Papa John’s Announces First Quarter 2016 Results

LOUISVILLE, Ky.–(hospitalitybusinessnews.com)–Papa John’s International, Inc. today announced financial results for the first quarter ended March 27, 2016.

Highlights

  • First quarter earnings per diluted share of $0.69 in 2016 compared to $0.55 in 2015, an increase of 25.5%
  • System-wide comparable sales increases of 0.1% for North America and 5.7% for international
  • 2016 guidance reaffirmed

“We’re pleased to have delivered another solid quarter, with excellent profitability growth in spite of a competitive promotional environment,” said Papa John’s founder, chairman and CEO John Schnatter. “Our continued commitment to quality, a growing domestic digital sales mix that now stands at 55%, our expanded sports partnerships and international momentum will continue to drive the Papa John’s global brand in 2016 and beyond.”

First quarter 2016 revenues were $428.6 million, a 0.9% decrease from first quarter 2015 revenues of $432.3 million. First quarter 2016 net income increased 17.7% to $26.2 million, compared to first quarter 2015 net income of $22.2 million. First quarter 2016 diluted earnings per share increased 25.5% to $0.69, compared to first quarter 2015 diluted earnings per share of $0.55.

Global Restaurant and Comparable Sales Information

First Quarter
Mar. 27, Mar. 29,
2016 2015
Global restaurant sales growth (a) 2.3 % 7.4 %

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

4.2 % 9.6 %
Comparable sales growth (b)
Domestic company-owned restaurants 1.0 % 8.1 %
North America franchised restaurants (0.2 %) 6.0 %
System-wide North America restaurants 0.1 % 6.5 %
System-wide international restaurants 5.7 % 7.7 %
(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. Management believes the presentation of global restaurant sales growth excluding the impact of foreign currency provides investors with useful information regarding underlying sales trends by presenting sales growth excluding the external factor of foreign currency exchange. 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.

We have streamlined our income statement presentation by combining certain income statement captions in the condensed income statement. We have summarized 2015 by quarter in this same format in a supplemental schedule included in this press release.

Revenue Highlights

Consolidated revenues were $428.6 million for the first quarter of 2016, a decrease of $3.7 million, or 0.9%. The lower revenues were primarily due to the prior year inclusion of point-of-sale system (“FOCUS”) equipment sales as well as lower PJ Food Service sales from lower commodity costs. Significant changes in revenues are as follows:

  • Domestic company-owned restaurant sales increased $8.4 million, or 4.3%, primarily due to an increase in equivalent units, including 20 restaurants acquired from franchisees during the first quarter, and a 1.0% increase in comparable sales.
  • Domestic franchise royalties and fees increased approximately $850,000, or 3.3%, primarily due to reduced levels of royalty incentives in the first quarter of 2016.
  • Domestic commissary and other sales decreased $15.0 million, or 8.1%. The decrease was due to the prior year inclusion of approximately $8.5 million of FOCUS equipment sales to franchisees. The higher levels of 2015 FOCUS equipment sales had no significant impact on 2015 operating results. Additionally, domestic commissary sales decreased by approximately $6.4 million as revenues associated with lower pricing for certain commodities, including meats and dough, were somewhat offset by an increase in sales volumes.
  • International revenues increased approximately $2.0 million, or 8.0%, primarily due to the first quarter of 2016 including sublease rental revenue in the United Kingdom of approximately $1.6 million, which was shown net of the rental expenses in the prior year. The change in presentation had no impact on income before income taxes. Additionally, royalties and commissary revenues were higher due to an increase in the number of restaurants and an increase in comparable sales of 5.7%, calculated on a constant dollar basis. These increases were somewhat offset by lower China Company-owned restaurant revenues. The negative impact of foreign currency exchange rates was approximately $1.9 million.

Operating Highlights

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

First Quarter

Mar. 27, Mar. 29, Increase
(In thousands) 2016 2015 (Decrease)
Domestic company-owned restaurants $ 20,187 $ 18,480 $ 1,707
Domestic commissaries 11,546 11,800 (254 )
North America franchising 23,580 22,319 1,261
International 3,038 1,344 1,694
All others 51 443 (392 )
Unallocated corporate expenses (16,332 ) (17,205 ) 873
Elimination of intersegment profits (661 ) (745 ) 84
Total income before income taxes $ 41,409 $ 36,436 $ 4,973

First quarter 2016 income before income taxes increased approximately $5.0 million, or 13.6%. This increase was primarily due to the following:

  • Domestic company-owned restaurants increased approximately $1.7 million primarily due to lower commodity costs, including meats and dough.
  • North America franchising increased approximately $1.3 million primarily due to reduced royalty and development incentives.
  • International income increased approximately $1.7 million primarily due to higher royalties and an increase in United Kingdom profits. This was somewhat offset by the impact of negative foreign currency exchange rates of approximately $700,000.
  • Unallocated corporate expenses were approximately $900,000 lower primarily due to lower legal costs and lower expenses for our annual operators’ conference due to the later timing of the event in the second quarter of 2016.

These increases were partially offset by lower domestic commissaries income of approximately $250,000 due to a lower margin, which was partially offset by higher sales volumes.

The first quarter 2016 effective income tax rate was 32.3%, representing a decrease of 1.2% from the prior year rate of 33.5%. Our effective income tax rate may fluctuate from quarter to quarter for various reasons, including the timing of various deductions and credits.

The company’s free cash flow, a non-GAAP financial measure, for the first quarters of 2016 and 2015, was as follows (in thousands):

First Quarter
Mar. 27, Mar. 29,
2016 2015
Net cash provided by operating activities (a) $ 29,969 $ 40,249
Purchases of property and equipment (10,249 ) (7,558 )
Free cash flow $ 19,720 $ 32,691
(a) The decrease of approximately $10.3 million was primarily due to the payment of approximately $12.5 million in the first quarter of 2016 for the previously disclosed legal settlement, partially offset by higher net income.

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 27, 2016.

Global Restaurant Unit Data

At March 27, 2016, there were 4,903 Papa John’s restaurants operating in all 50 states and in 40 international countries and territories, as follows:

Domestic Franchised
Company- North Total North
owned America America International System-wide

First Quarter

Beginning – December 27, 2015 707 2,681 3,388 1,505 4,893
Opened 2 18 20 24 44
Closed (18 ) (18 ) (16 ) (34 )
Acquired (divested) 20 (20 )
Ending – March 27, 2016 729 2,661 3,390 1,513 4,903
Unit growth (decline) 22 (20 ) 2 8 10
% increase (decrease) 3.1 % -0.7 % 0.1 % 0.5 % 0.2 %

Our development pipeline as of March 27, 2016 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 2016 and subsequent repurchases through April 26, 2016 (in thousands):

Number
Period

of Shares

Cost
First Quarter 2016 1,286 $ 66,033
March 27, 2016 through April 26, 2016 262 $ 14,625

There were 38.3 million diluted weighted average shares outstanding for the first quarter of 2016, representing a decrease of 5.5% over the prior year first quarter. Approximately 37.5 million actual shares of the company’s common stock were outstanding as of March 27, 2016.

2016 Guidance

The company is reaffirming its previously issued 2016 guidance.

 

Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three Months Ended
March 27, 2016 March 29, 2015
(In thousands, except per share amounts) (Unaudited) (Unaudited)
Revenues:
Domestic company-owned restaurant sales $ 205,679 $ 197,287
Domestic franchise royalties and fees 26,476 25,624
Domestic commissary and other sales 168,985 183,947
International 27,455 25,426
Total revenues 428,595 432,284
Costs and expenses:
Operating costs (excluding depreciation and amortization
shown separately below):
Domestic company-owned restaurant expenses 161,310 155,032
Domestic commissary and other expenses 156,806 170,339
International expenses 17,590 15,478
General and administrative expenses 40,247 43,749
Depreciation and amortization 9,744 10,041
Total costs and expenses 385,697 394,639
Operating income 42,898 37,645
Net interest (expense) income (1,489 ) (1,209 )
Income before income taxes 41,409 36,436
Income tax expense 13,358 12,197
Net income before attribution to noncontrolling interests 28,051 24,239
Income attributable to noncontrolling interests (1,869 ) (2,003 )
Net income attributable to the company $ 26,182 $ 22,236
Calculation of income for earnings per share:
Net income attributable to the company $ 26,182 $ 22,236
Change in noncontrolling interest redemption value 220 70
Net income attributable to participating securities (110 ) (100 )
Net income attributable to common shareholders $ 26,292 $ 22,206
Basic earnings per common share $ 0.69 $ 0.56
Diluted earnings per common share $ 0.69 $ 0.55
Basic weighted average common shares outstanding 37,931 39,827
Diluted weighted average common shares outstanding 38,297 40,510
Dividends declared per common share $ 0.175 $ 0.14
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 27, December 27,
2016 2015
(In thousands) (Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 17,272 $ 21,006
Accounts receivable, net 56,683 63,320
Notes receivable, net 7,049 7,816
Income taxes receivable 48 272
Inventories 22,267 21,564
Prepaid expenses and other current assets 27,910 29,313
Assets held for sale 9,094 9,299
Total current assets 140,323 152,590
Property and equipment, net 213,296 214,044
Notes receivable, less current portion, net 11,126 11,105
Goodwill 87,740 79,657
Deferred income taxes 2,041 2,415
Other assets 36,453 34,247
Total assets $ 490,979 $ 494,058
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 33,582 $ 43,492
Income and other taxes payable 8,805 8,527
Accrued expenses and other current liabilities 62,579 80,918
Total current liabilities 104,966 132,937
Deferred revenue 3,847 3,190
Long-term debt 316,717 255,146
Deferred income taxes 9,394 4,610
Other long-term liabilities 52,862 47,606
Total liabilities 487,786 443,489
Redeemable noncontrolling interests 8,887 8,363
Total stockholders’ equity (5,694 ) 42,206
Total liabilities, redeemable noncontrolling interests and stockholders’ equity $ 490,979 $ 494,058

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 27, 2016 March 29, 2015
(Unaudited) (Unaudited)
Operating activities
Net income before attribution to noncontrolling interests $ 28,051 $ 24,239

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

Provision for uncollectible accounts and notes receivable 216 659
Depreciation and amortization 9,744 10,041
Deferred income taxes 7,141 (36 )
Stock-based compensation expense 2,172 2,264
Other 1,101 1,180
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 6,457 (1,312 )
Income taxes receivable 223 5,899
Inventories (612 ) 1,043
Prepaid expenses and other current assets 1,624 2,452
Other assets and liabilities (614 ) (154 )
Accounts payable (10,007 ) (3,828 )
Income and other taxes payable 277 167
Accrued expenses and other current liabilities (16,738 ) (2,291 )
Deferred revenue 934 (74 )
Net cash provided by operating activities 29,969 40,249
Investing activities
Purchases of property and equipment (10,249 ) (7,558 )
Loans issued (917 ) (506 )
Repayments of loans issued 1,275 1,083
Acquisitions, net of cash acquired (11,202 ) (341 )
Other 159 20
Net cash used in investing activities (20,934 ) (7,302 )
Financing activities
Net proceeds on line of credit facility 61,500 549
Cash dividends paid (6,628 ) (5,545 )
Excess tax benefit on equity awards 3,884 5,091
Tax payments for equity award issuances (5,670 ) (5,557 )
Proceeds from exercise of stock options 922 2,210
Acquisition of Company common stock (66,033 ) (24,765 )
Contributions from noncontrolling interest holders 120
Distributions to noncontrolling interest holders (1,100 ) (1,705 )
Other 294 253
Net cash used in financing activities (12,711 ) (29,469 )
Effect of exchange rate changes on cash and cash equivalents (58 ) (76 )
Change in cash and cash equivalents (3,734 ) 3,402
Cash and cash equivalents at beginning of period 21,006 20,122
Cash and cash equivalents at end of period $ 17,272 $ 23,524

The following schedule provides the condensed consolidated statements of income by quarter and for the full year 2015 in the new format.

Papa John’s International, Inc. and Subsidiaries
2015 Condensed Consolidated Statements of Income
Full Year
Quarter Ended (Unaudited) Ended
Mar. 29, Jun. 28, Sep. 27, Dec. 27, Dec. 27,
2015 2015 2015 2015 2015
(In thousands, except per share amounts)
Revenues:
Domestic company-owned restaurant sales $ 197,287 $ 185,962 $ 180,059 $ 192,999 $ 756,307
Domestic franchise royalties and fees 25,624 23,276 22,285 24,871 96,056
Domestic commissary and other sales 183,947 163,427 159,939 173,008 680,321
International 25,426 26,326 27,001 25,938 104,691
Total revenues 432,284 398,991 389,284 416,816 1,637,375
Costs and expenses:

Operating costs (excluding depreciation and amortization shown separately below):

Domestic company-owned restaurant expenses 155,032 147,356 148,536 153,282 604,206
Domestic commissary and other expenses 170,339 151,206 148,709 159,169 629,423
International expenses 15,478 16,250 16,481 15,297 63,506
General and administrative expenses 43,749 43,047 37,660 39,170 163,626
Depreciation and amortization 10,041 10,136 10,461 9,669 40,307
Total costs and expenses 394,639 367,995 361,847 376,587 1,501,068
Operating income 37,645 30,996 27,437 40,229 136,307
Legal settlement expense (12,278 ) (12,278 )
Net interest (expense) income (1,209 ) (1,187 ) (1,180 ) (1,306 ) (4,882 )
Income before income taxes 36,436 17,531 26,257 38,923 119,147
Income tax expense 12,197 5,063 7,281 12,642 37,183
Net income before attribution to noncontrolling interests 24,239 12,468 18,976 26,281 81,964
Income attributable to noncontrolling interests (2,003 ) (1,688 ) (1,005 ) (1,586 ) (6,282 )
Net income attributable to the company $ 22,236 $ 10,780 $ 17,971 $ 24,695 $ 75,682
Calculation of income for earnings per share:
Net income attributable to the company $ 22,236 $ 10,780 $ 17,971 $ 24,695 $ 75,682
Change in noncontrolling interest redemption value 70 73 49 (127 ) 65
Net income attributable to participating securities (100 ) (50 ) (73 ) (102 ) (325 )
Net income attributable to common shareholders $ 22,206 $ 10,803 $ 17,947 $ 24,466 $ 75,422
Basic earnings per common share $ 0.56 $ 0.27 $ 0.46 $ 0.63 $ 1.91
Diluted earnings per common share $ 0.55 $ 0.27 $ 0.45 $ 0.62 $ 1.89
Basic weighted average common shares outstanding 39,827 39,692 39,394 38,909 39,458
Diluted weighted average common shares outstanding 40,510 40,217 39,895 39,367 40,000
Dividends declared per common share $ 0.14 $ 0.14 $ 0.175 $ 0.175 $ 0.63
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