Papa John's Announces Third Quarter 2014 Results

Papa Johns
Published: November 5th, 2014

Third Quarter Comparable Sales Increases of 7.4% for North America and 5.5% for International

LOUISVILLE, Ky. - November 04, 2014 - (BUSINESS WIRE) - Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the three and nine months ended September 28, 2014.

Highlights

• Third quarter earnings per diluted share of $0.39 in 2014 compared to $0.32 in 2013, an increase of 21.9%
• Third quarter system-wide comparable sales increases of 7.4% for North America and 5.5% for international
• Increased 2014 diluted earnings per share guidance to a range of $1.68 to $1.74; Increased North America comparable sales guidance to a range of +5.0% to +7.0%

"I’d like to congratulate our corporate and franchise operators for continuing to drive excellent sales and bottom line results," said Papa John’s Founder, Chairman, CEO and President John Schnatter. "Our focus on driving quality, digital innovation, and a better customer experience provides the foundation from which we will continue to consistently grow units and profitability."

Third quarter 2014 revenues were $390.4 million, a 12.7% increase from third quarter 2013 revenues of $346.3 million. Third quarter 2014 net income was $16.1 million, compared to third quarter 2013 net income of $14.3 million. Third quarter 2014 diluted earnings per share were $0.39, compared to third quarter 2013 diluted earnings per share of $0.32.

Revenues were $1.17 billion for the nine months ended September 28, 2014, an 11.6% increase from revenues of $1.05 billion for the same period in 2013. Net income was $52.1 million for the nine months ended September 28, 2014, compared to $50.7 million for the same period in 2013. Diluted earnings per share were $1.23 for the nine months ended September 28, 2014, compared to $1.13 for the same period in 2013.

Global Restaurant and Comparable Sales Information

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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 $44.1 million, or 12.7%, for the third quarter of 2014 and increased $121.5 million, or 11.6%, for the nine months ended September 28, 2014. The increases in revenues were primarily due to the following:

• Domestic company-owned restaurant sales increased $16.4 million, or 10.8%, and $51.6 million, or 11.1%, for the three and nine months, respectively, primarily due to increases of 8.3% and 9.1% in comparable sales.
• North America franchise royalty revenue increased approximately $2.7 million, or 14.0%, and $5.3 million, or 8.9%, for the three and nine months, respectively, primarily due to increases of 7.1% and 7.2% in comparable sales. The three-month period was also favorably impacted by lower performance-based royalty incentives.
• Domestic commissary sales increased $11.2 million, or 8.1%, and $41.9 million, or 9.9%, for the three and nine months, respectively, due to increases in the prices of certain commodities, primarily cheese, and increases in sales volumes for the nine-month period.
• Other sales increased $9.8 million, or 72.2%, and $11.1 million, or 28.7%, for the three and nine months, respectively, primarily due to point-of-sale system ("FOCUS") equipment sales to franchisees. See the "FOCUS Update" section for additional information.
• International revenues increased $4.0 million, or 17.9%, and $12.1 million, or 19.1%, for the three and nine months, primarily due to increases in the number of restaurants and increases in comparable sales of 5.5% and 6.9%, respectively, calculated on a constant dollar basis.

Operating Highlights

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

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Third quarter 2014 income before income taxes increased $3.0 million, or 13.9%. Excluding FOCUS rollout costs of approximately $1.2 million, income before income taxes increased approximately $4.1 million, or 19.5%. Significant results by segment are detailed as follows:

• Domestic company-owned restaurants results increased approximately $2.6 million primarily due to the 8.3% increase in comparable sales, partially offset by the impact of higher commodity costs. The market price for cheese averaged $2.14 per pound for the third quarter of 2014, compared to $1.74 per pound in the prior year. Additionally, the results for the third quarter of 2014 include approximately $450,000 of depreciation expense associated with FOCUS hardware costs.
• Domestic commissaries results increased approximately $2.4 million primarily due to a higher margin, partially offset by higher costs associated with various ongoing commissary initiatives. We manage commissary results on a full year basis and anticipate the 2014 full year profit margin percentage will approximate 2013.
• North America franchising increased $2.5 million primarily due to higher royalties attributable to the 7.1% increase in comparable sales and lower performance-based royalty incentives.
• International income increased approximately $500,000 primarily due to an increase in units and comparable sales of 5.5% which resulted in both higher royalties and an improvement in United Kingdom commissary results. These increases were partially offset by unfavorable results at our China company-owned restaurant operations, including an impairment charge of approximately $700,000 for eight restaurants.
• The results for the "All others" segment decreased approximately $900,000. The decrease was primarily due to higher infrastructure costs to support our digital ordering business and a lower margin at our print and promotions business.
• Unallocated corporate expenses were $3.7 million higher primarily due to the following:
  • General and administrative costs increased approximately $1.5 million primarily due to higher salaries, benefits, and equity compensation costs, increased professional and legal fees and higher insurance costs.
  • Interest costs were approximately $400,000 higher due to both a higher average outstanding debt balance and a higher effective interest rate.
  • The prior year included an approximate $375,000 benefit from a decrease in the redemption value of a mandatorily redeemable noncontrolling interest in a joint venture.
  • Depreciation expense increased approximately $1.0 million including depreciation expense of $600,000 for FOCUS capitalized software development costs.

Income before income taxes increased $3.7 million, or 4.7%, for the nine-month period ended September 28, 2014. Excluding FOCUS system rollout costs of approximately $2.3 million, income before income taxes increased by approximately $6.0 million, or 7.7% for the nine-month period. The increase was primarily due to the same reasons as noted above, except the domestic commissaries segment which decreased approximately $100,000 due to higher insurance costs of approximately $1.1 million and higher costs associated with ongoing commissary initiatives. These decreases were substantially offset by a higher margin.

The effective income tax rates were 30.0% and 32.4% for the three and nine months ended September 28, 2014, representing a decrease of 0.1% for the three-month period and an increase of 0.5% for the nine-month period. Our effective income tax rate may fluctuate from quarter to quarter for various reasons. The higher tax rate for the nine months of 2014 was primarily due to the prior year including both favorable state tax settlements and the reinstatement of certain 2012 tax credits under the American Taxpayer Relief Act of 2012.

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 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, dividends or share repurchases. 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 nine months ended September 28, 2014.

FOCUS Update

As previously disclosed, the company is implementing a new, proprietary point-of-sale system ("FOCUS") in substantially all domestic system-wide restaurants. As of September 28, 2014, we had installed FOCUS in almost 50% of our domestic restaurants, including all company-owned restaurants and almost 800 franchised restaurants. Substantial completion is expected to occur by the end of the first quarter of 2015.

The costs related to implementing FOCUS are projected to decrease income before income taxes by approximately $4.0 million in 2014, or a $0.06 negative impact on diluted earnings per share, as compared to 2013. For the three and nine months ended September 28, 2014, the impact was a $1.2 million and $2.3 million reduction in income before income taxes, or a $0.02 and $0.04 reduction in diluted earnings per share, respectively. For additional information, see the Quarterly Report on Form 10-Q for the three- and nine-month periods ended September 28, 2014.

Global Restaurant Unit Data

At September 28, 2014, there were 4,537 Papa John’s restaurants operating in all 50 states and in 36 international countries and territories, as follows: