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Papa John's Announces Third Quarter 2013 Results

By: Papa Johns |  7 Shares     79 Reads

Earnings Guidance Increased; Two-for-One Stock Split Declared

LOUISVILLE, Ky. - November 6, 2013 - (BUSINESS WIRE) - Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the three and nine months ended September 29, 2013.

Highlights

• Third quarter diluted earnings per share of $0.65 in 2013 compared to $0.55 in 2012, an increase of 18%
• System-wide comparable sales increases of 1.8% for North America and 8.1% for international during the quarter
• 2013 diluted earnings per share guidance increased to a range of $3.02 to $3.10
• 2013 guidance increased for North America comparable sales, international comparable sales, and worldwide net unit openings

"I'd like to congratulate our operators on yet another solid quarter," said Papa John's Founder, Chairman and Chief Executive Officer, John Schnatter. "Papa John's brand promise of delivering Better Ingredients, Better Pizza is resonating with customers around the world reflected by our strong international comp sales and unit growth. Having just initiated a regular cash dividend, today's announcement of a two-for-one stock split demonstrates our Company's sustained commitment to building value for our shareholders and our confidence in the fundamentals and growth potential of our business."

Third quarter 2013 revenues were $346.3 million, a 6.4% increase from third quarter 2012 revenues of $325.5 million. Third quarter 2013 net income was $14.3 million, compared to third quarter 2012 net income of $13.0 million. Third quarter 2013 diluted earnings per share were $0.65 compared to third quarter 2012 diluted earnings per share of $0.55.

Revenues were $1.05 billion for the nine months ended September 29, 2013, a 7.8% increase from revenues of $975.4 million for the same period in 2012. Net income was $50.7 million for the nine months ended September 29, 2013, compared to $44.3 million for the same period in 2012 ($50.2 million and $46.4 million, for the nine-month periods in 2013 and 2012, respectively, excluding the impact of the previously disclosed 2012 Incentive Contribution). Diluted earnings per share were $2.27 for the nine months ended September 29, 2013, compared to $1.84 for the same period in 2012 ($2.24 and $1.93, for the nine-month periods in 2013 and 2012, respectively, excluding the impact of the 2012 Incentive Contribution).

Global Restaurant and Comparable Sales Information
				Three Months Ended								Nine Months Ended
				Sept. 29, 2013				Sept. 23, 2012				Sept. 29, 2013				Sept. 23, 2012
Global restaurant sales growth (a)				6.9	%			7.1	%			6.7	%			7.6	%
Global restaurant sales growth, excluding the impact of foreign currency (a)				7.5	%			7.4	%			7.2	%			8.0	%
Comparable sales growth (b)
Domestic company-owned restaurants				5.1	%			5.0	%			5.0	%			5.1	%
North America franchised restaurants				0.6	%			1.7	%			1.3	%			2.4	%
System-wide North America restaurants				1.8	%			2.5	%			2.3	%			3.0	%
System-wide international restaurants				8.1	%			6.9	%			7.7	%			7.1	%
(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 conversion.

Management believes 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 revenues and operating highlights below are compared to the same period of the prior year and exclude the Incentive Contribution, unless otherwise noted.

Revenues

Consolidated revenues increased $20.8 million, or 6.4%, for the third quarter of 2013 and increased $75.8 million, or 7.8%, for the nine months endedSeptember 29, 2013. The increases in revenues were primarily due to the following:

• Domestic company-owned restaurant sales increased $9.4 million, or 6.5%, and $35.1 million, or 8.1%, for the three and nine months, respectively, primarily due to increases in comparable sales of 5.1% and 5.0%. The increase for the nine-month period was also due to the net acquisition of 50 restaurants in the Denver and Minneapolis markets from a franchisee in the second quarter of 2012.
• North America franchise royalty revenue increased approximately $600,000, or 3.4%, and $2.0 million, or 3.4%, for the three and nine months, respectively, primarily due to increases in net franchise units over the prior year and increases in comparable sales of 0.6% and 1.3%, partially offset by royalty incentives offered to franchisees for meeting certain sales targets. The increase for the nine-month period was partially offset by reduced royalties attributable to the company's net acquisition of the 50 restaurants noted above.
• Domestic commissary sales increased $5.4 million, or 4.1%, and $25.1 million, or 6.3%, for the three and nine months, respectively, primarily due to increases in sales volumes as well as increases in the prices of commodities.
• International revenues increased $4.4 million, or 24.2%, and $11.2 million, or 21.4%, for the three and nine months, respectively, primarily due to increases in the number of restaurants and increases in comparable sales of 8.1% and 7.7%, calculated on a constant dollar basis.

Operating Highlights

The table below summarizes income before income taxes on a reporting segment basis, excluding the Incentive Contribution:

				Three Months Ended															Nine Months Ended
				Sept. 29,					Sept. 23,					Increase					Sept. 29,					Sept. 23,					Increase
(In thousands)				2013					2012					(Decrease)					2013					2012					(Decrease)
Domestic company-owned restaurants				$	5,535				$	5,549				$	(14	)			$	24,666				$	27,228				$	(2,562	)
Less: Incentive Contribution (a)					-					-					-					-					1,029					(1,029	)
Domestic company-owned restaurants, excluding Incentive Contribution					5,535					5,549					(14	)				24,666					26,199					(1,533	)
Domestic commissaries					6,473					6,846					(373	)				26,278					25,990					288
North America franchising					16,516					16,070					446					52,134					50,829					1,305
International					945					625					320					2,152					1,217					935
All others					590					732					(142	)				2,402					1,598					804
Unallocated corporate expenses					(8,544	)				(9,201	)				657					(28,475	)				(34,784	)				6,309
Less: Incentive Contribution (a)					250					250					-					750					(4,250	)				5,000
Unallocated corporate expenses, excluding Incentive Contribution					(8,794	)				(9,451	)				657					(29,225	)				(30,534	)				1,309
Elimination of intersegment losses (profits)					(252	)				242					(494	)				(989	)				(229	)				(760	)
Total income before income taxes, excluding Incentive Contribution (a)				$	21,013				$	20,613				$	400				$	77,418				$	75,070				$	2,348
(a) Income before income taxes and other financial measures excluding the Incentive Contribution are non-GAAP financial measures. See Marketing Incentive Contribution table below for additional details and a reconciliation to our GAAP financial measures.

Third quarter 2013 income before income taxes increased approximately $400,000, or 1.9%, primarily due to the following:

• North America franchising increased primarily due to the increase in net restaurants and comparable sales, partially offset by royalty incentives offered to franchisees for meeting certain sales targets.
• International increased primarily due to the increase in net restaurants and comparable sales results and an improvement in our United Kingdom results, partially offset by higher operating losses in our company-owned China market.
• Unallocated corporate expenses decreased primarily due to lower settlement costs than originally estimated for the previously disclosed Agne text messaging class action lawsuit.

These increases were partially offset by the following decrease:

• Domestic commissaries decreased as higher distribution costs more than offset the incremental profits associated with higher sales. We manage commissary results on a full year basis and anticipate the 2013 full year pre-tax income margin will approximate the 2012 margin.

Domestic company-owned restaurants income before income taxes approximated the prior year as the incremental profits associated with higher comparable sales of 5.1% were offset by a lower gross margin.

The increase in income before income taxes for the nine months ended September 29, 2013 of $2.3 million, or 3.1%, was primarily due to the same reasons as the increases noted above for the three month period. In addition, All others increased primarily due to an improvement in our online operating results due to higher online sales volumes. These increases were partially offset by a decrease in income before income taxes at our domestic company-owned restaurants primarily due to higher commodity costs, somewhat offset by incremental profits associated with higher comparable sales of 5.0%.

The effective income tax rates were 30.0% and 31.9% for the three and nine months ended September 29, 2013, respectively, representing decreases of 3.7% and 1.9% from the prior year rates. The lower tax rates were due to various credits earned and the settlement or resolution of specific tax issues in 2013.

The company's free cash flow for the first nine months of 2013 and 2012 was as follows (in thousands):

				Nine Months Ended
				Sept. 29,					Sept. 23,
				2013					2012
Net cash provided by operating activities (a)				$	74,833				$	94,773
Purchase of property and equipment (b)					(38,537	)				(26,425	)
Free cash flow				$	36,296				$	68,348
(a) The decrease of approximately $19.9 million was primarily due to unfavorable changes in working capital, including the timing of income tax and other payments, partially offset by an increase in net income.
(b) The increased purchases of property and equipment primarily relate to expenditures on equipment for the New Jersey dough production as well as technology investments.

We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less 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 for additional information concerning our operating results and cash flow for the three- and nine-month periods ended September 29, 2013.

Global Restaurant Unit Data

At September 29, 2013, there were 4,296 Papa John's restaurants operating in all 50 states and in 35 countries, as follows:

				Domestic Company- owned				Franchised North America				Total North America				International				System-wide
Third Quarter
Beginning - June 30, 2013				654				2,588				3,242				1,010				4,252
Opened				2				48				50				40				90
Closed				-				(41	)			(41	)			(5	)			(46	)
Ending - September 29, 2013				656				2,595				3,251				1,045				4,296
Year-to-date
Beginning - December 30, 2012				648				2,556				3,204				959				4,163
Opened				8				111				119				112				231
Closed				-				(72	)			(72	)			(26	)			(98	)
Ending - September 29, 2013				656				2,595				3,251				1,045				4,296
Restaurant unit growth				8				39				47				86				133
% increase				1.2	%			1.5	%			1.5	%			9.0	%			3.2	%

Our development pipeline as of September 29, 2013 included approximately 1,300 restaurants (250 units in North America and 1,050 units internationally), the majority of which are scheduled to open over the next six years.

Marketing Incentive Contribution

The following table reconciles our GAAP financial results to our results excluding the Incentive Contribution for the three and nine months endedSeptember 29, 2013 versus the same periods in 2012:

				Three Months Ended										Nine Months Ended
				Sept. 29,					Sept. 23,					Sept. 29,					Sept. 23,
(In thousands, except per share amounts)				2013					2012					2013					2012
Income before income taxes, as reported				$	21,263				$	20,863				$	78,168				$	71,849
Incentive Contribution (a)					(250	)				(250	)				(750	)				3,221
Income before income taxes, excluding Incentive Contribution				$	21,013				$	20,613				$	77,418				$	75,070
Net income, as reported				$	14,276				$	13,031				$	50,732				$	44,301
Incentive Contribution (a)					(165	)				(159	)				(494	)				2,116
Net income, excluding Incentive Contribution				$	14,111				$	12,872				$	50,238				$	46,417
Earnings per diluted share, as reported				$	0.65				$	0.55				$	2.27				$	1.84
Incentive Contribution (a)					(0.01	)				(0.01	)				(0.03	)				0.09
Earnings per diluted share, excluding Incentive Contribution				$	0.64				$	0.54				$	2.24				$	1.93
(a) As previously disclosed, in connection with a 2012 multi-year supplier agreement, the Company received a $5.0 million supplier marketing payment in the first quarter of 2012. The Company is recognizing the supplier marketing payment evenly as income over the five-year term of the agreement ($250,000 per quarter). In 2012, the Company contributed the supplier marketing payment to the Papa John's Marketing Fund ("PJMF"), an unconsolidated, non-profit corporation, for the benefit of domestic restaurants. The Company's contribution to PJMF was fully expensed in the first quarter of 2012. PJMF elected to distribute the $5.0 million supplier marketing payment to the domestic system as advertising credits in the first quarter of 2012. Our domestic company-owned restaurants' portion resulted in an increase in income before income taxes of approximately $1.0 million in the first quarter of 2012. These transactions together are referred to as the "Incentive Contribution."

The results shown in the table and elsewhere in this press release, which exclude the Incentive Contribution, are not measures defined by accounting principles generally accepted in the United States ("GAAP"). These non-GAAP measures 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 impact of the Incentive Contribution is important for purposes of comparison to prior year results. In addition, management uses these non-GAAP measures to allocate resources, and analyze trends and underlying operating performance. Annual cash bonuses, and certain long-term incentive programs for various levels of management, were based on financial measures that excluded the Incentive Contribution.

Share Repurchase Activity

The following table reflects our repurchases for the three and nine months ended September 29, 2013 and subsequent repurchases through October 28, 2013 (in thousands):

Period				Number of Shares			Cost
Three Months Ended September 29, 2013				150			$	10,331
Nine Months Ended September 29, 2013				1,128			$	69,137
September 30, 2013 through October 28, 2013				74			$	5,260

There were 22.1 million and 22.4 million diluted weighted average shares outstanding for the three and nine months ended September 29, 2013, representing decreases of 6.9% and 7.2% over the prior year comparable periods. Diluted earnings per share increased $0.05 and $0.17 for the three and nine months ended September 29, 2013 due to the reduction in shares outstanding resulting from the share repurchase program. Approximately 21.5 million actual shares of the company's common stock were outstanding as of September 29, 2013.

Regular Quarterly Dividend and Two-for-One Stock Split

As previously announced, the Board of Directors declared a regular quarterly cash dividend of $0.25 per share; the dividend will be paid on November 22, 2013 to shareholders of record as of the close of business on November 11, 2013.

The Board of Directors also declared a two-for-one split of the company's outstanding shares of common stock, which will be effected in the form of a stock dividend. The stock dividend entitles each shareholder of record at the close of business on December 12, 2013 to receive one additional share for every outstanding share of common stock held on such record date. The stock dividend will be distributed on December 27, 2013.

2013 Guidance Update

The company provided the following 2013 guidance updates:

				Updated Guidance			Previous Guidance
Diluted earnings per share				$3.02 to $3.10			$2.92 to $3.00
North America comparables sales				+2.5% to +3.5%			+1.5% to +2.5%
International comparable sales				+7.0% to +8.0%			+5.0% to +7.0%
Worldwide net unit growth				245 to 275			230 to 260
North America				85 to 95			110 to 125
International				160 to 180			120 to 135

Conference Call

A conference call is scheduled for November 6, 2013 at 10:00 a.m. Eastern Time to review our third quarter 2013 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 atwww.papajohns.com. The Conference ID is 63215634.

Forward-Looking Statements

Certain matters discussed in this press release 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 and adverse general economic and political conditions, including increasing tax rates, and their resulting impact on consumer buying habits;
• the impact that product recalls, food quality or safety issues, and general public health concerns could have on our restaurants;
• failure to maintain our brand strength and quality reputation;
• the ability of the company and its franchisees to meet planned growth targets and to operate new and existing restaurants profitably;
• increases in or sustained high costs of food ingredients and other commodities;
• disruption of our supply chain or our commissary operations due to sole or limited source of suppliers or weather, drought, disease or other disruption beyond our control;
• increased risks associated with our international operations, including economic and political conditions in our international markets and difficulty in meeting planned sales targets and new store growth for our international operations;
• increased employee compensation, benefits, insurance, regulatory compliance and similar costs, including increased costs resulting from federal health care legislation;
• the credit performance of our franchise loan program;
• the impact of the resolution of current or future claims and litigation, and current or proposed legislation impacting our business;
• currency exchange or interest rates;
• failure to effectively execute succession planning, and our reliance on the services of our Founder and CEO who also serves as our brand spokesperson; and
• disruption of critical business or information technology systems, and risks associated with security breaches, including theft of company and customer information.

These and other risk factors are discussed in detail in "Part I. Item 1A. - Risk Factors" of the Annual Report on Form 10-K for the fiscal year endedDecember 30, 2012. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.

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

Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Income
				Three Months Ended										Nine Months Ended
				September 29, 2013					September 23, 2012					September 29, 2013					September 23, 2012
				(Unaudited)					(Unaudited)					(Unaudited)					(Unaudited)
(In thousands, except per share amounts)
Revenues:
North America:
Domestic Company-owned restaurant sales				$	152,662				$	143,299				$	465,713				$	430,641
Franchise royalties					19,419					18,777					60,382					58,396
Franchise and development fees					263					160					1,028					588
Domestic commissary sales					138,044					132,666					421,941					396,869
Other sales					13,566					12,581					38,617					36,610
International:
Royalties and franchise and development fees					5,454					4,582					15,912					13,769
Restaurant and commissary sales					16,934					13,449					47,539					38,496
Total revenues					346,342					325,514					1,051,132					975,369
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales					38,233					34,054					113,131					99,391
Salaries and benefits					41,701					39,587					127,026					118,239
Advertising and related costs					14,424					13,920					43,894					39,897
Occupancy costs					9,583					9,185					27,233					25,702
Other operating expenses					23,061					21,490					68,237					62,738
Total domestic Company-owned restaurant expenses					127,002					118,236					379,521					345,967
Domestic commissary and other expenses:
Cost of sales					115,563					111,114					347,386					328,364
Salaries and benefits					10,347					9,654					30,678					27,875
Other operating expenses					15,965					14,082					47,740					41,886
Total domestic commissary and other expenses					141,875					134,850					425,804					398,125
International restaurant and commissary expenses					14,372					11,394					40,008					32,761
General and administrative expenses					31,780					30,426					98,064					93,485
Other general expenses					1,260					1,211					4,042					8,020
Depreciation and amortization					8,605					8,192					25,672					24,223
Total costs and expenses					324,894					304,309					973,111					902,581
Operating income					21,448					21,205					78,021					72,788
Net interest (expense) income					(185	)				(342	)				147					(939	)
Income before income taxes					21,263					20,863					78,168					71,849
Income tax expense					6,385					7,038					24,926					24,256
Net income, including redeemable noncontrolling interests					14,878					13,825					53,242					47,593
Income attributable to redeemable noncontrolling interests					(602	)				(794	)				(2,510	)				(3,292	)
Net income, net of redeemable noncontrolling interests				$	14,276				$	13,031				$	50,732				$	44,301
Basic earnings per common share				$	0.66				$	0.56				$	2.32				$	1.87
Earnings per common share - assuming dilution				$	0.65				$	0.55				$	2.27				$	1.84
Basic weighted average shares outstanding					21,591					23,268					21,855					23,685
Diluted weighted average shares outstanding					22,084					23,721					22,381					24,107
Dividends declared per common share				$	0.25				$	-				$	0.25				$	-

 

Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
				September 29,				December 30,
				2013				2012
(In thousands)				(Unaudited)				(Note)
Assets
Current assets:
Cash and cash equivalents				$	13,689			$	16,396
Accounts receivable, net					47,642				44,647
Notes receivable					5,506				4,577
Inventories					22,918				22,178
Deferred income taxes					9,263				10,279
Prepaid expenses and other current assets					20,269				20,549
Total current assets					119,287				118,626
Property and equipment, net					207,415				196,661
Notes receivable, less current portion, net					12,305				12,536
Goodwill					79,024				78,958
Other assets					33,408				31,627
Total assets				$	451,439			$	438,408
Liabilities and stockholders' equity
Current liabilities:
Accounts payable				$	34,081			$	32,624
Income and other taxes payable					5,918				10,429
Accrued expenses and other current liabilities					55,192				60,528
Total current liabilities					95,191				103,581
Deferred revenue					6,215				7,329
Long-term debt					120,000				88,258
Deferred income taxes					12,471				10,672
Other long-term liabilities					41,118				40,674
Total liabilities					274,995				250,514
Redeemable noncontrolling interests					6,948				6,380
Total stockholders' equity					169,496				181,514
Total liabilities, redeemable noncontrolling interests and stockholders' equity				$	451,439			$	438,408
Note: The Condensed Consolidated Balance Sheets have been derived from the audited consolidated financial statements, but do 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
				Nine Months Ended
(In thousands)				September 29, 2013					September 23, 2012
				(Unaudited)					(Unaudited)
Operating activities
Net income, including redeemable noncontrolling interests				$	53,242				$	47,593
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts and notes receivable					1,130					1,250
Depreciation and amortization					25,672					24,223
Deferred income taxes					6,994					424
Stock-based compensation expense					5,642					4,932
Excess tax benefit on equity awards					(4,108	)				(1,717	)
Other					1,260					4,375
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable					(4,666	)				(6,018	)
Inventories					(740	)				(1,188	)
Prepaid expenses and other current assets					281					3,138
Other assets and liabilities					(3,254	)				(840	)
Accounts payable					1,457					1,106
Income and other taxes payable					(4,511	)				6,248
Accrued expenses and other current liabilities					(3,217	)				7,258
Deferred revenue					(349	)				3,989
Net cash provided by operating activities					74,833					94,773
Investing activities
Purchases of property and equipment					(38,537	)				(26,425	)
Loans issued					(3,830	)				(3,951	)
Repayments of loans issued					3,687					2,620
Acquisitions, net of cash acquired					-					(6,175	)
Proceeds from divestitures of restaurants					-					1,068
Other					324					4
Net cash used in investing activities					(38,356	)				(32,859	)
Financing activities
Net proceeds (repayments) on line of credit facility					31,742					(1,489	)
Cash dividends paid on common stock					(5,414	)				-
Excess tax benefit on equity awards					4,108					1,717
Tax payments for restricted stock issuances					(1,862	)				(846	)
Proceeds from exercise of stock options					4,193					11,399
Acquisition of Company common stock					(69,137	)				(64,146	)
Contributions from redeemable noncontrolling interest holders					850					-
Distributions to redeemable noncontrolling interest holders					(3,200	)				(2,431	)
Other					(501	)				174
Net cash used in financing activities					(39,221	)				(55,622	)
Effect of exchange rate changes on cash and cash equivalents					37					119
Change in cash and cash equivalents					(2,707	)				6,411
Cash and cash equivalents at beginning of period					16,396					18,942
Cash and cash equivalents at end of period				$	13,689				$	25,353

Contact:

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

Source: Papa John's International, Inc. 

News Provided by Acquire Media 

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