Financial

Papa John’s Announces Second Quarter 2015 Results

System-wide comparable sales increases of 5.5% for North America and 6.8% for International - Regular dividend increased 25% to $0.70 from $0.56 annually

Papa John’s

Papa John’s International, Inc. (NASDAQ: PZZA) yesterday announced financial results for the three and six months ended June 28, 2015.

Highlights

  • Reported earnings per diluted share of $0.27 in the second quarter of 2015; Adjusted earnings per diluted share of $0.47 in 2015, excluding a legal settlement, or an increase of 17.5% over 2014
  • System-wide comparable sales increases of 5.5% for North America and 6.8% for International
  • Regular dividend increased 25% to $0.70 from $0.56 annually
  • Increased 2015 diluted earnings per share guidance to a range of $2.04 to $2.10, excluding a legal settlement; Increased International comparable sales guidance to a range of +6.0% to +8.0%

“We are pleased to have maintained our excellent sales momentum and completed another successful quarter,” said Papa John’s founder, chairman and CEO, John Schnatter. “Our Better Ingredients, Better Pizza promise is resonating more than ever with our loyal consumers, and should only help drive increasingly better results as we continue to differentiate ourselves by enhancing the quality of our pizza.”

Second quarter 2015 revenues were $399.0 million, a 4.8% increase from second quarter 2014 revenues of $380.9 million. Second quarter 2015 net income was $10.8 million ($18.8 million, or a 12.0% increase, excluding a net after-tax expense of $8.0 million for a legal settlement discussed below), compared to second quarter 2014 net income of $16.7 million. Second quarter 2015 diluted earnings per share were $0.27 ($0.47, or a 17.5% increase, excluding the $0.20 impact of a legal settlement discussed below), compared to second quarter 2014 diluted earnings per share of $0.40.

Revenues were $831.3 million for the six months ended June 28, 2015, a 6.3% increase from revenues of $782.2 million for the same period in 2014. Net income was $33.0 million for the first six months of 2015 ($41.0 million, or a 13.7% increase, excluding the net after-tax expense of a legal settlement discussed below), compared to $36.1 million for the same period in 2014. Diluted earnings per share were $0.82 for the first six months of 2015 ($1.02, or a 20.0% increase, excluding a legal settlement discussed below), compared to $0.85 for the same period in 2014.

Legal Settlement

In the second quarter, the Company recorded a pre-tax expense of $12.3 million for a preliminary legal settlement, subject to court approval (“Legal Settlement”). This collective and class action, Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. which included approximately 19,000 drivers, alleged delivery drivers were not reimbursed in accordance with the Fair Labor Standards Act (“FLSA”). The Company continues to deny any liability or wrongdoing in this matter.

The following table reconciles our GAAP financial results to our adjusted financial results excluding the Legal Settlement, which are non-GAAP measures, for the three and six month periods ended June 28, 2015:

             
      Three Months Ended     Six Months Ended
      June 28,     June 29,     June 28,     June 29,
(In thousands, except per share amounts)     2015     2014     2015     2014
                         
Income before income taxes, as reported     $ 17,531     $ 26,236     $ 53,967     $ 57,646
Legal Settlement expense       12,278       -       12,278       -
Income before income taxes, as adjusted     $ 29,809     $ 26,236     $ 66,245     $ 57,646
                         
Net income, as reported     $ 10,780     $ 16,748     $ 33,016     $ 36,059
Legal Settlement expense       7,986       -       7,986       -
Net income, as adjusted     $ 18,766     $ 16,748     $ 41,002     $ 36,059
                         
Diluted earnings per share, as reported     $ 0.27     $ 0.40     $ 0.82     $ 0.85
Legal Settlement expense       0.20       -       0.20       -
Diluted earnings per share, as adjusted     $ 0.47     $ 0.40     $ 1.02     $ 0.85
                                 

The non-GAAP results shown above, which exclude the Legal Settlement, 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 Legal Settlement is important for purposes of comparison to prior year results. In addition, management uses this metric to evaluate the Company’s underlying operating performance and to analyze trends.

Global Restaurant and Comparable Sales Information

             
      Three Months Ended     Six Months Ended
     

June 28,

2015

 

June 29,

2014

   

June 28,

2015

   

June 29,

2014

                         
Global restaurant sales growth (a)     6.4%     10.2%     6.9%     11.4%
                         

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

    8.8%     10.4%     9.2%     11.8%
                         
Comparable sales growth (b)                        
Domestic company-owned restaurants     7.4%     7.5%     7.7%     9.5%
North America franchised restaurants     4.8%     5.4%     5.4%     7.2%
System-wide North America restaurants     5.5%     6.0%     6.0%     7.8%
                         
System-wide international restaurants     6.8%     8.6%     7.2%     7.6%
                         
(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 $18.1 million, or 4.8%, for the second quarter of 2015 and increased $49.0 million, or 6.3%, for the six months ended June 28, 2015. The increases in revenues were primarily due to the following:

  • Domestic company-owned restaurant sales increased $16.0 million, or 9.4%, and $35.1 million, or 10.1%, for the three and six months, respectively, primarily due to increases of 7.4% and 7.7% in comparable sales.
  • North America franchise royalty revenue increased $2.1 million, or 10.0%, and $4.8 million, or 11.1%, for the three and six months, respectively, primarily due to increases of 4.8% and 5.4% in comparable sales and reduced levels of royalty incentives.
  • Domestic commissary sales decreased $1.6 million, or 1.0%, and $3.3 million, or 1.0%, for the three and six months, respectively, due to lower revenues associated with lower cheese prices, somewhat offset by increases in restaurant sales volumes. PJ Food Service pricing for cheese is based on a fixed dollar markup; when cheese prices decrease, revenues decrease with no overall impact on the related dollar margin.
  • Other sales increased approximately $800,000, or 6.1%, and $9.7 million, or 36.8%, for the three and six months, respectively. The increases were primarily due to point-of-sale system (“FOCUS”) equipment sales to franchisees.
  • International revenues increased approximately $750,000, or 2.9%, and $2.6 million, or 5.2%, for the three and six months, respectively, primarily due to increases in the number of restaurants and increases in comparable sales of 6.8% and 7.2%, calculated on a constant dollar basis. This was somewhat offset by the negative impact of foreign currency exchange rates.

Operating Highlights

The tables below adjust income before income taxes on a reporting segment basis to exclude the Legal Settlement:

       
      Three Months Ended
      As Reported     Legal     Adjusted           Adjusted
      June 28,     Settlement     June 28,     June 29,     Increase
(In thousands)     2015     expense     2015     2014     (Decrease)
                               
Domestic company-owned restaurants     $ 14,617       $ -     $ 14,617       $ 10,651       $ 3,966  
Domestic commissaries       10,702         -       10,702         6,846         3,856  
North America franchising       20,054         -       20,054         17,882         2,172  
International       2,279         -       2,279         1,903         376  
All others       (117 )       -       (117 )       (442 )       325  
Unallocated corporate expenses       (29,949 )       12,278       (17,671 )       (10,702 )       (6,969 )
Elimination of intersegment losses (profits)       (55 )       -       (55 )       98         (153 )
Total income before income taxes*     $ 17,531       $ 12,278     $ 29,809       $ 26,236       $ 3,573  
                                                 

 

                         
      Six Months Ended
      As Reported     Legal     Adjusted           Adjusted
      June 28,     Settlement     June 28,     June 29,     Increase
(In thousands)     2015     expense     2015     2014     (Decrease)
                               
Domestic company-owned restaurants     $ 33,097       $ -     $ 33,097       $ 23,936       $ 9,161  
Domestic commissaries       22,502         -       22,502         17,277         5,225  
North America franchising       42,373         -       42,373         37,366         5,007  
International       3,623         -       3,623         2,635         988  
All others       326         -       326         148         178  
Unallocated corporate expenses       (47,154 )       12,278       (34,876 )       (23,163 )       (11,713 )
Elimination of intersegment losses (profits)       (800 )       -       (800 )       (553 )       (247 )
Total income before income taxes*     $ 53,967       $ 12,278     $ 66,245       $ 57,646       $ 8,599  
                               

*Income before income taxes was reduced by FOCUS costs in all periods presented. The 2015 costs were $1.2 million and $2.8 million higher for the three- and six-month periods, respectively. Diluted earnings per share were reduced $0.03 and $0.04 over the prior year three- and six-month periods, respectively. For additional information, see our Quarterly Report on Form 10-Q for the three and six months ended June 28, 2015.

Second quarter 2015 income before income taxes increased approximately $3.6 million, or 13.6%, excluding the $12.3 million Legal Settlement. This increase was primarily due to the following:

  • Domestic company-owned restaurants increased approximately $4.0 million primarily due to higher profits from the 7.4% increase in comparable sales and from lower commodity costs. The market price for cheese averaged $1.63 per pound for the second quarter of 2015, compared to $2.13 per pound in the prior year.
  • Domestic commissaries income increased approximately $3.9 million primarily due to a higher margin and incremental profits from higher restaurant volumes.
  • North America franchising increased approximately $2.2 million primarily due to higher royalties attributable to the 4.8% comparable sales increase and reduced levels of royalty incentives.
  • International income increased approximately $400,000 primarily due to the previously mentioned increase in units and comparable sales of 6.8%, which resulted in both higher royalties and an increase in United Kingdom profits. This was somewhat offset by the impact of negative foreign currency exchange rates.

These increases were partially offset by higher unallocated corporate expenses of approximately $7.0 million primarily due to higher management incentive compensation, tied to higher projected annual operating results, higher salaries and benefits, including health insurance, and increased legal and interest costs. The second quarter of 2015 also had higher expenses due to a shift in the timing of the annual operators’ conference (shift in timing from the first quarter in 2014 to the second quarter in 2015).

Income before income taxes increased $8.6 million, or 14.9%, for the six-month period ended June 28, 2015, excluding the $12.3 million Legal Settlement. This increase was primarily due to same reasons noted for the quarter.

The effective income tax rates were 28.9% and 32.0% for the three and six months ended June 28, 2015, representing decreases of 3.1% and 1.4% for the three- and six-month periods, respectively. The Legal Settlement reduced our income tax rates by approximately 2.5% and 0.5% for the three- and six-month periods, respectively. The rates for 2015 also include a higher benefit from various tax deductions and credits.

The company’s free cash flow, a non-GAAP financial measure, for the first six months of 2015 and 2014, was as follows (in thousands):

             
            Six Months Ended
            June 28,           June 29,
            2015           2014
                         
Net cash provided by operating activities (a)           $ 77,982             $ 54,565  
Purchases of property and equipment (b)             (16,501 )             (26,239 )
Free cash flow           $ 61,481             $ 28,326  
                                 
(a) The increase of approximately $23.4 million was primarily due to higher operating income and favorable changes in inventory and other working capital items. The prior year included higher inventory levels of equipment to support the rollout of FOCUS to our domestic franchised restaurants. The Legal Settlement does not currently impact cash provided by operating activities as it has not been paid. We expect the majority of the settlement payments to be made in the next twelve months.
(b) The decrease of approximately $9.7 million is primarily due to the prior year including FOCUS equipment costs for domestic Company-owned restaurants and higher levels of 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 28, 2015.

Global Restaurant Unit Data

At June 28, 2015, there were 4,734 Papa John’s restaurants operating in all 50 states and in 38 international countries and territories, as follows:

                               
     

Domestic

Company

-owned

   

Franchised

North

America

   

Total North

America

    International     System-wide

Second Quarter

                             
Beginning - March 29, 2015     691       2,650       3,341       1,358       4,699  
Opened     1       19       20       42       62  
Closed     -       (15 )     (15 )     (12 )     (27 )
Acquired (divested)     1       (1 )     -       -       -  
Ending - June 28, 2015     693       2,653       3,346       1,388       4,734  
                               

Year-to-date

                             
Beginning - December 28, 2014     686       2,654       3,340       1,323       4,663  
Opened     4       37       41       92       133  
Closed     -       (35 )     (35 )     (27 )     (62 )
Acquired (divested)     3       (3 )     -       -       -  
Ending - June 28, 2015     693       2,653       3,346       1,388       4,734  
                               
Unit growth (decline)     7       (1 )     6       65       71  
                               
% increase (decrease)     1.0 %     (0.0 %)     0.2 %     4.9 %     1.5 %
                               

Our development pipeline as of June 28, 2015 included approximately 1,250 restaurants (250 units in North America and 1,000 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 28, 2015 and subsequent repurchases through July 28, 2015 (in thousands):

                         
Period          

Number

of Shares

          Cost
                         
Three Months Ended June 28, 2015           416           $         27,318
                         
Six Months Ended June 28, 2015           818           $         52,083
                         
June 29, 2015 through July 28, 2015          

110

          $        

8,381

                                   

There were 40.2 million and 40.4 million diluted weighted average shares outstanding for the three and six months ended June 28, 2015, representing decreases of 4.2% and 4.6%, 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 28, 2015 due to the reduction in shares outstanding, primarily resulting from the share repurchase program. Approximately 39.6 million actual shares of the company’s common stock were outstanding as of June 28, 2015.

Cash Dividend

We paid a cash dividend of approximately $5.6 million ($0.14 per common share) during the second quarter of 2015. Subsequent to the second quarter, on July 30, 2015, our Board of Directors approved a 25% increase in the Company’s dividend rate per common share, from $0.56 on an annual basis to $0.70 on an annual basis, and declared a third quarter dividend of $0.175 per common share (approximately $6.9 million based on current shareholders of record). The dividend will be paid on August 21, 2015 to shareholders of record as of the close of business on August 11, 2015. 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.

2015 Guidance Update

The company provided the following 2015 guidance updates:

                     
          Updated Guidance         Previous Guidance
                     
Diluted earnings per share*         $2.04 to $2.10         $2.00 to $2.08
                     
International comparable sales         +6.0% to +8.0%         +5.0% to +7.0%
                     
Income tax rate         30.0% to 31.5%         31.5% to 33.0%
                     

*Excludes the $0.20 impact of the Legal Settlement.

               
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
   
 
Three Months Ended Six Months Ended
June 28, 2015     June 29, 2014 June 28, 2015     June 29, 2014
(In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
North America:
Domestic company-owned restaurant sales $ 185,962 $ 170,000 $ 383,249 $ 348,193
Franchise royalties 23,081 20,983 48,440 43,597
Franchise and development fees 195 132 460 276
Domestic commissary sales 149,007 150,581 311,340 314,628
Other sales 14,420 13,595 36,034 26,345
International:
Royalties and franchise and development fees 6,641 6,317 13,139 12,096
Restaurant and commissary sales   19,685         19,256     38,613         37,106  
Total revenues 398,991 380,864 831,275 782,241
 
Costs and expenses:
Domestic company-owned restaurant expenses:
Cost of sales 43,289 42,030 90,793 87,186
Salaries and benefits 51,502 45,805 105,160 93,388
Advertising and related costs 16,492 15,354 33,262 31,610
Occupancy costs and other restaurant operating expenses   36,073         34,666     73,173         69,264  
Total domestic company-owned restaurant expenses 147,356 137,855 302,388 281,448
 
Domestic commissary expenses:
Cost of sales 113,777 118,470 238,903 247,394
Salaries and benefits and other commissary operating expenses   23,781         23,062     48,391         45,941  
Total domestic commissary expenses 137,558 141,532 287,294 293,335
 
Other operating expenses 13,648 13,221 34,251 24,652
International restaurant and commissary expenses 16,250 15,876 31,728 30,761
General and administrative expenses 42,043 33,562 83,976 70,528
Other general expenses 1,004 1,964 2,820 3,497
Depreciation and amortization   10,136         9,855     20,177         19,019  
Total costs and expenses   367,995         353,865     762,634         723,240  
 
Operating income 30,996 26,999 68,641 59,001
Legal settlement expense (12,278 ) - (12,278 ) -
Net interest (expense) income   (1,187 )       (763 )   (2,396 )       (1,355 )
Income before income taxes 17,531 26,236 53,967 57,646
Income tax expense   5,063         8,397     17,260         19,266  
Net income before attribution to noncontrolling interests 12,468 17,839 36,707 38,380
Income attributable to noncontrolling interests   (1,688 )       (1,091 )   (3,691 )       (2,321 )
Net income attributable to the company $ 10,780       $ 16,748   $ 33,016       $ 36,059  
 
Calculation of income for earnings per share:
Net income attributable to the company $ 10,780 $ 16,748 $ 33,016 $ 36,059
Decrease (increase) in noncontrolling interest redemption value 73 (31 ) 143 (39 )
Net income attributable to participating securities   (50 )       (81 )   (150 )       (218 )
Net income attributable to common shareholders $ 10,803       $ 16,636   $ 33,009       $ 35,802  
 
Basic earnings per common share $ 0.27       $ 0.40   $ 0.83       $ 0.86  
Diluted earnings per common share $ 0.27       $ 0.40   $ 0.82       $ 0.85  
 
Basic weighted average common shares outstanding   39,692         41,225     39,764         41,501  
Diluted weighted average common shares outstanding   40,217         41,970     40,368         42,332  
 
Dividends declared per common share $

0.14

$ 0.125 $

0.28

$

0.25

 

 

 
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
       
 
June 28, December 28,
2015     2014
(In thousands) (Unaudited) (Note)
 
Assets
Current assets:
Cash and cash equivalents $ 22,447 $ 20,122
Accounts receivable, net 53,083 56,047
Notes receivable, net 6,422 6,106
Income taxes receivable 10,808 9,527
Inventories 23,848 27,394
Deferred income taxes 9,312 8,248
Prepaid expenses and other current assets   27,272   28,564
Total current assets 153,192 156,008
 
Property and equipment, net 215,208 219,457
Notes receivable, less current portion, net 12,009 12,801
Goodwill 82,291 82,007
Deferred income taxes 3,537 3,914
Other assets   36,805   38,616
Total assets $ 503,042 $ 512,803
 
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 35,029 $ 38,832
Income and other taxes payable 9,709 9,637
Accrued expenses and other current liabilities   73,161   58,293
Total current liabilities 117,899 106,762
 
Deferred revenue 3,926 4,257
Long-term debt 234,000 230,451
Deferred income taxes 19,792 22,188
Other long-term liabilities   42,262   41,875
Total liabilities 417,879 405,533
 
Redeemable noncontrolling interests 7,741 8,555
 
Total stockholders' equity   77,422   98,715
Total liabilities, redeemable noncontrolling interests and stockholders' equity $ 503,042 $ 512,803
 
 

Note: The Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements, 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
Consolidated Statements of Cash Flows
 
 
Six Months Ended
(In thousands) June 28, 2015 June 29, 2014
(Unaudited) (Unaudited)
Operating activities
Net income before attribution to noncontrolling interests $ 36,707 $ 38,380

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for uncollectible accounts and notes receivable 631 936
Depreciation and amortization 20,177 19,019
Deferred income taxes 6,424 6,298
Stock-based compensation expense 4,985 3,612
Excess tax benefit on equity awards (9,488 ) (7,890 )
Other 2,239 2,270
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 1,682 3,400
Income taxes receivable (1,281 ) -
Inventories 3,474 (7,295 )
Prepaid expenses and other current assets 1,292 28
Other assets and liabilities (773 ) (17 )
Accounts payable (3,877 ) (1,934 )
Income taxes and other taxes payable 72 1,423
Accrued expenses and other current liabilities 15,495 (3,970 )
Deferred revenue   223     305  
Net cash provided by operating activities 77,982 54,565
 
Investing activities
Purchases of property and equipment (16,501 ) (26,239 )
Loans issued (1,571 ) (2,642 )
Repayments of loans issued 2,787 1,880
Acquisitions, net of cash acquired (491 ) (3,179 )
Other   348     3  
Net cash used in investing activities (15,428 ) (30,177 )
 
Financing activities
Net proceeds on line of credit facility 3,549 52,100
Cash dividends paid (11,083 ) (10,404 )
Excess tax benefit on equity awards 9,488 7,890
Tax payments for equity award issuances (10,654 ) (7,498 )
Proceeds from exercise of stock options 3,915 3,361
Acquisition of Company common stock (52,083 ) (63,304 )
Contributions from noncontrolling interest holders 683 100
Distributions to noncontrolling interest holders (4,350 ) (600 )
Other   319     293  
Net cash used in financing activities (60,216 ) (18,062 )
 

Effect of exchange rate changes on cash and cash equivalents

  (13 )   (25 )

Change in cash and cash equivalents

2,325 6,301

Cash and cash equivalents at beginning of period

  20,122     13,670  
 
Cash and cash equivalents at end of period $ 22,447   $ 19,971  



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