Papa John’s Announces First Quarter 2014 Results

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LOUISVILLE, Ky.–(hospitalitybusinessnews.com)– Papa John’s International, Inc. today announced financial results for the first quarter ended March 30, 2014.

Highlights

  • First quarter earnings per diluted share of $0.45 in 2014 compared to $0.42 in 2013
  • System-wide comparable sales increases of 9.6% for North America and 6.4% for international
  • 2014 guidance reaffirmed

“I’d like to congratulate our operators on delivering another excellent quarter, especially considering the commodity headwinds we’ve seen thus far in 2014,” said Papa John’s founder, chairman and CEO, John Schnatter. “I’m extremely confident that we will continue to drive the business forward globally by building on the quality advantages we have established over the past 30 years. We will also continue to capitalize on digital expertise, with our industry-leading digital sales mix approaching 50% of total sales and almost 60% of all delivery sales.”

First quarter 2014 revenues were $401.4 million, a 12.9% increase from first quarter 2013 revenues of $355.6 million. Net income was $19.3 million for both the first quarter of 2014 and 2013. First quarter 2014 diluted earnings per share were $0.45 compared to first quarter 2013 diluted earnings per share of $0.42.

 

Global Restaurant and Comparable Sales Information

First Quarter

Mar. 30,

2014

Mar. 31,

2013

Global restaurant sales growth (a) 12.5 % 6.1 %

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

13.2 % 6.5 %
Comparable sales growth (b)
Domestic company-owned restaurants 11.4 % 3.9 %
North America franchised restaurants 8.9 % 0.8 %
System-wide North America restaurants 9.6 % 1.6 %
System-wide international restaurants 6.4 % 8.2 %

(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 were $401.4 million for the first quarter of 2014, an increase of $45.8 million, or 12.9%. This increase in revenues was primarily due to the following:

  • Domestic company-owned restaurant sales increased $20.3 million, or 12.9%, primarily due to an increase of 11.4% in comparable sales during the first quarter of 2014.
  • North America franchise royalty revenue increased $1.9 million, or 9.1%, primarily due to an increase of 8.9% in comparable sales during the first quarter of 2014.
  • Domestic commissary sales increased $20.2 million, or 14.0%, due to increases in the prices of certain commodities, primarily cheese, and an increase in sales volumes.
  • International revenues increased $3.7 million, or 18.6%, primarily due to an increase in the number of restaurants and an increase in comparable sales of 6.4%, calculated on a constant dollar basis.

Operating Highlights

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

First Quarter
Mar. 30, Mar. 31, Increase
(In thousands) 2014 2013 (Decrease)
Domestic company-owned restaurants $ 13,285 $ 10,956 $ 2,329
Domestic commissaries 10,431 10,163 268
North America franchising 19,484 18,222 1,262
International 732 341 391
All others 590 659 (69 )
Unallocated corporate expenses (12,461 ) (9,518 ) (2,943 )
Elimination of intersegment profits (651 ) (526 ) (125 )
Total income before income taxes $ 31,410 $ 30,297 $ 1,113

First quarter 2014 income before income taxes increased approximately $1.1 million, or 3.7%. This increase was primarily due to the following:

  • Domestic company-owned restaurants increased approximately $2.3 million primarily due to the 11.4% increase in comparable sales, partially offset by lower profits from higher commodity costs. The market price for cheese averaged $2.21 per pound for the first quarter of 2014, compared to $1.66 per pound in the prior year.
  • Domestic commissaries income increased approximately $300,000 as the incremental profits from higher sales were partially offset by higher costs resulting from the transition to in-house distribution from a third party provider at certain of our commissaries. We manage commissary results on a full year basis and anticipate the 2014 full year profit margin will approximate 2013.
  • North America franchising increased approximately $1.3 million primarily due to higher royalties attributable to the strong 8.9% comparable sales.
  • International income increased approximately $400,000 primarily due to the increase in units and comparable sales of 6.4%, which resulted in both higher royalties and an increase in United Kingdom profits.

These increases were partially offset by higher unallocated corporate expenses of approximately $2.9 million in 2014 due to the following:

  • the prior year included an $800,000 benefit from a decrease in the redemption value of a mandatorily redeemable noncontrolling interest in a joint venture;
  • interest costs were approximately $400,000 higher due to both a higher average outstanding debt balance and a higher effective interest rate; and
  • an increase in general and administrative costs, including higher salaries, benefits and long-term performance-based incentive compensation.

The first quarter 2014 effective income tax rate was 34.6%, representing an increase of 1.7% from the prior year rate of 32.9%. Our effective income tax rate may fluctuate from quarter to quarter for various reasons. The higher tax rate in the first quarter of 2014 was primarily due to the prior year period including both the benefit of the reinstatement of certain 2012 tax credits under the American Taxpayer Relief Act of 2012 and favorable state tax settlements.

The company’s free cash flow, a non-GAAP financial measure, for the first quarters of 2014 and 2013, was as follows (in thousands):

First Quarter
Mar. 30, Mar. 31,
2014 2013
Net cash provided by operating activities (a) $ 26,678 $ 29,914
Purchases of property and equipment (11,137 ) (13,248 )
Free cash flow $ 15,541 $ 16,666

(a) The decrease of approximately $3.2 million includes higher inventory levels of equipment to support the rollout of our new proprietary point-of-sale technology system (“FOCUS”) to our domestic system-wide restaurants.

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-month period ended March 30, 2014.

Global Restaurant Unit Data

At March 30, 2014, there were 4,440 Papa John’s restaurants operating in all 50 states and in 34 countries, as follows:

Domestic

Company-

owned

Franchised

North

America

Total

North

America

International System-wide

First Quarter

Beginning – December 29, 2013 665 2,621 3,286 1,142 4,428
Opened 2 21 23 23 46
Closed (1 ) (27 ) (28 ) (6 ) (34 )
Ending – March 30, 2014 666 2,615 3,281 1,159 4,440
Unit growth (decline) 1 (6 ) (5 ) 17 12
% increase (decrease) 0.2 % -0.2 % -0.2 % 1.5 % 0.3 %

Our development pipeline as of March 30, 2014 included approximately 1,300 restaurants (200 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 first quarter of 2014 and subsequent repurchases through April 29, 2014 (in thousands):

Period

Number of

Shares

Cost
First Quarter 2014 651 $ 32,800
March 31, 2014 through April 29, 2014 338 $ 16,988

There were 42.7 million diluted weighted average shares outstanding for the first quarter, representing a decrease of 6.4% over the prior year first quarter. Diluted earnings per share increased $0.03 for the first quarter of 2014 due to the reduction in shares outstanding, primarily resulting from the share repurchase program. Approximately 41.5 million actual shares of the company’s common stock were outstanding as of March 30, 2014.

 

Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three Months Ended
March 30, 2014 March 31, 2013
(In thousands, except per share amounts) (Unaudited) (Unaudited)
Revenues:
North America:
Domestic company-owned restaurant sales $ 178,193 $ 157,898
Franchise royalties 22,614 20,733
Franchise and development fees 144 546
Domestic commissary sales 164,047 143,894
Other sales 12,750 12,607
International:
Royalties and franchise and development fees 5,779 5,067
Restaurant and commissary sales 17,850 14,859
Total revenues 401,377 355,604
Costs and expenses:
Domestic company-owned restaurant expenses:
Cost of sales 45,156 37,073
Salaries and benefits 47,583 43,272
Advertising and related costs 16,256 14,793
Occupancy costs 9,311 8,711
Other restaurant operating expenses 25,287 22,745
Total domestic company-owned restaurant expenses 143,593 126,594
Domestic commissary expenses:
Cost of sales 128,924 110,923
Salaries and benefits 7,024 6,016
Other commissary operating expenses 15,855 15,461
Total domestic commissary expenses 151,803 132,400
Other operating expenses 11,431 11,452
International restaurant and commissary expenses 14,885 12,653
General and administrative expenses 36,966 33,158
Other general expenses 1,533 1,185
Depreciation and amortization 9,164 8,537
Total costs and expenses 369,375 325,979
Operating income 32,002 29,625
Net interest (expense) income (592 ) 672
Income before income taxes 31,410 30,297
Income tax expense 10,869 9,978
Net income before attribution to noncontrolling interests 20,541 20,319
Income attributable to noncontrolling interests (1,230 ) (1,013 )
Net income attributable to the company $ 19,311 $ 19,306
Calculation of income for earnings per share:
Net income attributable to the company $ 19,311 $ 19,306
Increase in noncontrolling interest redemption value (8 )
Net income attributable to participating securities (137 )
Net income attributable to common shareholders $ 19,166 $ 19,306
Basic earnings per common share $ 0.46 $ 0.43
Diluted earnings per common share $ 0.45 $ 0.42
Basic weighted average common shares outstanding 41,778 44,512
Diluted weighted average common shares outstanding 42,696 45,612
Dividends declared per common share $ 0.125 $

 

Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 30, December 29,
2014 2013
(In thousands) (Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 14,388 $ 13,670
Accounts receivable, net 53,682 53,203
Notes receivable, net 5,825 3,566
Inventories 27,767 23,035
Deferred income taxes 5,830 8,004
Prepaid expenses and other current assets 21,847 23,562
Total current assets 129,339 125,040
Property and equipment, net 213,427 212,097
Notes receivable, less current portion, net 11,852 13,239
Goodwill 79,430 79,391
Other assets 34,551 34,524
Total assets $ 468,599 $ 464,291
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 34,342 $ 35,653
Income and other taxes payable 7,669 4,401
Accrued expenses and other current liabilities 51,876 57,807
Total current liabilities 93,887 97,861
Deferred revenue 5,953 5,827
Long-term debt 177,167 157,900
Deferred income taxes 13,729 14,660
Other long-term liabilities 43,589 42,835
Total liabilities 334,325 319,083
Redeemable noncontrolling interests 7,789 7,024
Total stockholders’ equity 126,485 138,184
Total liabilities, redeemable noncontrolling interests and stockholders’ equity $ 468,599 $ 464,291
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
Three Months Ended
(In thousands) March 30, 2014 March 31, 2013
(Unaudited) (Unaudited)
Operating activities
Net income before attribution to noncontrolling interests $ 20,541 $ 20,319

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

Provision for uncollectible accounts and notes receivable 145 314
Depreciation and amortization 9,164 8,537
Deferred income taxes 6,170 3,325
Stock-based compensation expense 2,190 1,681
Excess tax benefit on equity awards (4,900 ) (1,142 )
Other 1,110 (180 )
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (854 ) (627 )
Inventories (3,210 ) (1,744 )
Prepaid expenses and other current assets 1,715 3,380
Other assets and liabilities (795 ) 38
Accounts payable (1,311 ) (406 )
Income and other taxes payable 3,268 1,243
Accrued expenses and other current liabilities (6,958 ) (4,641 )
Deferred revenue 403 (183 )
Net cash provided by operating activities 26,678 29,914
Investing activities
Purchases of property and equipment (11,137 ) (13,248 )
Loans issued (1,758 ) (1,748 )
Repayments of loans issued 1,164 1,916
Other 7 319
Net cash used in investing activities (11,724 ) (12,761 )
Financing activities
Net proceeds on line of credit facility 19,267 20,652
Cash dividends paid (5,240 )
Excess tax benefit on equity awards 4,900 1,142
Tax payments for equity award issuances (3,233 ) (843 )
Proceeds from exercise of stock options 2,989 2,704
Acquisition of Company common stock (32,800 ) (32,122 )
Contributions from noncontrolling interest holders 350
Distributions to noncontrolling interest holders (300 ) (1,000 )
Other 223 112
Net cash used in financing activities (14,194 ) (9,005 )
Effect of exchange rate changes on cash and cash equivalents (42 ) 7
Change in cash and cash equivalents 718 8,155
Cash and cash equivalents at beginning of period 13,670 16,396
Cash and cash equivalents at end of period $ 14,388 $ 24,551

 

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