Papa John's Announces First Quarter 2015 Results

Papa Johns
Published: May 6th, 2015

First Quarter EPS Growth of 22% with Comparable Sales Increases of 6.5% for North America and 7.7% for International

LOUISVILLE, Ky.- May 5, 2015 -(BUSINESS WIRE) - Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the first quarter ended March 29, 2015.

Highlights

• First quarter earnings per diluted share of $0.55 in 2015 compared to $0.45 in 2014, an increase of 22.2%
• System-wide comparable sales increases of 6.5% for North America and 7.7% for international
• 36 net global restaurant openings
• Increased 2015 diluted earnings per share guidance to a range of $2.00 to $2.08; Increased North America comparable sales guidance to a range of +3% to +5%

"We would like to thank our customers for an incredible quarter, which saw demand for our "Better Ingredients. Better Pizza." soar, measured by comp sales, earnings growth and new unit openings," said Papa John's founder, chairman, president and CEO, John Schnatter. "Our corporate and franchise operators are united in our efforts to expand the Papa John's brand by leveraging our industry leading digital platforms to deliver our superior Papa John's pizza to new customers around the world."

First quarter 2015 revenues were $432.3 million, a 7.7% increase from first quarter 2014 revenues of $401.4 million. First quarter 2015 net income increased 15.1% to $22.2 million, compared to first quarter 2014 net income of $19.3 million. First quarter 2015 diluted earnings per share increased 22.2% to $0.55, compared to first quarter 2014 diluted earnings per share of $0.45.

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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 were $432.3 million for the first quarter of 2015, an increase of $30.9 million, or 7.7%. This increase in revenues was primarily due to the following:

• Domestic company-owned restaurant sales increased $19.1 million, or 10.7%, primarily due to an increase of 8.1% in comparable sales during the first quarter of 2015.
• North America franchise royalty revenue increased $2.7 million, or 12.1%, primarily due to an increase of 6.0% in comparable sales and due to reduced levels of royalty incentives in the first quarter of 2015.
• Domestic commissary sales decreased $1.7 million, or 1.0%, as lower revenues associated with lower cheese prices, were somewhat offset by increases in sales volumes. PJ Food Service pricing for cheese is based on a fixed dollar markup; when cheese prices decrease, revenues will decrease with no overall impact on the related dollar margin.
• Other sales increased $8.9 million, or 69.5%, primarily due to point-of-sale system ("FOCUS") equipment sales to franchisees. See the "FOCUS Update" section for additional information.
• International revenues increased $1.8 million, or 7.6%, primarily due to an increase in the number of restaurants and an increase in comparable sales of 7.7%, calculated on a constant dollar basis. This was somewhat offset by the negative impact of foreign currency exchange rates.

Operating Highlights

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First quarter 2015 income before income taxes increased approximately $5.0 million, or 16.0%. This increase was primarily due to the following:

• Domestic company-owned restaurants increased approximately $5.2 million primarily due to the 8.1% increase in comparable sales and due to higher profits from lower commodity costs. The market price for cheese averaged $1.54 per pound for the first quarter of 2015, compared to $2.21per pound in the prior year. The results for the first quarter of 2015 include approximately $500,000 of depreciation expense associated with FOCUS equipment.
• Domestic commissaries income increased approximately $1.4 million due to incremental profits from higher restaurant volumes.
• North America franchising increased approximately $2.8 million primarily due to higher royalties attributable to the 6.0% comparable sales increase and reduced levels of royalty incentives.
• International income increased approximately $600,000 primarily due to the previously mentioned increase in units and comparable sales of 7.7%, 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 $4.7 million in 2015 primarily due to higher legal, insurance, management incentive compensation, and interest costs. Additionally, the results for the first quarter of 2015 include approximately $700,000 of depreciation expense associated with FOCUS capitalized software development costs.

The first quarter 2015 effective income tax rate was 33.5%, representing a decrease of 1.1% from the prior year rate of 34.6%. Our effective income tax rate may fluctuate from quarter to quarter for various reasons.

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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. 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 29, 2015.

FOCUS Update

As of March 29, 2015, the company had implemented its new, proprietary point-of-sale system ("FOCUS") in substantially all domestic restaurants. The impact of implementing FOCUS was a $1.8 million reduction in income before income taxes in the first quarter of 2015, or a $0.03 reduction in diluted earnings per share, compared to a reduction of approximately $200,000 in the first quarter of 2014. For additional information, see the Quarterly Report on Form 10-Q for the three months ended March 29, 2015.

Global Restaurant Unit Data

At March 29, 2015, there were 4,699 Papa John's restaurants operating in all 50 states and in 37 international countries and territories, as follows:

 

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Our development pipeline as of March 29, 2015 included approximately 1,200 restaurants (200 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

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There were 40.5 million diluted weighted average shares outstanding for the first quarter, representing a decrease of 5.1% over the prior year first quarter. Diluted earnings per share increased $0.03 for the first quarter of 2015 due to the reduction in shares outstanding, primarily resulting from the share repurchase program. Approximately 39.8 million actual shares of the company's common stock were outstanding as of March 29, 2015.

2015 Guidance Update

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Conference Call

A conference call is scheduled for May 6, 2015 at 10:00 a.m. Eastern Time to review our first quarter 2015 earnings results. The call can be accessed from the company's web page at www.papajohns.com in a listen-only mode, or dial 877-312-8816 (U.S. and Canada) or 253-237-1189 (international). The conference call will be available for replay, including by downloadable podcast, from the company's web site at www.papajohns.com. The Conference ID is 45346371.

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to use our investor relations website as a means of disclosing information about our business, our financial condition and results of operations and other matters and for complying with our disclosure obligations under Regulation FD. The information we post on our investor relations website, including information contained in investor presentations, may be deemed material. Accordingly, investors should monitor our investor relations website, in addition to following our press releases, SEC filings and public conference calls and webcasts. We encourage investors and others to sign up for email alerts at our investor relations page under Shareholder Tools at the bottom right side of the page. These email alerts are intended to help investors and others to monitor our investor relations website by notifying them when new information is posted on the site.

Forward-Looking Statements

Certain matters discussed in this press release and other company communications constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as "expect," "estimate," "believe," "anticipate," "will," "forecast," "plan," "project," or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements may relate to projections or guidance concerning business performance, revenue, earnings, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, capital expenditures, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:

• aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales; and new product and concept developments by food industry competitors;
• changes in consumer preferences or consumer buying habits, including the impact of adverse economic conditions;
• the impact that product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns, including potential epidemics, could have system-wide on our restaurants or our results;
• failure to maintain our brand strength and quality reputation and risks related to our better ingredients marketing strategy;
• the ability of the Company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably;
• increases in or sustained high costs of food ingredients or other restaurant costs. This could include increased employee compensation, benefits, insurance, tax rates, regulatory compliance and similar costs; including increased costs resulting from federal health care legislation;
• disruption of our supply chain or commissary operations which could be caused by our sole source of supply of cheese or limited source of suppliers for other key ingredients or more generally due to weather, drought, disease, geopolitical or other disruptions beyond our control;
• increased risks associated with our international operations, including economic and political conditions, instability in our international markets, fluctuations in currency exchange rates, and difficulty in meeting planned sales targets and new store growth. This could include our expansion into emerging or underpenetrated markets, such as China, where we have a Company-owned presence. Based on prior experience in underpenetrated markets, operating losses are likely to occur as the market is being established;
• the impact of changes in interest rates on the Company or our franchisees;
• the credit performance of our franchise loan or guarantee programs;
• the impact of the resolution of current or future claims and litigation, in particular the Perrin litigation that is scheduled for trial in August 2015 (see the Form 10-Q for the quarter ended March 29, 2015 for additional information);
• current or proposed legislation impacting our business;
• failure to effectively execute succession planning, and our reliance on the multiple roles of our Founder, Chairman, President and Chief Executive Officer, who also serves as our brand spokesperson; and
• disruption of critical business or information technology systems, and risks associated with systems failures and data privacy and security breaches, including theft of Company, employee and customer information.

These and other risk factors are discussed in detail in "Part I. Item 1A. - Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.

For more information about the company, please visit www.papajohns.com.

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SOURCE Papa John's International, Inc.

Contact:

Lance Tucker
Papa John's International, Inc.
Chief Financial Officer
502-261-4218

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