and $7.3 million for the three- and six-month periods ended June 30, 2019, respectively, which are part of our franchise assistance program and are included in the previously discussed Special charges.
  • International revenues, excluding the impact of refranchising, were approximately $0.5 million and $0.1 million higher for the three-and six-month periods ended June 30, 2019, as higher royalties from increased equivalent units were substantially offset by unfavorable foreign exchange rates of approximately $1.3 million and $3.0 million for the three- and six-month periods, respectively.

Consolidated income before income taxes of $10.0 million for the second quarter of 2019 decreased $9.2 million, or 47.9%, compared to the second quarter of 2018. Excluding the impact of the previously mentioned Special items, consolidated income before income taxes was $15.2 million, or a decrease of $6.1 million from the second quarter of 2018. Significant changes in income before income taxes are as follows:

  • Domestic company-owned restaurants operating margin decreased $1.8 million primarily due to negative comparable sales of 6.8%, somewhat offset by the favorable impact of current year promotions with lower food costs and favorable non-owned automobile insurance costs. This contributed to the improvement in operating margin of 0.9% as a percentage of related revenues.
  • North America franchise royalties and fees decreased $4.2 million, or 17.4%, compared to the second quarter of 2018, primarily due to $2.5 million of royalty relief as part of the North America franchise assistance program, which is included in the Special charges. Excluding the Special charges, royalties were $1.7 million lower than the second quarter of 2018 due to negative comparable sales of 5.3% and an increase in targeted royalty waivers.
  • North America commissary operating margin increased $0.2 million, or 0.4% as a percentage of related revenues, as the impact of the lower North America sales volumes was offset by favorable labor costs.
  • International operating margin approximated the prior year as the higher royalties attributable to increased units was offset by the unfavorable impact of foreign exchange rates. The international operating margin of 42.5%, as a percentage of related revenues, improved 5.3% with the refranchising of the China company-owned operations.
  • Other operating margin increased $2.3 million, or 5.3% as a percentage of related revenues, primarily due to the timing of marketing spending and higher online revenues.
  • General and administrative (“G&A”) costs increased $9.7 million, or 25.0%, primarily due to incremental national marketing fund investments of approximately $2.5 million, as reflected in the Special charges, a shift in the timing of our operators’ conference from the third quarter in 2018 to the second quarter in 2019, higher professional and consulting fees and higher management incentive costs.
  • The second quarter of 2018 included refranchising losses of $2.1 million primarily related to the refranchising of our China operations.
  • Net interest expense decreased $1.5 million primarily due to lower outstanding debt, partially offset by an increase in interest rates. Total debt outstanding was $384.3 million as of June 30, 2019, including $11.2 million associated with PJMF. Outstanding debt decreased $240.7 million from December 30, 2018, primarily due to the use of proceeds from the issuance of Series B preferred stock to Starboard to repay debt.

For the six months ended June 30, 2019, consolidated income before income taxes was $9.2 million, a decrease of $33.0 million, or 78.2%, compared to the six months ended July 1, 2018. Excluding the impact of the previously mentioned Special charges, consolidated income before income taxes was $30.2 million, or a decrease of $13.8 million, compared to the six months ended July 1, 2018. These decreases were primarily due to the same reasons as the three-month period.

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 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 Condensed Consolidated Statements of Operations. Consolidated income before income taxes reported includes G&A expenses, depreciation and amortization, refranchising gains (losses), net and net interest expense that have been excluded from this operating margin (loss) calculation.

The effective income tax rate was 12.9% for the quarter ended June 30, 2019 in comparison to 36.8% for the quarter ended July 1, 2018. The 2018 higher tax rate includes the impact of refranchising our China operations. The effective income tax rate for the six months ended June 30, 2019 was 23.0%. The effective income tax rate is higher for the six months ended June 30, 2019 due in part to the $5.9 million mark-to-market fair value adjustment of the options to purchase Series B preferred stock, which was not tax deductible.

Diluted earnings per share was $0.15 for the second quarter of 2019, compared to $0.35 for the prior year period. Excluding Special items, adjusted diluted earnings per share was $0.28 for the second quarter of 2019, as compared to $0.48 for the second quarter of 2018. For the six months ended June 30, 2019, diluted earnings per share was $0.03, compared to diluted earnings per share of $0.87 for the prior year period. Excluding Special items, adjusted diluted earnings per share was $0.59 for the six months ended June 30, 2019, as compared to $0.99 for the prior year period.

Free Cash Flow

The company’s free cash flow, a non-GAAP financial measure, for the first six months of 2019 and 2018 were as follows (in thousands):

  Six Months Ended
 

June 30,

July 1,

 

2019

2018 (b)

   
  Net cash provided by operating activities (a)

$

32,175

 

$

73,427

 

  Purchases of property and equipment

 

(17,836

)

 

(21,562

)

  Dividends paid to preferred shareholders

 

(5,470

)

 

-

 

  Free cash flow

$

8,869

 

$

51,865

 

 

(a)

The decrease of $41.3 million was primarily due to lower net income and unfavorable changes in working capital items, including the impact of PJMF.

(b)

 The six-month period ended July 1, 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 SEC for additional information concerning our operating results for the three and six months ended June 30, 2019 and cash flow for the six months ended June 30, 2019.

Global Restaurant Unit Data

At June 30, 2019, there were 5,345 Papa John’s restaurants operating in all 50 states and in 47 international countries and territories, as follows:

Domestic

Company-

owned

Franchised

North

America

Total

North

America

International

System-wide

Second Quarter
Beginning - March 31, 2019

645

 

2,691

 

3,336

 

2,000

 

5,336

 

Opened

1

 

17

 

18

 

34

 

52

 

Closed

(2

)

(33

)

(35

)

(8

)

(43

)

Acquired

-

 

1

 

1

 

-

 

1

 

Sold

(1

)

-

 

(1

)

-

 

(1

)

Ending - June 30, 2019

643

 

2,676

 

3,319

 

2,026

 

5,345

 

 
Year-to-date
Beginning - December 30, 2018

645

 

2,692

 

3,337

 

1,966

 

5,303

 

Opened

2

 

43

 

45

 

83

 

128

 

Closed

(2

)

(61

)

(63

)

(23

)

(86

)

Acquired

-

 

2

 

2

 

-

 

2

 

Sold

(2

)

-

 

(2

)

-

 

(2

)

Ending - June 30, 2019

643

 

2,676

 

3,319

 

2,026

 

5,345

 

 
Unit growth (decline)

(2

)

(16

)

(18

)

60

 

42

 

 
% increase (decrease)

(0.3%

)

(0.6%

)

(0.5%

)

3.1%

0.8%

 

The company has added 98 net worldwide units over the trailing four quarters ended June 30, 2019. Our development pipeline as of June 30, 2019 included approximately 1,080 restaurants (90 units in North America and 990 units internationally), the majority of which are scheduled to open over the next six years.

Cash Dividend

The company paid cash dividends of $10.5 million in the second quarter of 2019 and declared third quarter cash dividends of approximately $10.5 million on July 18, 2019 to be paid to common and preferred shareholders. The dividends are as follows (in thousands):

 

Second

Quarter

2019

Third

Quarter

2019

  Common stock dividends ($0.225 per share)

$

7,070

$

7,100

  Common stock dividends to preferred shareholders ($0.225 per share) (a)

 

1,140

 

1,140

  Preferred dividends (3.6% of the investment per annum)

 

2,290

 

2,270

  Total dividends

$

10,500

$

10,510

   
 (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

On June 19, 2019, we announced an investment of $80 million in marketing and royalty relief for our U.S. franchise system beginning in the third quarter of 2019 through the fourth quarter of 2020. The marketing investment includes advertising initiatives with our new ambassador, Shaquille O’Neal. Additionally, we will continue financial assistance to our traditional domestic franchisees through 2020 in the form of lower royalties and related incentives. We expect to incur approximately 50% of the $80 million investment in 2019.

We are updating our GAAP diluted earnings per share (EPS) outlook to reflect these investments and to narrow our North America comparable sales and net global new unit growth outlook as detailed below.

Updated Outlook Previous Outlook
 
GAAP diluted earnings (loss) per share

($0.40) to ($0.10)

 

$0.00 to $0.50

Adjusted diluted earnings per share*

$1.00 to $1.20

 

$1.00 to $1.20

Special Charges

$50 to $60 million

 

$30 to $50 million

North America comparable sales

(1.0%) to (4.0%)

 

(1.0%) to (5.0%)

International comparable sales

0.0% to 3.0%

 

0.0% to 3.0%

Net global new unit growth

100 to 150

 

75 to 150

Block cheese price

low $1.70's

 

low to mid $1.60'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 $1.20 to $1.40 for 2019. We believe excluding the Special items is meaningful to our financial statement users as it presents our core results excluding unusual items.

 



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