Papa John’s Announces Second Quarter 2016 Results

LOUISVILLE, Ky.–(hospitalitybusinessnews.com)–Papa John’s International, Inc. today announced financial results for the three and six months ended June 26, 2016

Highlights

  • Second quarter earnings per diluted share of $0.61 in 2016, or an increase of 29.8% over adjusted 2015 earnings, which excludes the impact of a prior year legal settlement
  • System-wide comparable sales increases of 4.8% for North America and 5.3% for International
  • Increased 2016 diluted earnings per share guidance to a range of $2.35 to $2.45 from the prior range of $2.30 to $2.40
  • Increased 2016 North America comparable sales guidance to a range of 3.0% to 5.0% from the prior range of 2.0% to 4.0%
  • Regular dividend increased to $0.80 annually from $0.70 annually

“We are pleased with our strong 2nd quarter results, with good comp sales leading to another quarter of excellent earnings growth,” said Papa John’s founder, chairman and CEO John Schnatter. “Our strong digital platform, unwavering commitment to quality, and consistent, disciplined approach to growing our global footprint have us well-positioned to maintain our momentum throughout 2016 and well into the future.”

Second quarter 2016 revenues were $423.0 million, a 6.0% increase from second quarter 2015 revenues of $399.0 million. Second quarter 2016 net income was $22.5 million, compared to second quarter 2015 net income of $10.8 million. Net income for the second quarter of 2016 increased 20.1%, compared to the second quarter of 2015 net income of $18.8 million that excludes the prior year legal settlement (“adjusted”), as detailed in the “Item Impacting Comparability – Non-GAAP Presentation” table. Second quarter 2016 diluted earnings per share were $0.61, compared to second quarter 2015 diluted earnings per share of $0.27 (adjusted earnings per share of $0.47 in the second quarter of 2015, or a 29.8% increase).

Revenues were $851.6 million for the six months ended June 26, 2016, a 2.4% increase from revenues of $831.3 million for the same period in 2015. Net income was $48.7 million for the first six months of 2016, compared to $33.0 million for the same period in 2015. Net income for the first six months of 2016 increased 18.8%, compared to adjusted net income of $41.0 million for the same period in 2015. Diluted earnings per share were $1.29 for the first six months of 2016, compared to $0.82 for the same period in 2015 (adjusted earnings per share of $1.02 in the same period of 2015, or a 26.5% increase).

Global Restaurant and Comparable Sales Information

Three Months Ended Six Months Ended

June 26,
2016

June 28,
2015

June 26,
2016

June 28,
2015

Global restaurant sales growth (a) 5.9 % 6.4 % 4.0 % 6.9 %

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

7.7 % 8.8 % 5.8 % 9.2 %
Comparable sales growth (b)
Domestic company-owned restaurants 5.6 % 7.4 % 3.2 % 7.7 %
North America franchised restaurants 4.5 % 4.8 % 2.1 % 5.4 %
System-wide North America restaurants 4.8 % 5.5 % 2.4 % 6.0 %
System-wide international restaurants 5.3 % 6.8 % 5.5 % 7.2 %

(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. 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.

Revenue Highlights

Consolidated revenues increased $24.0 million, or 6.0%, for the second quarter of 2016 and increased $20.3 million, or 2.4%, for the six months ended June 26, 2016. The increases in revenues were primarily due to the following:

  • Domestic company-owned restaurant sales increased $18.3 million, or 9.8%, and $26.7 million, or 7.0%, for the three and six months, respectively, primarily due to increases of 5.6% and 3.2% in comparable sales and increases of 5.1% and 4.6% in equivalent units, including 20 restaurants acquired from franchisees during the first quarter.
  • Domestic franchise royalties and fees increased approximately $2.0 million, or 8.7%, and $2.9 million, or 5.9%, for the three and six months, respectively, primarily due to increases of 4.5% and 2.1% in comparable sales and reduced levels of royalty incentives in 2016.
  • Domestic commissary and other sales increased $1.5 million, or 0.9%, and decreased $13.4 million, or 3.9%, for the three and six months, respectively. The increase of $1.5 million for the three-month period was primarily due to higher commissary sales from an increase in volumes, partially offset by lower pricing for certain commodities, including cheese, and an increase in online fee revenues for our online and mobile ordering business. These increases were partially offset by the prior year inclusion of approximately $1.3 million of FOCUS equipment sales to franchisees which had no significant impact on 2015 operating results. The decrease of $13.4 million for the six-month period was primarily due to lower FOCUS equipment sales of approximately $9.8 million and lower domestic commissary sales due to lower pricing for certain commodities, partially offset by higher domestic commissary sales volumes.
  • International revenues increased approximately $2.1 million, or 8.1%, and $4.2 million, or 8.0%, for the three and six months, respectively, primarily due to the following:
    • International revenues include sublease rental revenue in the United Kingdom of approximately $1.7 million and $3.3 million for the three- and six-months, respectively, which were shown net of the rental expenses in the prior year. The change had no impact on income before income taxes.
    • Royalties and commissary revenues were higher due to an increase in the number of restaurants and increases in comparable sales of 5.3% and 5.5% for the three- and six-month periods, respectively, calculated on a constant dollar basis.
    • China Company-owned restaurant revenues were $1.3 million and $2.6 million lower than the prior year three- and six-month periods, respectively, primarily due to negative comparable sales and fewer restaurants.

Foreign currency exchange rates reduced revenues by approximately $2.2 million and $4.0 million for the three- and six-months periods, respectively.

Operating Highlights

The tables below reconcile our GAAP financial results to the adjusted (non-GAAP) financial results, excluding the legal settlement in 2015, for the three and six months ended June 26, 2016 and June 28, 2015:

Three Months Ended
As Reported Legal Adjusted Adjusted
June 26, June 28, Settlement June 28, Increase
(In thousands) 2016 2015 expense 2015 (Decrease)
Domestic company-owned restaurants $ 15,325 $ 14,617 $ $ 14,617 $ 708
Domestic commissaries 11,682 10,702 10,702 980
North America franchising 22,445 20,054 20,054 2,391
International 2,875 2,279 2,279 596
All others 425 (117 ) (117 ) 542
Unallocated corporate expenses (17,079 ) (29,949 ) 12,278 (17,671 ) 592
Elimination of intersegment profits (473 ) (55 ) (55 ) (418 )
Total income before income taxes $ 35,200 $ 17,531 $ 12,278 $ 29,809 $ 5,391
Six Months Ended
As Reported Legal Adjusted Adjusted
June 26, June 28, Settlement June 28, Increase
(In thousands) 2016 2015 expense 2015 (Decrease)
Domestic company-owned restaurants $ 35,512 $ 33,097 $ $ 33,097 $ 2,415
Domestic commissaries 23,228 22,502 22,502 726
North America franchising 46,025 42,373 42,373 3,652
International 5,913 3,623 3,623 2,290
All others 476 326 326 150
Unallocated corporate expenses (33,411 ) (47,154 ) 12,278 (34,876 ) 1,465
Elimination of intersegment profits (1,134 ) (800 ) (800 ) (334 )
Total income before income taxes $ 76,609 $ 53,967 $ 12,278 $ 66,245 $ 10,364

Second quarter 2016 income before income taxes increased approximately $17.7 million compared to the prior year period and increased $5.4 million, or 18.1%, compared to the adjusted second quarter 2015 income before income taxes. The increase of $5.4 million was primarily due to the following:

  • Domestic company-owned restaurants increased approximately $700,000 primarily due to a 5.6% increase in comparable sales and lower commodity costs, partially offset by higher non-owned automobile claims costs.
  • Domestic commissaries income increased approximately $1.0 million primarily due to higher sales volumes.
  • North America franchising income increased approximately $2.4 million primarily due to higher royalties attributable to the 4.5% increase in comparable sales and lower sales and development incentives.
  • International income increased approximately $600,000 primarily due to higher royalties from an increase in the number of restaurants and an increase in comparable sales. This increase was somewhat offset by the impact of negative foreign currency exchange rates of approximately $500,000.
  • Unallocated corporate expenses were approximately $600,000 lower primarily due to lower legal costs.

Income before income taxes increased $22.6 million for the six month period ended June 26, 2016, compared to the prior year period and increased $10.4 million, or 15.6%, compared to the adjusted 2015 income before income taxes. The increase of $10.4 million was primarily due to the same reasons noted for the three-month period.

The effective income tax rates were 31.5% and 31.9% for the three and six months ended June 26, 2016, representing an increase of 2.6% for the three-month period and no change from the prior year six-month period. The legal settlement reduced our 2015 income tax rates by approximately 2.5% and 0.5% for the three- and six-month periods, respectively. Our effective income tax rates 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 six months of 2016 and 2015, was as follows (in thousands):

Six Months Ended
June 26, June 28,
2016 2015
Net cash provided by operating activities (a) $ 75,123 $ 77,982
Purchases of property and equipment (24,001 ) (16,501 )
Free cash flow $ 51,122 $ 61,481

(a) The decrease of approximately $2.9 million was primarily due to the payment of approximately $12.5 million in the first quarter of 2016 for the previously mentioned legal settlement and unfavorable changes in working capital items, 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 liquidity or 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 26, 2016.

Global Restaurant Unit Data

At June 26, 2016, there were 4,935 Papa John’s restaurants operating in all 50 states and in 43 international countries and territories, as follows:

Domestic
Company-
owned

Franchised
North
America

Total North
America

International System-wide

Second Quarter

Beginning – March 27, 2016 729 2,661 3,390 1,513 4,903
Opened 5 23 28 46 74
Closed (16 ) (16 ) (26 ) (42 )
Ending – June 26, 2016 734 2,668 3,402 1,533 4,935

Year-to-date

Beginning – December 27, 2015 707 2,681 3,388 1,505 4,893
Opened 7 41 48 70 118
Closed (34 ) (34 ) (42 ) (76 )
Acquired (divested) 20 (20 )
Ending – June 26, 2016 734 2,668 3,402 1,533 4,935
Unit growth (decline) 27 (13 ) 14 28 42
% increase (decrease) 3.8 % (0.5 %) 0.4 % 1.9 % 0.9 %

Our development pipeline as of June 26, 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.

Item Impacting Comparability – Non-GAAP Presentation

The following table reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures, for the three and six month periods ended June 26, 2016:

Three Months Ended Six Months Ended
June 26, June 28, June 26, June 28,
(In thousands, except per share amounts) 2016 2015 2016 2015
Income before income taxes, as reported $ 35,200 $ 17,531 $ 76,609 $ 53,967
Legal settlement expense 12,278 12,278
Income before income taxes, as adjusted $ 35,200 $ 29,809 $ 76,609 $ 66,245
Net income, as reported $ 22,541 $ 10,780 $ 48,723 $ 33,016
Legal settlement expense 7,986 7,986
Net income, as adjusted $ 22,541 $ 18,766 $ 48,723 $ 41,002
Diluted earnings per share, as reported $ 0.61 $ 0.27 $ 1.29 $ 0.82
Legal settlement expense 0.20 0.20
Diluted earnings per share, as adjusted $ 0.61 $ 0.47 $ 1.29 $ 1.02

The 2015 legal settlement expense represents a pre-tax expense of $12.3 million for a collective and class action, Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc.

The non-GAAP adjusted results shown above, which exclude the 2015 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.

Share Repurchase Activity

The following table reflects our repurchases for the three and six months ended June 26, 2016 and subsequent repurchases through July 26, 2016 (in thousands):

Period

Number of
Shares

Cost
Three Months Ended June 26, 2016 521 $ 30,322
Six Months Ended June 26, 2016 1,807 $ 96,355
June 27, 2016 through July 26, 2016 68 $ 4,661

There were 37.5 million and 37.9 million diluted weighted average shares outstanding for the three and six months ended June 26, 2016, representing decreases of 6.7% and 6.1%, respectively, over the prior year comparable periods. Approximately 37.0 million actual shares of the company’s common stock were outstanding as of June 26, 2016.

Cash Dividend

We paid a cash dividend of approximately $6.5 million ($0.175 per common share) during the second quarter of 2016. Subsequent to the second quarter, on July 28, 2016, our Board of Directors approved a 14% increase in the company’s dividend rate per common share, from $0.70 on an annual basis to $0.80 on an annual basis, and declared a third quarter dividend of $0.20 per common share (approximately $7.4 million based on current shareholders of record). The dividend will be paid on August 19, 2016 to shareholders of record as of the close of business on August 8, 2016. 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.

2016 Guidance Update

The company provided the following 2016 guidance updates and reaffirmed all other guidance:

Updated Guidance Previous Guidance
Diluted earnings per share* $2.35 to $2.45 $2.30 to $2.40
North America comparable sales +3.0% to +5.0% +2.0% to +4.0%
Capital expenditures $55 to $65 million $55 to $60 million

*The earnings guidance presented excludes any potential impact of a refranchising in 2016 of our corporate owned China market, for which we have previously disclosed our plans to sell, and any related non-operating items.

 

Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three Months Ended Six Months Ended
June 26, 2016 June 28, 2015 June 26, 2016 June 28, 2015
(In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Domestic company-owned restaurant sales $ 204,248 $ 185,962 $ 409,927 $ 383,249
Domestic franchise royalties and fees 25,302 23,276 51,778 48,900
Domestic commissary and other sales 164,954 163,427 333,939 347,374
International 28,460 26,326 55,915 51,752
Total revenues 422,964 398,991 851,559 831,275
Costs and expenses:

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

Domestic company-owned restaurant expenses 163,469 147,356 324,779 302,388
Domestic commissary and other expenses 152,258 151,206 309,064 321,545
International expenses 17,752 16,250 35,342 31,728
General and administrative expenses 42,623 43,047 82,870 86,796
Depreciation and amortization 10,031 10,136 19,775 20,177
Total costs and expenses 386,133 367,995 771,830 762,634
Operating income 36,831 30,996 79,729 68,641
Legal settlement expense (12,278 ) (12,278 )
Net interest expense (1,631 ) (1,187 ) (3,120 ) (2,396 )
Income before income taxes 35,200 17,531 76,609 53,967
Income tax expense 11,088 5,063 24,446 17,260
Net income before attribution to noncontrolling interests 24,112 12,468 52,163 36,707
Income attributable to noncontrolling interests (1,571 ) (1,688 ) (3,440 ) (3,691 )
Net income attributable to the company $ 22,541 $ 10,780 $ 48,723 $ 33,016
Calculation of income for earnings per share:
Net income attributable to the company $ 22,541 $ 10,780 $ 48,723 $ 33,016
Change in noncontrolling interest redemption value 279 73 499 143
Net income attributable to participating securities (91 ) (50 ) (201 ) (150 )
Net income attributable to common shareholders $ 22,729 $ 10,803 $ 49,021 $ 33,009
Basic earnings per common share $ 0.61 $ 0.27 $ 1.30 $ 0.83
Diluted earnings per common share $ 0.61 $ 0.27 $ 1.29 $ 0.82
Basic weighted average common shares outstanding 37,203 39,692 37,567 39,764
Diluted weighted average common shares outstanding 37,507 40,217 37,904 40,368
Dividends declared per common share $ 0.175 $ 0.140 $ 0.350 $ 0.280
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 26, December 27,
2016 2015
(In thousands) (Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 15,266 $ 21,006
Accounts receivable, net 56,357 63,320
Notes receivable, net 4,715 7,816
Income taxes receivable 744 272
Inventories 22,531 21,564
Prepaid expenses and other current assets 25,989 29,313
Assets held for sale 8,823 9,299
Total current assets 134,425 152,590
Property and equipment, net 217,528 214,044
Notes receivable, less current portion, net 9,906 11,105
Goodwill 87,266 79,657
Deferred income taxes 1,713 2,415
Other assets 36,385 34,247
Total assets $ 487,223 $ 494,058
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable $ 34,928 $ 43,492
Income and other taxes payable 12,231 8,527
Accrued expenses and other current liabilities 68,887 80,918
Total current liabilities 116,046 132,937
Deferred revenue 3,965 3,190
Long-term debt, net 316,484 255,146
Deferred income taxes 2,002 4,610
Other long-term liabilities 58,019 47,606
Total liabilities 496,516 443,489
Redeemable noncontrolling interests 7,989 8,363
Total stockholders’ equity (deficit) (17,282 ) 42,206
Total liabilities, redeemable noncontrolling interests and stockholders’ equity (deficit) $ 487,223 $ 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
Six Months Ended
(In thousands) June 26, 2016 June 28, 2015
(Unaudited) (Unaudited)
Operating activities
Net income before attribution to noncontrolling interests $ 52,163 $ 36,707

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

Provision for uncollectible accounts and notes receivable 247 631
Depreciation and amortization 19,775 20,177
Deferred income taxes 3,786 (3,064 )
Stock-based compensation expense 4,893 4,985
Other 1,883 2,239
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 6,680 1,682
Income taxes receivable (472 ) (1,281 )
Inventories (877 ) 3,474
Prepaid expenses and other current assets 3,817 1,292
Other assets and liabilities (1,724 ) (773 )
Accounts payable (8,654 ) (3,877 )
Income and other taxes payable 3,703 72
Accrued expenses and other current liabilities (11,425 ) 15,495
Deferred revenue 1,328 223
Net cash provided by operating activities 75,123 77,982
Investing activities
Purchases of property and equipment (24,001 ) (16,501 )
Loans issued (1,630 ) (1,571 )
Repayments of loans issued 5,382 2,787
Acquisitions, net of cash acquired (11,202 ) (491 )
Other 165 348
Net cash used in investing activities (31,286 ) (15,428 )
Financing activities
Net proceeds on line of credit facility 61,375 3,549
Cash dividends paid (13,130 ) (11,083 )
Excess tax benefit on equity awards 4,490 9,488

Tax payments for equity award issuances

(5,831 ) (10,654 )
Proceeds from exercise of stock options 2,812 3,915
Acquisition of Company common stock (96,355 ) (52,083 )
Contributions from noncontrolling interest holders 120 683
Distributions to noncontrolling interest holders (3,320 ) (4,350 )
Other 391 319
Net cash used in financing activities (49,448 ) (60,216 )
Effect of exchange rate changes on cash and cash equivalents (129 ) (13 )
Change in cash and cash equivalents (5,740 ) 2,325
Cash and cash equivalents at beginning of period 21,006 20,122
Cash and cash equivalents at end of period $ 15,266 $ 22,447
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