Louisville / KY. (pj) Papa John’s International Inc., the world’s third largest pizza company, announced financial results for the three and six months ended June 25, 2017. Highlights:
- Second quarter earnings per diluted share of 0.65 USD in 2017 compared to 0.61 USD in the second quarter of 2016, an increase of 6.6 percent
- System-wide comparable sales increases of 1.4 percent for North America and 3.9 percent for international
- Plan announced to return additional capital to shareholders through 500 million USD 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».
| (In thousands except per share amounts) | Q2/2017 | Q2/2016 | Change | H1/2017 | H1/2016 | Change | |||||||||||||||||||
| Total revenue | USD | 434’778 | USD | 422’964 | 2.8 | % | USD | 884’044 | USD | 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 | USD | 48’723 | 6.7 | % | ||||||||||||||||
| Diluted EPS | USD | 0.65 | USD | 0.61 | 6.6 | % | USD | 1.42 | USD | 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 USD, or 2.8 percent, for the second quarter of 2017 and increased 32.5 million USD, or 3.8 percent, 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 USD and 5.6 million USD 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 USD, or 1.0 percent, for the second quarter of 2017. Operating income as a percentage of consolidated revenues decreased 0.1 percent to 8.6 percent 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 percent 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 percent 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 percent primarily due to higher revenues and lower management incentive costs.
On higher revenues, consolidated operating income increased 1.2 million USD, or 1.5 percent, for the six months ended June 25, 2017. Operating income as a percentage of consolidated revenues decreased 0.2 percent to 9.2 percent 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 percent 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 percent and 29.0 percent for the three and six months ended June 25, 2017, respectively, representing decreases of 2.0 percent and 2.9 percent 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 percent and 2.2 percent for the three and six month periods, respectively.
Diluted earnings per share increased 6.6 percent to 0.65 USD for the second quarter of 2017 and increased 10.1 percent to 1.42 USD 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 USD and 0.04 USD 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 percent and 7.0 percent for the three and six month periods, respectively.
Global Restaurant and Comparable Sales Information
| Q2/2017 | Q2/2016 | H1/2017 | H1/2016 | ||||||||||||||
| 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):
| H1/2017 | H1/2016 | ||||||||||
| Net cash provided by operating activities (a) | USD | 77’863 | USD | 79’613 | |||||||
| Purchases of property and equipment (b) | (30’457 | ) | (24’001 | ) | |||||||
| Free cash flow | USD | 47’406 | USD | 55’612 | |||||||
(a) The decrease of 1.8 million USD was primarily due to changes in working capital amounts.
(b) The increase of 6.5 million USD 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 | %) | |||||||||||
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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 | USD | 20’892 | |||||
| Six months ended June 25, 2017 | 421 | 33’968 | ||||||
| June 25, 2017 through July 27, 2017 | 177 | USD | 13’158 | |||||
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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 percent and 1.6 percent 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 USD increase in the Company’s share repurchase authorization, which previously had 90.2 million USD 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 USD (0.20 USD 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 percent increase in the company’s dividend rate per common share, from 0.80 USD on an annual basis to 0.90 USD on an annual basis, and declared a third quarter dividend of 0.225 USD per common share (approximately 8.2 million USD 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% |
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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.
