LOUISVILLE, Ky. - (BUSINESS WIRE) - Feb. 25, 2021 - Papa John’s International, Inc. (NASDAQ: PZZA) today announced financial results for the three months and full year ended December 27, 2020.
Fourth quarter highlights compared to prior year
Full year 2020 highlights compared to prior year
“2020 was a transformational year for Papa John’s, as we turned our focus to the future. We were able to deliver industry-leading sales growth and significant profitability by coming together as a system to take care of our team members, customers and communities in one of the most challenging years in history,” said President & CEO Rob Lynch. “Q4 2020 was the third consecutive quarter of double-digit comparable sales growth and the sixth straight quarter of positive comparable sales in North America. We ended the year with the launch of Epic Stuffed Crust, the biggest product innovation in the company’s history, and our future is extremely bright.”
Mr. Lynch continued, “We are confident that the foundations of our business – our company’s core values, our iconic brand, our dedicated team members, our strong franchise system and our rapidly improving financial performance – are stronger than ever, and we continue to build momentum. We remain hopeful for a swift end to the global pandemic and continue to prioritize the health and safety of our team and customers, while we meet our responsibility to serve millions of new and returning customers.”
Global restaurant and comparable sales information for the three months and full year ended December 27, 2020, compared to the three months and full year ended December 29, 2019 are as follows:
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Financial Highlights
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Revenues
Consolidated revenues of $469.8 million increased $52.3 million, or 12.5%, in the fourth quarter of 2020 compared to the fourth quarter of 2019 primarily due to strong comparable sales results for North America restaurants, including 10.2% for company-owned restaurants and 14.5% for franchised restaurants, resulting in higher company-owned restaurant revenues, franchise royalties and commissary sales. International revenues also increased primarily due to higher commissary revenues and higher royalties from strong comparable sales results of 21.4% for the quarter.
Operating Results
Consolidated operating income of $19.7 million for the fourth quarter of 2020 increased $19.8 million compared to the fourth quarter of 2019. Excluding the impact of Special items, consolidated operating income increased $28.7 million for the three months ended December 27, 2020. See “Reconciliation of Non-GAAP Financial Measures,” for additional information. The increase, excluding Special items, was primarily due to temporary franchise support of $25.4 million in the fourth quarter of 2019 (see “Temporary Franchise Support” below) and higher income from higher comparable sales both domestically and internationally.
Diluted earnings per share was $0.28 for the fourth quarter of 2020 representing an increase of $0.46 over the fourth quarter of 2019. Excluding Special items, diluted earnings per share was $0.40 representing an increase of $0.65 over the fourth quarter of 2019. Diluted earnings per share was reduced by approximately $0.01 per diluted share in the fourth quarter of 2020 ($0.03 impact when excluding Special items) due to income attributable to participating securities, including our Series B Convertible Preferred Stock (the “Series B Preferred Stock”), based on the allocation of undistributed earnings to participating securities in the period. See “Participating Securities Earnings Per Share” for additional information related to the calculation of income attributable to participating securities for the three months ended December 27, 2020.
Segment Results
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Consolidated operating income of $19.7 million for the fourth quarter of 2020 increased $19.8 million from the fourth quarter of 2019. Excluding the impact of Special items, the increase was $28.7 million. Significant changes in operating income and operating income, excluding Special items, are as follows:
Full Year Results
Consolidated revenues increased 12.0% to $1,813.2 million for the year ended December 27, 2020, compared to the prior year comparable period, primarily due to higher comparable sales which benefited each of the company’s operating segments. Consolidated operating income increased $65.7 million for the year ended December 27, 2020 ($62.2 million excluding Special items), compared to the prior year comparable period, primarily due to improved results from North America franchising and Domestic Company-owned restaurants and lower temporary franchise support.
For the year ended December 27, 2020, diluted earnings per share was $1.28 representing an increase of $1.52 over the prior year period. Excluding Special items, diluted earnings per share was $1.40 representing an increase of $1.37 over the prior year period. Diluted earnings per share was reduced by approximately $0.07 per share for the year ($0.09 impact when excluding Special items) due to income attributable to participating securities, including Series B Preferred Stockholders, based on the allocation of undistributed earnings to participating securities in the period. See “Participating Securities Earnings Per Share” for additional information related to the calculation of income attributable to participating securities for the year ended December 27, 2020.
The company’s cash flow from operating activities for the year ended December 27, 2020 was $186.4 million, compared to $61.7 million a year ago, reflecting higher net income and favorable working capital changes, including timing of payments. This resulted in significantly higher free cash flow (a non-GAAP financial measure defined as net cash provided by operating activities, less purchases of property and equipment and dividends paid to preferred shareholders) of $137.1 million, compared to $14.0 million for the year ended December 29, 2019. See “Free Cash Flow” for additional information.
See the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K filed with the SEC for additional information concerning our operating results and cash flow for the year ended December 27, 2020.
Cash Dividend
The company paid common and preferred stock dividends of $10.9 million in the fourth quarter of 2020. The company declared first quarter 2021 dividends of approximately $10.8 million on January 25, 2021, which were paid to common shareholders on February 19, 2021. The first quarter preferred dividend will be paid on April 1, 2021. 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 holders of Series B Preferred Stock receive quarterly preferred dividends and common stock dividends on an as converted to common stock basis.
Global Restaurant Unit Data
As of December 27, 2020, there were 5,400 Papa John’s restaurants operating in 48 countries and territories, as follows:
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Our development pipeline as of December 27, 2020 included approximately 1,460 restaurants (210 units in North America and 1,250 units internationally), the majority of which are scheduled to open over the next six years.
On September 17, 2020, we announced plans to open an office in Atlanta, Georgia. The Atlanta office is part of a broader strategic reorganization of corporate functions reflecting the company’s ongoing transformation into a brand and culture that can effectively and efficiently deliver on the company’s purpose, values and strategic business priorities. The opening of the Atlanta location and related organizational changes are expected to be completed by the summer of 2021. Affected employees who do not relocate to Atlanta have been offered a separation package. We expect to incur certain one-time corporate reorganization costs of approximately $15 to $20 million related to employee severance and transition, recruitment and relocation, and third-party and other costs through 2021, and $6.0 million (or approximately $0.12 per diluted share) of these strategic corporate reorganization costs were incurred in the fourth quarter of 2020. See “Reconciliation of Non-GAAP Financial Measures” for additional information.
Given on-going uncertainty surrounding the future impact of COVID-19, we are not providing outlook for 2021 at this time.
A conference call is scheduled for February 25, 2021 at 8:00 a.m. Eastern Time to review the company’s fourth quarter and full year 2020 earnings results. The call can be accessed from the company’s web page. The conference call will be available for replay, including by downloadable podcast, from the company’s web site. The Conference ID is 9479043.
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.
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 projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, 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 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, the duration of changes in consumer behavior caused by the pandemic, the duration and number of temporary store closures, our plans to open a new office in Atlanta, the associated reorganization costs and the related organizational, employment and real estate changes that are expected, royalty relief, the effectiveness of our menu innovations and other business initiatives, marketing efforts, liquidity, compliance with debt covenants, 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.
Our forward-looking statements are based on our assumptions which are based on currently available information, including assumptions about our ability to manage difficulties and opportunities 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; impact of delayed new store openings, both domestically and internationally; the overall contraction in global economic activity, including increased unemployment; our liquidity position; our ability to navigate changing governmental programs and regulations relating to the pandemic; the increased risk of phishing and other cyber-attacks; our ability to successfully implement or fully realize the anticipated benefits of our corporate reorganization and new office in Atlanta, Georgia and corporate reorganization in the timeframes we desire or within the expected range of expenses, or at all; In addition, turnover in our support teams due to our relocations to Georgia could distract our employees, decrease employee morale, harm our reputation, and negatively impact the overall performance of our corporate support teams. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. These and other risks, uncertainties and assumptions that are involved in our forward-looking statements 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 27, 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.
Definition
Comparable sales: We believe North America, international and global restaurant and comparable sales growth information 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.
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, concluded in the third quarter of 2020. The adjusted financial results for the three months and full year ended December 27, 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. The non-GAAP adjusted results shown below and within this press release, which exclude the items in the table below (collectively defined as “Special items”), 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 items 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.
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Temporary Franchise Support
Beginning in the third quarter of 2018, the company began providing various forms of support and financial assistance to the North America franchise system in response to declining North America sales. In July 2019, the company announced a formal relief program to provide our North America franchisees with certainty regarding the availability and schedule of the temporary relief which concluded in the third quarter of 2020.
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 items within its adjusted financial results. The prior period adjusted financial measures presented above in “Reconciliation of non-GAAP Financial Measures” have also been revised to remove the impact of these items. The Temporary Franchise Support concluded in the third quarter of 2020.
Temporary Franchise Support investments were $29.3 million (or approximately $0.69 per diluted share) for the full year ended December 27, 2020 (none for the three-month period), compared to $25.4 million (or approximately $0.62 per diluted share) and $46.6 million (or approximately $1.14 per diluted share) for the three and twelve months ended December 29, 2019, respectively, as follows (in thousands):
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Free Cash Flow
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. The company’s free cash flow for the years ended December 27, 2020 and December 29, 2019, respectively were as follows (in thousands):
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Participating Securities Earnings Per Share
We compute earnings per common share using the two-class method, by which net income attributable to participating securities, in addition to preferred stock dividends and accretion, is deducted from net income attributable to the company to determine net income attributable to common shareholders. Net income attributable to participating securities is the portion of undistributed earnings, defined as net income attributable to the company, less dividends paid to common and preferred shareholders, that would be allocated to the holders of participating securities on an as-converted basis.
The calculation to determine the amount of undistributed earnings to allocate to participating securities is as follow (in thousands):
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Source: Papa John’s International, Inc.
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