Papa John’s Announces First Quarter 2020 Results And Provides Business Update In Response To COVID-19 Pandemic

Papa Johns
Published: May 6th, 2020

LOUISVILLE, Ky. - (BUSINESS WIRE) - May 6, 2020 - Papa John’s International, Inc. (NASDAQ: PZZA) today announced financial results for the first quarter ended March 29, 2020. The company also provided an update on the business impact of the global coronavirus (COVID-19) pandemic.

Highlights

• First quarter 2020 earnings per diluted share of $0.15 compared to first quarter 2019 loss per diluted share of ($0.12)
• System-wide North America comparable sales increase of 5.3%
• International comparable sales increase of 2.3%
• Cash flow from operations of $33.7 million; free cash flow of $24.4 million for first quarter 2020
• Launched No Contact Delivery and Carryout domestically and in many international markets and on plan to hire thousands of new team members
• Preliminary estimated April fiscal period comparable sales increases of 26.9% for North America and 1.4% for international

Rob Lynch, President & CEO said, “Thanks to the tremendous effort of our team members and franchisees, I’m proud to say that Papa John’s has kept its doors open and continued feeding our customers and neighbors in North America and most markets during the COVID-19 pandemic. Guided by the needs of our team members and the communities we serve, we have implemented rigorous additional health and safety measures, including No Contact Delivery, and expanded our health and paid-leave benefits. Our team members and franchisees have also served more than two million free slices of pizza to those on the front lines and in need. As seen in our April North America comparable sales, after the close of the first quarter, unprecedented numbers of families are relying on Papa John’s. We are rising to this challenge, hiring thousands of new team members, safeguarding our supply chain and carefully managing our finances. It's an honor to deliver BETTER INGREDIENTS. BETTER PIZZA. to our new and returning customers, especially in these trying times.”

Global Restaurant and Comparable Sales Information

Global restaurant and comparable sales information and operating highlights for the first quarter ended March 29, 2020, compared to the first quarter ended March 31, 2019 are as follows:

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(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 North America, international and global restaurant and comparable sales growth information, as defined in the table above, is useful in analyzing our results since our franchisees pay royalties and marketing fund contributions that are based on a percentage of franchise sales. Franchise sales also generate commissary revenue in the United States and in certain international markets. Franchise restaurant and comparable sales growth information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of franchise restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in the company’s revenues.

Revenue and Operating Highlights

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(a) Adjusted to exclude Non-GAAP items in 2019 referred to as “Special charges,” which impact comparability. The reconciliation of GAAP to non-GAAP financial results is included in the table below. 

Adjusted Financial Results

Effective as of the first quarter of 2020, the company modified its presentation of adjusted (non-GAAP) financial results to no longer present certain financial assistance provided to the North America system in the form of royalty relief and discretionary marketing fund investments as Special charges. This financial assistance, which began in the third quarter of 2018 in response to declining sales in North America, will continue through the third quarter of 2020, as announced in a formal plan in July 2019. The adjusted financial results for the quarter ended March 31, 2019 have been revised to remove these items. See “Temporary Franchise Support” for additional information regarding this change in presentation.

The table below reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures. We present these non-GAAP measures because we believe the Special charges in the first quarter of 2019 impact comparability to our first quarter 2020 results.

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View Original for Full Data Table

The 2019 non-GAAP adjusted results shown above and within this press release, which exclude the Special charges, 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 certain financial information excluding the Special charges is important for purposes of comparison to current year results. In addition, management uses these metrics to evaluate the company’s underlying operating performance and to analyze trends.

Temporary Franchise Support

As previously mentioned, effective as of the first quarter of 2020, the company no longer presents certain royalty relief and discretionary marketing fund investments, included herein as “Temporary Franchise Support,” as Special charges within its adjusted financial results. The prior period adjusted financial measures presented above in “Adjusted Financial Results” have also been revised to remove the impact of these items.

Temporary Franchise Support investments were $10.7 million (or approximately $0.26 per diluted share) in the first quarter ended March 29, 2020, compared to $4.9 million (or approximately $0.12 per diluted share) in the first quarter ended March 31, 2019, as follows (in thousands):

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View Original for Full Data Table

Revenue Highlights

Consolidated revenues increased $11.5 million, or 2.9%, for the first quarter of 2020 compared to the first quarter of 2019. Excluding the impact of refranchising 46 domestic restaurants and a quality control center in Mexico in 2019, consolidated revenues increased approximately $23.1 million, or 6.0%, for the first quarter ended March 29, 2020, primarily due to the following:

• Excluding the impact of refranchising, Domestic Company-owned restaurant sales increased due to positive comparable sales of 6.1%.
• North America commissary revenues increased primarily due to pricing associated with higher commodities costs, primarily cheese.
• North America franchise royalties and fees increased primarily due to positive comparable sales of 5.1%.
• International revenues, excluding refranchising, increased primarily due to higher United Kingdom commissary revenues and higher royalties from increased equivalent units and higher comparable sales of 2.3%. The higher revenues were partially offset by lower development fees and unfavorable foreign exchange rates.
• Other revenues increased due to higher marketing fund revenue primarily due to an increase in the national marketing fund contribution rate in 2020 and higher online revenues.

Operating Highlights

The table below summarizes income before income taxes on a reporting segment basis. Alongside the GAAP income (loss) before income taxes data, we have included “adjusted” income (loss) before income taxes to exclude Special charges. We believe this non-GAAP measure is important for purposes of comparison to prior year results.

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Consolidated income before income taxes of $11.5 million for the first quarter of 2020 increased $12.3 million compared to the first quarter of 2019. Excluding the impact of the previously mentioned Special charges in 2019, consolidated income before income taxes increased $1.3 million from the first quarter of 2019. Significant changes in income before income taxes, excluding Special charges are as follows:

• Domestic Company-owned restaurants income before income taxes increased $4.1 million primarily due to higher profits from positive comparable sales of 6.1% and lower loyalty program costs, partially offset by higher commodities costs, primarily cheese.
• North America Franchising income before income taxes was $1.6 million higher primarily due to higher comparable sales of 5.1%.
• International income before income taxes decreased $0.8 million primarily due to lower development fee revenues, higher general and administrative costs and the unfavorable impact of foreign exchange rates, partially offset by higher royalty revenues attributable to increased units and higher comparable sales.
• Unallocated corporate expenses increased $4.6 million, primarily due to a $5.0 million discretionary marketing fund investment as part of the formal relief program, as described above in “Temporary Franchise Support,” and higher management incentive costs and legal fees. These increases were partially offset by a decrease in interest expense from a lower average debt balance and lower interest rates.

Income tax expense was $2.5 million for the first quarter of 2020, for an effective tax rate of 21.8%, compared to $0.8 million for the first quarter of 2019, for an effective tax rate of 108.3%. The change in the effective rate was due to higher income before income taxes in the first quarter of 2020 and the non-deductible $5.9 million expense associated with the one-time mark-to-market increase in the fair value of the Starboard option to purchase Series B convertible preferred stock in the first quarter of 2019, as previously mentioned.

Diluted earnings per common share was $0.15 for the first quarter of 2020, compared to diluted loss per common share of ($0.12) for the first quarter of 2019.

Free Cash Flow

The company’s free cash flow, a non-GAAP financial measure, for the first quarter of 2020 and 2019, respectively, was as follows (in thousands):

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(a) The increase of $19.9 million was primarily due to higher net income and favorable working capital changes, including timing of payments.

We define free cash flow as net cash provided by operating activities (from the Consolidated Statements of Cash Flows) less the purchases of property and equipment and dividends paid to preferred shareholders. We view free cash flow as an important measure because it is one 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 SEC for additional information concerning our operating results and cash flow for the three months ended March 29, 2020.

Cash Dividend

The company declared common and preferred stock dividends of $10.7 million in the first quarter of 2020. The company declared second quarter 2020 cash dividends of approximately $10.7 million on April 30, 2020 which will be paid to common shareholders on May 22, 2020. The second quarter preferred dividend will be paid on ­­­­­July 1, 2020. The dividends are as follows (in thousands):

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The declaration and payment of any future dividends on our common stock 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. The Series B preferred stockholders receive quarterly preferred dividends and common stock dividends on an as-converted to common stock basis.

Global Restaurant Unit Data

At March 29, 2020, there were 5,378 Papa John’s restaurants operating in 49 countries and territories, as follows:

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(1) Temporary closures as a result of the COVID-19 outbreak are not reflected as “closed” in the restaurant progression above. See “Update on Impact of COVID-19 on International and North America Markets” section below.

Our development pipeline as of March 29, 2020 included approximately 1,140 restaurants (90 units in North America and 1,050 units internationally), the majority of which are scheduled to open over the next six years.

Update on Impact of COVID-19 on International and North America Markets

The COVID-19 outbreak has presented evolving developments domestically and internationally. The outbreak began to result in disruption in certain of our international markets beginning in January 2020, which negatively impacted our operations in affected locations, including causing temporary closures of franchise locations in China and South Korea. Subsequently, the outbreak was characterized as a pandemic by the World Health Organization on March 11, 2020 and declared a national emergency in the United States during the same timeframe. In response, governments and other authorities around the world have imposed measures to attempt to control the spread of COVID-19, including restrictions on freedom of movement and business operations such as travel bans, social distancing requirements, including limitations on gatherings, shelter-in-place orders and quarantines, and mandated business closures, which have resulted in significant changes in commercial activity and consumer behavior. In addition, the pandemic has resulted in an overall contraction in global economic activity and rising unemployment. We have been in discussions with our major suppliers and currently have not experienced material disruptions in our supply chain.

Our primary focus continues to be the safety of our team members, franchisees, and customers. The company has taken steps to mitigate the impact of the COVID-19 pandemic by implementing extra health and safety measures across our business, including No Contact Delivery and enhanced cleaning and sanitization measures, for the protection of both our customers and team members. We have expanded our corporate employee benefits to include free virtual doctor visits. This is in addition to existing employee benefits of no-cost mental health support and affordable health plan options. In addition, the company is in the process of hiring thousands of team members to help serve our customers.

Of the company’s approximately 2,100 international franchised stores, approximately 375 are temporarily closed, principally in Europe (140 stores), Latin America (130 stores), and the Middle East (95 stores) in accordance with government policies. In China and South Korea, our markets which were impacted the earliest by the COVID-19 outbreak, a limited number of restaurants remain closed. Some international markets are open predominantly for delivery only, such as in the United Kingdom. In North America, substantially all our traditional restaurants remain open and fully operational. A number of non-traditional restaurants located in universities and stadiums are temporarily closed; these non-traditional locations are not significant to our revenues and operating results.

Although March sales in North America were negatively impacted by the cancellation of large gatherings, including major sporting events, our domestic businesses have performed well, as customers and communities rely on us and others in the food delivery industry. The demand for carry-out and delivery across our markets has increased over the past several weeks.

Our sales results by month for the first quarter, and our preliminary, estimated comparable sales information for the first month of the second quarter of 2020 (Period 4) are as follows:

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(a) 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 have sufficient cash on hand to support our current operations and we have access to approximately $350 million from our credit facility, should we need it.

Withdrawal of 2020 Outlook

There continues to be many uncertainties related to the COVID-19 pandemic. In late March, the company withdrew its previously provided financial outlook for 2020.

Conference Call and Website Information

A conference call is scheduled for May 6, 2020 at 8:00 a.m. Eastern Time to review the company’s first quarter 2020 earnings results. The call can be accessed from the company’s web page 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. The Conference ID is 8681167.

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 that are not statements of historical fact constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “intend,” “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 include or may relate to the preliminary estimated same store sales growth and related trends, projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, the financial impact of the temporary business opportunities, disruptions and temporary changes in demand we are experiencing related to the current outbreak of the novel coronavirus disease (COVID-19), including the projections for sales trends and comparable sales, temporary restaurant closures, our cash on hand and access to our credit facilities, commodity costs, currency fluctuations, profit margins, unit growth, unit level performance, capital expenditures, restaurant and franchise development, royalty relief, the effectiveness of our strategic turnaround efforts and other business initiatives, marketing efforts, liquidity, compliance with debt covenants, stockholder and other stakeholder engagement, strategic decisions and actions, dividends, effective tax rates, regulatory changes and impacts, adoption of new accounting standards, 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:

• the ability of the company to manage difficulties associated with or related to the COVID-19 pandemic, including risks related to: the impact of governmental restrictions on freedom of movement and business operations including quarantines, social distancing requirements and mandatory business closures; the virus’s impact on the availability of our workforce; the potential disruption of our supply chain; changes in consumer demand or behavior; the overall contraction in global economic activity, including rising unemployment; our liquidity position; and our ability to navigate changing governmental programs and regulations relating to the pandemic; and the increased risk of phishing and other cyber-attacks;
• the assumption that the store closures in international markets and non-traditional restaurants in North America are not expected to be permanent; the assumption that our delivery restaurants will continue to stay open and be deemed essential businesses by national, state and local authorities in most of the jurisdictions in which we operate;
• increased costs for branding initiatives and launching new advertising and marketing campaigns and promotions to improve consumer sentiment and sales trends, and the risk that such initiatives will not be effective;
• the ability of the company to ensure the long-term success of the brand through significant investments committed to our U.S. franchise system, including marketing fund investments and royalty relief;
• the ability of the company to improve customer sentiment and sales trends through advertising, marketing and promotional activities;
• risks related to social media, including publicity adversely and rapidly impacting our brand and reputation;
• aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors;
• changes in consumer preferences or consumer buying habits, including the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending, including higher unemployment;
• the adverse impact on the company or our results caused by global health concerns, product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our company-owned or franchised restaurants or others in the restaurant industry;
• the effectiveness of our technology investments and changes in unit-level operations;
• the ability of the company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, store level employees or suitable sites;
• increases in food costs or sustained higher other operating costs. This could include increased employee compensation, benefits, insurance, tax rates, new regulatory requirements or increasing compliance costs;
• increases in insurance claims and related costs for programs funded by the company up to certain retention limits, including medical, owned and non-owned vehicles, workers’ compensation, general liability and property;
• 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, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control;
• increased risks associated with our international operations, including economic and political conditions and risks associated with the withdrawal of the United Kingdom from the European Union, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new store growth;
• the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business including compliance with the European Union General Data Protection Regulation;
• the company's ability to continue to pay dividends to shareholders based upon profitability, cash flows and capital adequacy if restaurant sales and operating results decline;
• failure to effectively manage recent transitions within our executive leadership team or to otherwise successfully execute succession planning;
• disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and security breaches, including theft of confidential company, employee and customer information, including payment cards; and
• changes in Federal or state income, general and other tax laws, rules and regulations and changes in generally accepted accounting principles.

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 29, 2019, and in “Part II. Item 1A. – Risk Factors” in our Quarterly Report on Form 10-Q for the first quarter ended March 29, 2020. 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.

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Source: Papa John’s International, Inc.