Papa John's Announces First Quarter 2016 Results

First Quarter EPS Growth of 25.5%

LOUISVILLE, Ky. - May 3, 2016 - (BUSINESS WIRE) - Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the first quarter ended March 27, 2016.

Highlights

  • First quarter earnings per diluted share of $0.69 in 2016 compared to $0.55 in 2015, an increase of 25.5%
  • System-wide comparable sales increases of 0.1% for North America and 5.7% for international
  • 2016 guidance reaffirmed

"We're pleased to have delivered another solid quarter, with excellent profitability growth in spite of a competitive promotional environment," said Papa John's founder, chairman and CEO John Schnatter. "Our continued commitment to quality, a growing domestic digital sales mix that now stands at 55%, our expanded sports partnerships and international momentum will continue to drive the Papa John's global brand in 2016 and beyond."

First quarter 2016 revenues were $428.6 million, a 0.9% decrease from first quarter 2015 revenues of $432.3 million. First quarter 2016 net income increased 17.7% to $26.2 million, compared to first quarter 2015 net income of $22.2 million. First quarter 2016 diluted earnings per share increased 25.5% to $0.69, compared to first quarter 2015 diluted earnings per share of $0.55.

Global Restaurant and Comparable Sales Information

         
    First Quarter
    Mar. 27,   Mar. 29,
    2016   2015
         
Global restaurant sales growth (a)   2.3 %   7.4 %
         

Global restaurant sales growth, excluding the impact of foreign currency (a)

  4.2 %   9.6 %
         
Comparable sales growth (b)        
Domestic company-owned restaurants   1.0 %   8.1 %
North America franchised restaurants   (0.2 %)   6.0 %
System-wide North America restaurants   0.1 %   6.5 %
         
System-wide international restaurants   5.7 %   7.7 %
         
(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 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. Management believes the presentation of global restaurant sales growth excluding the impact of foreign currency provides investors with useful information regarding underlying sales trends by presenting sales growth excluding the external factor of foreign currency exchange. 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.

We have streamlined our income statement presentation by combining certain income statement captions in the condensed income statement. We have summarized 2015 by quarter in this same format in a supplemental schedule included in this press release.

Revenue Highlights

Consolidated revenues were $428.6 million for the first quarter of 2016, a decrease of $3.7 million, or 0.9%. The lower revenues were primarily due to the prior year inclusion of point-of-sale system ("FOCUS") equipment sales as well as lower PJ Food Service sales from lower commodity costs. Significant changes in revenues are as follows:

  • Domestic company-owned restaurant sales increased $8.4 million, or 4.3%, primarily due to an increase in equivalent units, including 20 restaurants acquired from franchisees during the first quarter, and a 1.0% increase in comparable sales.
  • Domestic franchise royalties and fees increased approximately $850,000, or 3.3%, primarily due to reduced levels of royalty incentives in the first quarter of 2016.
  • Domestic commissary and other sales decreased $15.0 million, or 8.1%. The decrease was due to the prior year inclusion of approximately $8.5 million of FOCUS equipment sales to franchisees. The higher levels of 2015 FOCUS equipment sales had no significant impact on 2015 operating results. Additionally, domestic commissary sales decreased by approximately $6.4 million as revenues associated with lower pricing for certain commodities, including meats and dough, were somewhat offset by an increase in sales volumes.
  • International revenues increased approximately $2.0 million, or 8.0%, primarily due to the first quarter of 2016 including sublease rental revenue in the United Kingdom of approximately $1.6 million, which was shown net of the rental expenses in the prior year. The change in presentation had no impact on income before income taxes. Additionally, royalties and commissary revenues were higher due to an increase in the number of restaurants and an increase in comparable sales of 5.7%, calculated on a constant dollar basis. These increases were somewhat offset by lower China Company-owned restaurant revenues. The negative impact of foreign currency exchange rates was approximately $1.9 million.

Operating Highlights

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

               
 

 

 

First Quarter

      Mar. 27,   Mar. 29,   Increase
(In thousands)   2016   2015   (Decrease)
               
Domestic company-owned restaurants   $ 20,187     $ 18,480     $ 1,707  
Domestic commissaries     11,546       11,800       (254 )
North America franchising     23,580       22,319       1,261  
International     3,038       1,344       1,694  
All others     51       443       (392 )
Unallocated corporate expenses     (16,332 )     (17,205 )     873  
Elimination of intersegment profits     (661 )     (745 )     84  
Total income before income taxes   $ 41,409     $ 36,436     $ 4,973  
             

First quarter 2016 income before income taxes increased approximately $5.0 million, or 13.6%. This increase was primarily due to the following:

  • Domestic company-owned restaurants increased approximately $1.7 million primarily due to lower commodity costs, including meats and dough.
  • North America franchising increased approximately $1.3 million primarily due to reduced royalty and development incentives.
  • International income increased approximately $1.7 million primarily due to higher royalties and an increase in United Kingdom profits. This was somewhat offset by the impact of negative foreign currency exchange rates of approximately $700,000.
  • Unallocated corporate expenses were approximately $900,000 lower primarily due to lower legal costs and lower expenses for our annual operators' conference due to the later timing of the event in the second quarter of 2016.

These increases were partially offset by lower domestic commissaries income of approximately $250,000 due to a lower margin, which was partially offset by higher sales volumes.

The first quarter 2016 effective income tax rate was 32.3%, representing a decrease of 1.2% from the prior year rate of 33.5%. Our effective income tax rate may fluctuate from quarter to quarter for various reasons, including the timing of various deductions and credits.

   
    First Quarter
    Mar. 27,   Mar. 29,
    2016   2015
         
Net cash provided by operating activities (a)   $ 29,969     $ 40,249  
Purchases of property and equipment     (10,249 )     (7,558 )
Free cash flow   $ 19,720     $ 32,691  
         
(a)   The decrease of approximately $10.3 million was primarily due to the payment of approximately $12.5 million in the first quarter of 2016 for the previously disclosed legal settlement, partially offset by higher net income.

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 27, 2016.

Global Restaurant Unit Data

At March 27, 2016, there were 4,903 Papa John's restaurants operating in all 50 states and in 40 international countries and territories, as follows:

The company's free cash flow, a non-GAAP financial measure, for the first quarters of 2016 and 2015, was as follows (in thousands):

                   
    Domestic   Franchised            
    Company-   North   Total North        
    owned   America   America   International   System-wide

First Quarter

                   
Beginning - December 27, 2015   707     2,681     3,388     1,505     4,893  
Opened   2     18     20     24     44  
Closed   -     (18 )   (18 )   (16 )   (34 )
Acquired (divested)   20     (20 )   -     -     -  
Ending - March 27, 2016   729     2,661     3,390     1,513     4,903  
Unit growth (decline)   22     (20 )   2     8     10  
% increase (decrease)   3.1 %   -0.7 %   0.1 %   0.5 %   0.2 %
                 

Our development pipeline as of March 27, 2016 included approximately 1,300 restaurants (200 units in North America and 1,100 units internationally), the majority of which are scheduled to open over the next six years.

Share Repurchase Activity

The following table reflects our repurchases for the first quarter of 2016 and subsequent repurchases through April 26, 2016 (in thousands):

         
    Number    
Period  

of Shares

  Cost
         
First Quarter 2016   1,286   $ 66,033
         
March 27, 2016 through April 26, 2016   262   $ 14,625
         

There were 38.3 million diluted weighted average shares outstanding for the first quarter of 2016, representing a decrease of 5.5% over the prior year first quarter. Approximately 37.5 million actual shares of the company's common stock were outstanding as of March 27, 2016.

2016 Guidance

The company is reaffirming its previously issued 2016 guidance.

Conference Call

A conference call is scheduled for May 4, 2016 at 10:00 a.m. Eastern Time to review our first quarter 2016 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 87333910.

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," "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 may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, unit level performance, 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 profitability; and new product and concept developments by food industry competitors;
  • changes in consumer preferences or consumer buying habits, including changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending;
  • the adverse impact on the company or our results caused by 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;
  • failure to maintain our brand strength, quality reputation and consumer enthusiasm for our better ingredients marketing and advertising strategy;
  • 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 automobiles, 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, geopolitical or other disruptions beyond our control;
  • increased risks associated with our international operations, including economic and political conditions, instability in our international markets, especially emerging markets, fluctuations in currency exchange rates, and difficulty in meeting planned sales targets and new store growth;
  • the impact of current or future claims and litigation, including labor and employment-related claims;
  • current or proposed legislation impacting our business;
  • failure to effectively execute succession planning, and our reliance on the multiple roles of our founder, chairman and chief executive officer, who also serves as our brand spokesperson; and
  • 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.

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 27, 2015. 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.

       
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
             
             
        Three Months Ended
        March 27, 2016   March 29, 2015
(In thousands, except per share amounts)   (Unaudited)   (Unaudited)
Revenues:        
  Domestic company-owned restaurant sales   $ 205,679     $ 197,287  
  Domestic franchise royalties and fees     26,476       25,624  
  Domestic commissary and other sales     168,985       183,947  
  International     27,455       25,426  
Total revenues     428,595       432,284  
             
Costs and expenses:        
  Operating costs (excluding depreciation and amortization        
  shown separately below):        
    Domestic company-owned restaurant expenses     161,310       155,032  
    Domestic commissary and other expenses     156,806       170,339  
    International expenses     17,590       15,478  
  General and administrative expenses     40,247       43,749  
  Depreciation and amortization     9,744       10,041  
Total costs and expenses     385,697       394,639  
             
Operating income     42,898       37,645  
  Net interest (expense) income     (1,489 )     (1,209 )
Income before income taxes     41,409       36,436  
  Income tax expense     13,358       12,197  
Net income before attribution to noncontrolling interests     28,051       24,239  
  Income attributable to noncontrolling interests     (1,869 )     (2,003 )
Net income attributable to the company   $ 26,182     $ 22,236  
             
Calculation of income for earnings per share:        
Net income attributable to the company   $ 26,182     $ 22,236  
Change in noncontrolling interest redemption value     220       70  
Net income attributable to participating securities     (110 )     (100 )
Net income attributable to common shareholders   $ 26,292     $ 22,206  
             
Basic earnings per common share   $ 0.69     $ 0.56  
Diluted earnings per common share   $ 0.69     $ 0.55  
             
Basic weighted average common shares outstanding     37,931       39,827  
Diluted weighted average common shares outstanding     38,297       40,510  
             
Dividends declared per common share   $ 0.175     $ 0.14  
                 

 

Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
           
           
      March 27,   December 27,
      2016   2015
(In thousands)   (Unaudited)   (Note)
           
Assets          
Current assets:        
Cash and cash equivalents   $ 17,272     $ 21,006
Accounts receivable, net     56,683       63,320
Notes receivable, net     7,049       7,816
Income taxes receivable     48       272
Inventories       22,267       21,564
Prepaid expenses and other current assets     27,910       29,313
Assets held for sale     9,094       9,299
Total current assets     140,323       152,590
           
Property and equipment, net     213,296       214,044
Notes receivable, less current portion, net     11,126       11,105
Goodwill       87,740       79,657
Deferred income taxes     2,041       2,415
Other assets       36,453       34,247
Total assets     $ 490,979     $ 494,058
           
           
Liabilities and stockholders' equity        
Current liabilities:        
Accounts payable   $ 33,582     $ 43,492
Income and other taxes payable     8,805       8,527
Accrued expenses and other current liabilities     62,579       80,918
Total current liabilities     104,966       132,937
           
Deferred revenue     3,847       3,190
Long-term debt     316,717       255,146
Deferred income taxes     9,394       4,610
Other long-term liabilities     52,862       47,606
Total liabilities     487,786       443,489
           
Redeemable noncontrolling interests     8,887       8,363
           
Total stockholders' equity     (5,694 )     42,206
Total liabilities, redeemable noncontrolling interests and stockholders' equity   $ 490,979     $ 494,058

 

Note:   The Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements, but does 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
         
         
    Three Months Ended
(In thousands)   March 27, 2016   March 29, 2015
    (Unaudited)   (Unaudited)
Operating activities        
Net income before attribution to noncontrolling interests   $ 28,051     $ 24,239  

Adjustments to reconcile net income to net cash provided by operating activities:

       
Provision for uncollectible accounts and notes receivable     216       659  
Depreciation and amortization     9,744       10,041  
Deferred income taxes     7,141       (36 )
Stock-based compensation expense     2,172       2,264  
Other     1,101       1,180  
Changes in operating assets and liabilities, net of acquisitions:        
Accounts receivable     6,457       (1,312 )
Income taxes receivable     223       5,899  
Inventories     (612 )     1,043  
Prepaid expenses and other current assets     1,624       2,452  
Other assets and liabilities     (614 )     (154 )
Accounts payable     (10,007 )     (3,828 )
Income and other taxes payable     277       167  
Accrued expenses and other current liabilities     (16,738 )     (2,291 )
Deferred revenue     934       (74 )
Net cash provided by operating activities     29,969       40,249  
         
Investing activities        
Purchases of property and equipment     (10,249 )     (7,558 )
Loans issued     (917 )     (506 )
Repayments of loans issued     1,275       1,083  
Acquisitions, net of cash acquired     (11,202 )     (341 )
Other     159       20  
Net cash used in investing activities     (20,934 )     (7,302 )
         
Financing activities        
Net proceeds on line of credit facility     61,500       549  
Cash dividends paid     (6,628 )     (5,545 )
Excess tax benefit on equity awards     3,884       5,091  
Tax payments for equity award issuances     (5,670 )     (5,557 )
Proceeds from exercise of stock options     922       2,210  
Acquisition of Company common stock     (66,033 )     (24,765 )
Contributions from noncontrolling interest holders     120       -  
Distributions to noncontrolling interest holders     (1,100 )     (1,705 )
Other     294       253  
Net cash used in financing activities     (12,711 )     (29,469 )
         
Effect of exchange rate changes on cash and cash equivalents     (58 )     (76 )
Change in cash and cash equivalents     (3,734 )     3,402  
Cash and cash equivalents at beginning of period     21,006       20,122  
         
Cash and cash equivalents at end of period   $ 17,272     $ 23,524  
                 

 

The following schedule provides the condensed consolidated statements of income by quarter and for the full year 2015 in the new format.

                         
Papa John's International, Inc. and Subsidiaries
2015 Condensed Consolidated Statements of Income
                         
              Full Year  
      Quarter Ended (Unaudited)       Ended  
      Mar. 29,   Jun. 28,   Sep. 27,   Dec. 27,   Dec. 27,  
      2015   2015   2015   2015   2015  
(In thousands, except per share amounts)                        
Revenues:                        
Domestic company-owned restaurant sales     $ 197,287     $ 185,962     $ 180,059     $ 192,999     $ 756,307    
Domestic franchise royalties and fees       25,624       23,276       22,285       24,871       96,056    
Domestic commissary and other sales       183,947       163,427       159,939       173,008       680,321    
International       25,426       26,326       27,001       25,938       104,691    
Total revenues       432,284       398,991       389,284       416,816       1,637,375    
                         
Costs and expenses:                        

Operating costs (excluding depreciation and amortization shown separately below):

                       
Domestic company-owned restaurant expenses       155,032       147,356       148,536       153,282       604,206    
Domestic commissary and other expenses       170,339       151,206       148,709       159,169       629,423    
International expenses       15,478       16,250       16,481       15,297       63,506    
General and administrative expenses       43,749       43,047       37,660       39,170       163,626    
Depreciation and amortization       10,041       10,136       10,461       9,669       40,307    
Total costs and expenses       394,639       367,995       361,847       376,587       1,501,068    
                         
Operating income       37,645       30,996       27,437       40,229       136,307    
Legal settlement expense       -       (12,278 )     -       -       (12,278 )  
Net interest (expense) income       (1,209 )     (1,187 )     (1,180 )     (1,306 )     (4,882 )  
Income before income taxes       36,436       17,531       26,257       38,923       119,147    
Income tax expense       12,197       5,063       7,281       12,642       37,183    
Net income before attribution to noncontrolling interests       24,239       12,468       18,976       26,281       81,964    
Income attributable to noncontrolling interests       (2,003 )     (1,688 )     (1,005 )     (1,586 )     (6,282 )  
Net income attributable to the company     $ 22,236     $ 10,780     $ 17,971     $ 24,695     $ 75,682    
                         
Calculation of income for earnings per share:                        
Net income attributable to the company     $ 22,236     $ 10,780     $ 17,971     $ 24,695     $ 75,682    
Change in noncontrolling interest redemption value       70       73       49       (127 )     65    
Net income attributable to participating securities       (100 )     (50 )     (73 )     (102 )     (325 )  
Net income attributable to common shareholders     $ 22,206     $ 10,803     $ 17,947     $ 24,466     $ 75,422    
                         
Basic earnings per common share     $ 0.56     $ 0.27     $ 0.46     $ 0.63     $ 1.91    
Diluted earnings per common share     $ 0.55     $ 0.27     $ 0.45     $ 0.62     $ 1.89    
                         
Basic weighted average common shares outstanding       39,827       39,692       39,394       38,909       39,458    
Diluted weighted average common shares outstanding       40,510       40,217       39,895       39,367       40,000    
                         
Dividends declared per common share     $ 0.14     $ 0.14     $ 0.175     $ 0.175     $ 0.63    
                                             

SOURCE Papa John's International, Inc.

Contact:

Lance Tucker
Papa John's International, Inc.
Chief Financial Officer
502-261-7272

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