Papa John’s Announces Second Quarter 2017 Results and Increased Share Repurchase Authorization

System-wide comparable sales increases of 1.4% for North America and 3.9% for international

Papa John’s International, Inc. (NASDAQ: PZZA) yesterday announced financial results for the three and six months ended June 25, 2017.

Highlights

• Second quarter earnings per diluted share of $0.65 in 2017 compared to $0.61 in the second quarter of 2016, an increase of 6.6%
• System-wide comparable sales increases of 1.4% for North America and 3.9% for international
• Plan announced to return additional capital to shareholders through $500 million increase in share repurchase authorization
• In conjunction with increase to share repurchase authorization, leverage planned to be increased to 3.0x – 4.0x EBITDA over the next 12-18 months

“The Company delivered solid results in the second quarter, including the 27th consecutive quarter of positive North America comparable sales and the 29th consecutive quarter of positive International comparable sales,” said Papa John’s founder, chairman, and CEO John Schnatter. “Our industry-leading quality and digital platforms, such as our launch of Facebook instant ordering, will continue to drive the consistent growth of the Papa John’s brand globally. The increase in our share repurchase authorization aligns with the continued confidence we have in our business.”

Operating Highlights
(In thousands except per share amounts)
				Three Months Ended												Six Months Ended
				June 25, 2017				June 26, 2016				Increase %				June 25, 2017				June 26, 2016				Increase %
Total revenue				$	434,778			$	422,964			2.8	%			$	884,044			$	851,559			3.8	%
Operating income					37,217				36,831			1.0	%				80,898				79,729			1.5	%
Net income					23,538				22,541			4.4	%				51,966			$	48,723			6.7	%
Diluted EPS				$	0.65			$	0.61			6.6	%			$	1.42			$	1.29			10.1	%

 

All operating highlights are compared to the same period of the prior year, unless otherwise noted.

Consolidated revenues increased $11.8 million, or 2.8%, for the second quarter of 2017 and increased $32.5 million, or 3.8%, for the six months ended June 25, 2017. These increases were primarily due to increased North America commissary sales due to higher volumes and higher commodity costs. The increased revenues from higher comparable sales for North America and International were somewhat offset by the impact of unfavorable foreign exchange rates and the impact of refranchising 42 domestic restaurants in the fourth quarter of 2016. The unfavorable impact of foreign currency exchange rates was approximately $2.5 million and $5.6 million for the three and six month periods, respectively, which was primarily attributable to our operations in the United Kingdom.

On higher revenues, consolidated operating income increased $400,000, or 1.0%, for the second quarter of 2017. Operating income as a percentage of consolidated revenues decreased 0.1% to 8.6% for the second quarter. Significant changes in the operating income percentage are as follows:

• North America commissary and other margin, as a percentage of related revenues, decreased 0.7% due primarily to start-up costs related to our new domestic commissary in Georgia.
• International margin, as a percentage of international revenues, decreased 2.0% primarily due to lower operating margins at our United Kingdom commissary from higher commodity costs.
• These decreases were somewhat offset by lower general and administrative costs, as a percentage of consolidated revenues, of 0.4% primarily due to higher revenues and lower management incentive costs.

On higher revenues, consolidated operating income increased $1.2 million, or 1.5%, for the six months ended June 25, 2017. Operating income as a percentage of consolidated revenues decreased 0.2% to 9.2% for the six month period. This decrease was primarily attributable to the same reasons noted for the three-month period. Additionally, the Domestic Company-owned restaurants margin, as a percentage of restaurant sales, decreased 0.8% primarily due to increased delivery costs from higher non-owned automobile insurance claims costs and higher mileage reimbursement costs.

The effective income tax rates were 29.5% and 29.0% for the three and six months ended June 25, 2017, respectively, representing decreases of 2.0% and 2.9% from the prior year comparable periods. These decreases were primarily due to adopting new guidance for accounting for share-based compensation in 2017. This guidance requires excess tax benefits recognized on stock based awards to be recorded as a reduction of income tax expense rather than stockholders’ equity. The impact of this adoption decreased our effective tax rate by 1.1% and 2.2% for the three and six month periods, respectively.

Diluted earnings per share increased 6.6% to $0.65 for the second quarter of 2017 and increased 10.1% to $1.42 for the six months ended June 25, 2017. These increases were primarily due to an increase in net income attributable to common shareholders and a decrease in shares outstanding from share repurchases. Diluted earnings per share was also favorably impacted by approximately $0.01 and $0.04 for the three and six month periods, respectively, due to the adoption of the new guidance for accounting for share-based compensation. Excluding the impact of this adoption, diluted earnings per share would have increased 4.9% and 7.0% for the three and six month periods, respectively.

Global Restaurant and Comparable Sales Information
				Three Months Ended								Six Months Ended
				June 25, 2017				June 26, 2016				June 25, 2017				June 26, 2016
Global restaurant sales growth (a)				4.1	%			5.9	%			4.5	%			4.0	%
Global restaurant sales growth, excluding the impact of foreign currency (a)				5.1	%			7.7	%			5.3	%			5.8	%
Comparable sales growth (b)
Domestic company-owned restaurants				2.3	%			5.6	%			2.7	%			3.2	%
North America franchised restaurants				1.1	%			4.5	%			1.4	%			2.1	%
System-wide North America restaurants				1.4	%			4.8	%			1.7	%			2.4	%
System-wide international restaurants				3.9	%			5.3	%			4.9	%			5.5	%

(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.

Free Cash Flow

The company’s free cash flow, a non-GAAP financial measure, was as follows for the first six months of 2017 and 2016 (in thousands):

				Six Months Ended
				June 25,					June 26
				2017					2016
Net cash provided by operating activities (a)				$	77,863				$	79,613
Purchases of property and equipment (b)					(30,457	)				(24,001	)
Free cash flow				$	47,406				$	55,612

(a) The decrease of $1.8 million was primarily due to changes in working capital amounts.

(b) The increase of $6.5 million was primarily due to construction costs for our new domestic commissary in Georgia, which opened in July 2017.

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 liquidity measure because it is one factor that management uses in determining the amount of cash available for investment, however it does not represent residual cash flows available for discretionary expenditures. 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 liquidity 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 six months ended June 25, 2017.

Global Restaurant Unit Data

At June 25, 2017, there were 5,088 Papa John’s restaurants operating in all 50 states and in 44 international countries and territories, as follows:

				Domestic Company- owned				Franchised North America				Total North America				International				System-wide
Second Quarter
Beginning – March 26, 2017				705				2,723				3,428				1,654				5,082
Opened				–				28				28				49				77
Closed								(28	)			(28	)			(43	)			(71	)
Ending – June 25, 2017				705				2,723				3,428				1,660				5,088
Year-to-date
Beginning – December 25, 2016				702				2,739				3,441				1,656				5,097
Opened				2				43				45				87				132
Closed				–				(58	)			(58	)			(83	)			(141	)
Acquired				1				–				1				–				1
Sold				–				(1	)			(1	)			–				(1	)
Ending – June 25, 2017				705				2,723				3,428				1,660				5,088
Unit growth (decline)				3				(16	)			(13	)			4				(9	)
% increase (decrease)				0.4	%			(0.6	%)			(0.4	%)			0.2	%			(0.2	%)

The company has added 153 net worldwide units over the trailing four quarters. Our development pipeline as of June 25, 2017 included approximately 1,100 restaurants (200 units in North America and 900 units internationally), the majority of which are scheduled to open over the next six years.

Share Repurchase Activity and Increased Authorization

The following table reflects our share repurchases for the three and six months ended June 25, 2017 and subsequent repurchases through July 27, 2017 (in thousands):

Period				Number of Shares			Cost
Three months ended June 25, 2017				262			$	20,892
Six months ended June 25, 2017				421				33,968
June 25, 2017 through July 27, 2017				177			$	13,158

 

There were 37.2 million and 37.3 million diluted weighted average shares outstanding for the three and six months ended June 25, 2017, respectively, representing decreases of 0.8% and 1.6% over the prior year comparable periods. Approximately 36.6 million actual shares of the company’s common stock were outstanding as of June 25, 2017.

Effective immediately, the Board has authorized a $500 million increase in the Company’s share repurchase authorization, which previously had $90.2 million authorization remaining. The Company expects to repurchase the full amount of the increased authorization within approximately 12-18 months of the date of this announcement, and plans to enter into new debt facilities to finance the increased capital return program.

The timing and volume of share repurchases may be executed at the discretion of management on an opportunistic basis, or pursuant to trading plans or other arrangements. Any share repurchase under this program may be made in the open market, in privately negotiated transactions, or otherwise, and may depend upon prevailing market conditions and other factors. The Company expects to implement an accelerated share repurchase program in the second half of 2017 for a portion of the increased share repurchase authorization. Repurchases under the Company’s share repurchase program may be commenced or suspended from time to time at the Company’s discretion without prior notice.

Cash Dividend

We paid a cash dividend of approximately $7.3 million ($0.20 per common share) during the second quarter of 2017. Subsequent to the second quarter, on July 27, 2017, our Board of Directors approved a 12.5% increase in the company’s dividend rate per common share, from $0.80 on an annual basis to $0.90 on an annual basis, and declared a third quarter dividend of $0.225 per common share (approximately $8.2 million based on current shareholders of record). The dividend will be paid on August 18, 2017 to shareholders of record as of the close of business on August 7, 2017. The declaration and payment of any future dividends 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.

2017 Outlook

The company provided the following 2017 outlook update and reaffirmed all of our remaining 2017 outlook:

				Updated Outlook			Previous Outlook
Net global new unit growth				3.0% to 4.0%			4.0% to 5.0%

The company is reducing the net unit outlook to reflect the closure of the India market; 33 stores were closed as of the end of the second quarter and the remaining 33 stores closed in the third quarter. We do not expect the closure of these stores to have a significant impact on our 2017 operating results.

The reaffirmation of the earnings outlook excludes the impact of the increased share repurchase authorization discussed above.

 

Global Restaurant and Comparable Sales Information
				Three Months Ended								Six Months Ended
				June 25, 2017				June 26, 2016				June 25, 2017				June 26, 2016
Global restaurant sales growth (a)				4.1	%			5.9	%			4.5	%			4.0	%
Global restaurant sales growth, excluding the impact of foreign currency (a)				5.1	%			7.7	%			5.3	%			5.8	%
Comparable sales growth (b)
Domestic company-owned restaurants				2.3	%			5.6	%			2.7	%			3.2	%
North America franchised restaurants				1.1	%			4.5	%			1.4	%			2.1	%
System-wide North America restaurants				1.4	%			4.8	%			1.7	%			2.4	%
System-wide international restaurants				3.9	%			5.3	%			4.9	%			5.5	%

 

Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
				Three Months Ended										Six Months Ended
				June 25, 2017					June 26, 2016					June 25, 2017					June 26, 2016
(In thousands, except per share amounts)				(Unaudited)					(Unaudited)					(Unaudited)					(Unaudited)
Revenues:
Domestic company-owned restaurant sales				$	202,756				$	204,248				$	409,652				$	409,927
North America franchise royalties and fees					26,588					25,302					54,195					51,778
North America commissary and other sales					175,204					164,954					361,449					333,939
International					30,230					28,460					58,748					55,915
Total revenues					434,778					422,964					884,044					851,559
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic company-owned restaurant expenses					162,433					163,469					327,852					324,779
North America commissary and other expenses					162,989					152,258					336,701					309,064
International expenses					19,482					17,752					37,472					35,342
General and administrative expenses					42,003					42,623					80,010					82,870
Depreciation and amortization					10,654					10,031					21,111					19,775
Total costs and expenses					397,561					386,133					803,146					771,830
Operating income					37,217					36,831					80,898					79,729
Net interest expense					(1,759	)				(1,631	)				(3,569	)				(3,120	)
Income before income taxes					35,458					35,200					77,329					76,609
Income tax expense					10,476					11,088					22,448					24,446
Net income before attribution to noncontrolling interests					24,982					24,112					54,881					52,163
Income attributable to noncontrolling interests					(1,444	)				(1,571	)				(2,915	)				(3,440	)
Net income attributable to the company				$	23,538				$	22,541				$	51,966				$	48,723
Calculation of income for earnings per share:
Net income attributable to the company				$	23,538				$	22,541				$	51,966				$	48,723
Change in noncontrolling interest redemption value					662					279					1,182					499
Net income attributable to participating securities					(99	)				(91	)				(216	)				(201	)
Net income attributable to common shareholders				$	24,101				$	22,729				$	52,932				$	49,021
Basic earnings per common share				$	0.66				$	0.61				$	1.44				$	1.30
Diluted earnings per common share				$	0.65				$	0.61				$	1.42				$	1.29
Basic weighted average common shares outstanding					36,732					37,203					36,771					37,567
Diluted weighted average common shares outstanding					37,217					37,507					37,283					37,904
Dividends declared per common share				$	0.20				$	0.175				$	0.40				$	0.35

 

Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
				June 25,				December 25,
				2017				2016
(In thousands)				(Unaudited)				(Note)
Assets
Current assets:
Cash and cash equivalents				$	22,247			$	15,563
Accounts receivable, net					59,882				59,691
Notes receivable, net					3,680				3,417
Income taxes receivable					2,417				2,372
Inventories					24,586				25,132
Prepaid expenses and other current assets					30,505				33,143
Assets held for sale					6,272				6,257
Total current assets					149,589				145,575
Property and equipment, net					234,524				230,473
Notes receivable, less current portion, net					10,709				10,141
Goodwill					85,922				85,529
Deferred income taxes					315				769
Other assets					44,583				40,078
Total assets				$	525,642			$	512,565
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable				$	38,653			$	42,701
Income and other taxes payable					9,815				8,540
Accrued expenses and other current liabilities					67,772				76,789
Total current liabilities					116,240				128,030
Deferred revenue					3,060				3,313
Long-term debt, net					305,149				299,820
Deferred income taxes					9,416				10,047
Other long-term liabilities					60,179				53,093
Total liabilities					494,044				494,303
Redeemable noncontrolling interests					8,819				8,461
Total stockholders’ equity					22,779				9,801
Total liabilities, redeemable noncontrolling interests and stockholders’ equity				$	525,642			$	512,565

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
				Six Months Ended
(In thousands)				June 25, 2017					June 26, 2016
				(Unaudited)					(Unaudited)
Operating activities
Net income before attribution to noncontrolling interests				$	54,881				$	52,163
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts and notes receivable					(1,091	)				247
Depreciation and amortization					21,111					19,775
Deferred income taxes					158					3,786
Stock-based compensation expense					5,571					4,893
Other					1,978					1,883
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable					(355	)				6,680
Income taxes receivable					(45	)				4,018
Inventories					550					(877	)
Prepaid expenses and other current assets					2,594					3,817
Other assets and liabilities					(1,559	)				(1,724	)
Accounts payable					(3,950	)				(8,654	)
Income and other taxes payable					1,275					3,703
Accrued expenses and other current liabilities					(3,002	)				(11,425	)
Deferred revenue					(253	)				1,328
Net cash provided by operating activities					77,863					79,613
Investing activities
Purchases of property and equipment					(30,457	)				(24,001	)
Loans issued					(1,476	)				(1,630	)
Repayments of loans issued					2,125					5,382
Acquisitions, net of cash acquired					(21	)				(11,202	)
Other					25					165
Net cash used in investing activities					(29,804	)				(31,286	)
Financing activities
Net proceeds on line of credit facility					5,156					61,375
Cash dividends paid					(14,703	)				(13,130	)
Tax payments for equity award issuances					(2,282	)				(5,831	)
Proceeds from exercise of stock options					5,218					2,812
Acquisition of Company common stock					(33,968	)				(96,355	)
Distributions to noncontrolling interest holders					(1,389	)				(3,200	)
Other					494					391
Net cash used in financing activities					(41,474	)				(53,938	)
Effect of exchange rate changes on cash and cash equivalents					99					(129	)
Change in cash and cash equivalents					6,684					(5,740	)
Cash and cash equivalents at beginning of period					15,563					21,006
Cash and cash equivalents at end of period				$	22,247				$	15,266