26 April 2024
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Global Industry

Papa John’s: Announces Fourth Quarter 2018 Results

Louisville / KY. (pj) Papa John’s International Inc. announced financial results for the three months and full year ended December 30, 2018.

Highlights

  • Loss per diluted share of (USD 0.44) and adjusted earnings per diluted share of USD 0.15 in the fourth quarter of 2018, excluding the impact of Special items; adjusted earnings per diluted share down 72.2 percent from the fourth quarter 2017 of USD 0.54
  • Earnings per diluted share of USD 0.05 and adjusted earnings per diluted share of USD 1.34 for full year 2018, excluding Special items; adjusted earnings per diluted share down 46.6 percent from full year 2017 of USD 2.51
  • System-wide North America comparable sales decreases of 8.1 percent for the fourth quarter and 7.3 percent for the full year
  • International comparable sales decreases of 2.6 percent for the fourth quarter and 1.6 percent for the full year; total international sales increase of 11.0 percent for the fourth quarter and 13.3 percent for the full year, driven by unit growth
  • 56 net unit openings in the fourth quarter and 104 for the full year, driven by International
  • Cash flow from operations of USD 72.8 million; free cash flow of USD 30.8 million for 2018

Steve Ritchie, President and CEO of Papa John’s, said, «I am confident in the long-term success of Papa John’s. With the additional USD 200 million of financial resources from Starboard, we will make targeted investments in the highest return initiatives that showcase our quality and improve the customer experience. We remain focused on people and pizza and continue to be enthusiastic about the opportunities ahead.»

Jeff Smith, Chairman of the Papa John’s Board of Directors, added, «Over the past few weeks, I have met with many of our team members and franchisees and am excited by their ideas, passion and dedication to Papa John’s. I look forward to working closely with Steve and the management team to develop additional product, menu, and customer engagement strategies that fortify our position as the «Better Ingredients. Better Pizza.» company.»

Operating Highlights

(In thousands, except per share amounts) Q4/2018 Q4/2017 Change FY-2018 FY-2017 Change
Total revenue USD 373,981 USD 467,606 (20.0 %) USD 1,573,316 USD 1,783,359 (11.8 %)
(Loss)/ Income before income taxes (16,224 ) 32,064 (150.6 %) 5,891 140,342 (95.8 %)
Net (loss)/ income (13,849 ) 28,509 (148.6 %) 1,646 102,292 (98.4 %)
Diluted (loss)/ earnings per share USD (0.44 ) USD 0.81 (154.3 %) USD 0.05 USD 2.83 (98.2 %)
Adjusted diluted earnings per share USD 0.15 USD 0.54 (72.2 %) USD 1.34 USD 2.51 (46.6 %)

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Adjusted financial results excluding Special items, which impact comparability, are summarized in the following reconciliation. The table reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures. All highlights are compared to the same period of the prior year, unless otherwise noted.

(In thousands, except per share amounts) Q4/2018 Q4/2017 FY-2018 FY-2017
GAAP (Loss)/Income before income taxes USD (16,224 ) USD 32,064 USD 5,891 USD 140,342
Special items:
Special charges (1) 25,899 – 50,732 –
Refranchising and impairment (gains)/losses, net (2) (1,629 ) 1,674 289 1,674
Adjusted income before income taxes USD 8,046 USD 33,738 USD 56,912 USD 142,016
53rd week USD – USD (5,900 ) USD – USD (5,900 )
Adjusted income before income taxes – 52 weeks USD 8,046 USD 27,838 USD 56,912 USD 136,116
GAAP (Loss)/Net income USD (13,849 ) USD 28,509 USD 1,646 USD 102,292
Special items, net of income taxes:
Special charges (3) 19,687 – 38,957 –
Refranchising and impairment (gains)/losses, net (3) (1,251 ) 1,323 222 1,323
Tax impact of China refranchising – – 2,435 –
U.S. tax legislation effect on deferred taxes (4) – (7,020 ) – (7,020 )
Equity compensation tax benefit (5) – (19 ) – (1,879 )
Adjusted net income USD 4,587 USD 22,793 USD 43,260 USD 94,716
53rd week USD – USD (3,900 ) USD – USD (3,900 )
Adjusted net income – 52 weeks USD 4,587 USD 18,893 USD 43,260 USD 90,816
GAAP Diluted (Loss)/ Earnings per share USD (0.44 ) USD 0.81 USD 0.05 USD 2.83
Special items:
Special charges 0.63 – 1.21 –
Refranchising and impairment (gains)/losses, net (0.04 ) 0.04 0.01 0.04
Tax impact of China refranchising – – 0.07 –
U.S. tax legislation effect on deferred taxes – (0.20 ) – (0.20 )
Equity compensation tax benefit – – – (0.05 )
Adjusted diluted earnings per share USD 0.15 USD 0.65 USD 1.34 USD 2.62
53rd week USD – USD (0.11 ) USD – USD (0.11 )
Adjusted net income – 52 weeks USD 0.15 USD 0.54 USD 1.34 USD 2.51
  1. The company incurred significant costs (defined as ‘Special charges’) as a result of the recent events in the second half of 2018. We incurred Special charges of USD 25.9 million and USD 50.7 million for the fourth quarter and full year, respectively, as follows: (i) re-imaging costs at nearly all domestic restaurants and costs to replace or write-off certain branded assets of approximately USD 2.2 million and USD 5.8 million for the fourth quarter and full year, respectively, (ii) financial assistance to domestic franchisees, such as short-term royalty reductions, in an effort to mitigate closings of approximately USD 5.5 million and USD 15.4 million for the fourth quarter and full year, respectively, (iii) contributions to the national marketing fund of USD 10.0 million in the fourth quarter to increase marketing and promotional activities, and (iv) costs totaling approximately USD 8.2 million and USD 19.5 million for the fourth quarter and full year, respectively, associated with the activities of the Special Committee of the Board of Directors, including legal and advisory costs related to the review of a wide range of strategic opportunities that culminated in Starboard’s strategic investment in the company by affiliates of Starboard Value LP, as well as a third-party audit of the culture of Papa John’s.
  2. The refranchising and impairment (gains)/losses, net of USD 289,000 loss before tax and USD 222,000 net loss after tax in 2018 are primarily due to the loss associated with the China refranchise of the 34 company-owned restaurants and the quality control center in China with an impairment loss related to these stores in 2017, substantially offset by refranchising gains related to the refranchising of 62 company-owned restaurants in North America in 2018. We also had USD 2.4 million of additional tax expense associated with the China refranchise. This additional tax expense is primarily attributable to the required recapture of operating losses previously taken by Papa John’s International.
  3. Tax effect was calculated using the company’s full year marginal rates of 23.2 percent and 21.0 percent for 2018 and 2017, respectively.
  4. The U.S. income tax legislation effect on deferred taxes is related to the remeasurement of the net deferred tax liability due to the Tax Cuts and Jobs Act in 2017.
  5. 2017 also includes the favorable impact of adopting the new guidance for accounting for share-based compensation. 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. Beginning in 2018, and on a go-forward basis, the benefit or reduction in income from this change will not be shown as an adjustment in GAAP results.

The non-GAAP adjusted results shown above and within this document, which exclude Special items, should not be construed as a substitute for or a better indicator of the company’s performance than the company’s GAAP results. Management believes presenting certain financial information without the Special items is important for purposes of comparison to prior year results. In addition, management uses these metrics to evaluate the company’s underlying operating performance and analyze trends.

Consolidated revenues for the fourth quarter were USD 374.0 million, decreasing USD 93.6 million, or 20.0 percent, compared to the fourth quarter of 2017. The fourth quarter and full year 2017 results include the benefit of the 53rd week of operations which contributed approximately USD 30.9 million. Excluding the 53rd week in 2017, the revenues for the fourth quarter of 2018 decreased USD 62.7 million, or 13.4 percent. For the full year ended December 30, 2018, consolidated revenues decreased USD 210.0 million, or 11.8 percent. Excluding the 53rd week in 2017, the revenues for the full year decreased USD 179.2 million, or 10.1 percent. These decreases were primarily due to the following:

  • Negative comparable sales for the fourth quarter of 10.2 percent for domestic company-owned restaurants and negative 7.4 percent for franchise restaurants, which resulted in lower company-owned restaurant revenues, lower royalties and decreased North American commissary sales;
  • the refranchising of 62 company-owned restaurants in North America which reduced total company- owned revenues on a quarter and full-year basis by approximately USD 15.0 million and USD 42.2 million, respectively, compared to the prior year comparable periods;
  • the short-term royalty reductions that are part of our franchise assistance program of approximately USD 5.5 million and USD 15.4 million on a quarter and full-year basis, respectively, which are included in the previously mentioned Special charges;
  • decreases in International revenues due to the refranchising of the company-owned restaurants and quality control center in China of approximately USD 4.0 million and USD 8.1 million on a quarter and full-year basis, respectively, and lower new store franchise fees after the adoption of Topic 606; and
  • additional decreases in revenues of approximately USD 1.7 million under Topic 606 for the fourth quarter 2018. This includes fourth quarter decreases in North America and United Kingdom commissary revenue of approximately USD 2.6 million and USD 700,000, respectively, due to required reporting of franchise new store equipment incentives as a reduction of revenue. These incentives were previously recorded as General and administrative expenses. For the full year 2018, revenue increased approximately USD 4.0 million under Topic 606 primarily related to required reporting of franchise marketing fund contributions as revenues, offset by the required reporting of franchise new store equipment incentives as a reduction of revenue, as previously discussed; see the «Revenue Recognition and Income Statement Presentation» section below for more details.

The consolidated loss before income taxes was USD 16.2 million for the fourth quarter of 2018, or 4.3 percent of consolidated revenues, in comparison to consolidated income before income taxes of USD 32.1 million in the fourth quarter of 2017, representing a decrease of USD 48.3 million. The decline in income in the quarter was primarily attributable to the previously mentioned USD 25.9 million of Special charges, the impact of lower North America and International revenues and the impact of the 53rd week in 2017 of USD 5.9 million. Significant changes in the operating results in the fourth quarter of 2018 by business unit are detailed as follows:

  • Domestic company-owned restaurants operating margin decreased USD 9.3 million, or as a percentage of related revenues decreased 0.6 percent, primarily due to negative comparable sales of 10.2 percent. Additionally, the adoption of Topic 606 reduced the restaurant operating margin due to the revised method of accounting for the customer loyalty program. The 53rd week of operations in 2017 contributed approximately USD 2.4 million of the decrease.
  • North America franchise royalties and fees decreased USD 9.2 million, or a decrease of 34.1 percent, as compared to the fourth quarter of 2017, primarily due to the short-term royalty reductions granted to the entire North America system as part of the franchise assistance program, which is included in the Special charges. Royalties were further reduced due to negative comparable sales of 7.4 percent. The 53rd week of operations in 2017 contributed approximately USD 2.0 million of the decrease.
  • North America commissary operating margin decreased USD 5.5 million, or a decrease of 2.4 percent as a percentage of related revenues, primarily due to the decline in North America restaurant sales and lower commissary revenues due to the required reporting of USD 2.6 million in new store franchise equipment incentives under Topic 606, as previously discussed. The reduction attributable to the equipment incentives is offset by a reduction in General and administrative costs, as discussed below. The 53rd week of operations in 2017 contributed approximately USD 1.7 million of the decrease.
  • International operating margin decreased USD 2.5 million primarily due to lower new store opening fees and lower United Kingdom QCC revenues of USD 700,000 due to the required reporting of franchise new store equipment incentives under Topic 606, as previously discussed. The 53rd week of operations in 2017 contributed approximately USD 700,000 of the decrease. As a percentage of international revenues, the operating margin increased 0.7 percent primarily due to the divestiture of our China operations in the second quarter of 2018.
  • Other operating margin decreased USD 1.4 million primarily due to higher costs related to various technology initiatives and increased advertising spend in the United Kingdom. The «Revenue Recognition and Income Statement Presentation» section below provides more information on our «Other revenues» and «Other expenses» income statement line items.
  • General and administrative («G+A») costs increased USD 20.2 million, or 52.5 percent, primarily due to costs associated with the Special charges of approximately USD 20.4 million, as previously detailed. Additional significant changes in G+A include the following:
    • higher technology initiative costs;
    • the USD 1.5 million fourth quarter contribution to our newly formed Papa John’s Foundation. This foundation is a separate legal entity that is not consolidated in the company’s results;
    • G+A costs were also reduced by USD 3.3 million for the quarter compared to fourth quarter 2017 due to the required reporting of equipment incentives given to franchisees under Topic 606 as a reduction of North America and United Kingdom commissary revenue; and
    • These increases were offset by the 53rd week of operations in 2017 which included approximately USD 900,000 additional expense.
  • Net interest expense increased USD 3.2 million for the fourth quarter due to an increase in average outstanding debt, including the impact of share repurchases made through August 2018, as well as higher interest rates.
  • Refranchising and impairment gains/losses, net was favorable by approximately USD 3.3 million as the fourth quarter of 2018 had refranchising gains related to the 62 company-owned stores in North America whereas the fourth quarter of 2017 had an impairment charge related to the China divestiture, as previously discussed.

For the year ended December 30, 2018 consolidated income before income taxes was USD 5.9 million, a decrease of USD 134.5 million compared to the year ended December 31, 2017. Excluding Special items, income before income taxes was USD 56.9 million, or a decrease of USD 79.2 million compared to the year ended December 31, 2017, on a 52-week basis. The decrease in the full year results, excluding the Special charges, was primarily attributable to the following:

  • the Domestic company-owned restaurants operating margin decreased USD 36.5 million, or USD 34.1 million excluding the 53rd week of operations, compared to the corresponding period in 2017 primarily due to the negative comparable sales of 9.0 percent and the items noted above for the fourth quarter as well as increased labor costs including higher minimum wages and increased non-owned automobile costs of USD 5.4 million.
  • North America franchise royalties and fees decreased USD 11.9 million, or USD 10.0 million excluding the 53rd week of operations in 2017, on negative comparable sales of 6.7 percent.
  • North America commissary operating margin decreased USD 7.4 million, or USD 5.7 million excluding the 53rd week of operations in 2017, primarily due to lower restaurant volumes and the company’s commitment to reduce its overall profit margin as additional support to franchisees. Additionally, the lower margin is due to the required reporting of USD 2.6 million in new store franchise equipment incentives as a revenue reduction under Topic 606.
  • Other operating margin decreased USD 5.4 million primarily due to higher costs related to various technology initiatives and increased advertising spend in the United Kingdom.
  • G+A costs increased USD 6.5 million, or USD 5.6 million excluding the 53rd week of operations in 2017, primarily due to higher technology initiative costs, the USD 1.5 million foundation donation in the fourth quarter, higher legal and professional fees not associated with the Special charge and increases in bad debt expense. These increases were somewhat offset by the USD 3.3 million reduction in G+A related to the required reporting of equipment incentives given to franchisees under Topic 606 as a reduction of North America and United Kingdom commissary revenue.
  • Interest expense increased USD 14.0 million on higher debt as well as a higher interest rate. The 53rd week of operations in 2017 increased interest expense for the year by approximately USD 300,000.

Operating margin (loss) is not a measure defined by GAAP and should not be considered in isolation, or as an alternative to evaluation of the company’s financial performance. In addition to an evaluation of GAAP consolidated (loss) income before income taxes, we believe the presentation of operating margin (loss) is beneficial as it represents an additional measure used by the company to further evaluate operating efficiency and performance of the various business units. Additionally, operating margin (loss) discussion may be helpful for comparison within the industry. The operating margin (loss) results detailed herein can be calculated by business unit based on the specific revenue and operating expense line items on the face of the Consolidated Statements of Operations. Consolidated (loss) income before income taxes reported includes G+A expenses, depreciation and amortization, refranchising and impairment gains/(losses), net, and net interest expense that have been excluded from this operating margin calculation.

For the three months ended December 30, 2018, the company had an effective tax benefit of 12.4 percent due to the pre-tax losses for the quarter. In comparison, the quarter ended December 31, 2017, had an effective income tax rate of 9.6 percent, which included a rate reduction for the USD 7.0 million remeasurement of the deferred tax liability, as previously detailed in the Special items. For the year ended December 30, 2018, the effective tax rate of 44.9 percent is higher than the 24.1 percent effective rate for the year ended December 31, 2017 primarily due to the China divestiture, as previously detailed in the Special items.

Diluted loss per share was USD 0.44 for the three months ended December 30, 2018 as compared to diluted earnings per share of USD 0.81 for the fourth quarter of 2017. For the year ended December 30, 2018, diluted earnings per share was USD 0.05 in comparison to USD 2.83 for the year ended December 31, 2017. Adjusted diluted earnings per share of USD 0.15 and USD 1.34 for the three months and year ended December 30, 2018 decreased 72.2 percent and 46.6 percent, respectively, in comparison to the adjusted diluted earnings per share of USD 0.54 and USD 2.51 for the prior year comparable periods, respectively.

Global Restaurant and Comparable Sales Information

Q4/2018 Q4/2017 FY-2018 FY-2017
Global restaurant sales (decline) / growth (a) (13.0 %) 9.9 % (5.9 %) 5.8 %
Global restaurant sales (decline) / growth, excluding the impact of foreign currency (a) (11.7 %) 9.6 % (5.4 %) 6.3 %
Comparable sales (decline) / growth (b)
Domestic company-owned restaurants (10.2 %) (4.7 %) (9.0 %) 0.4 %
North America franchised restaurants (7.4 %) (3.5 %) (6.7 %) (0.1 %)
System-wide North America restaurants (8.1 %) (3.9 %) (7.3 %) 0.1 %
System-wide international restaurants (2.6 %) 2.6 % (1.6 %) 4.4 %

(a) Includes both company-owned and franchised restaurant sales.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 North America, international and 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 also generate commissary revenue in the United States and in certain international markets. Franchise restaurant and comparable sales growth information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of franchise restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in company revenues.

Free Cash Flow

The company’s free cash flow, a non-GAAP financial measure, for the full year of 2018 and 2017 was as follows (in thousands):

FY-2018 FY-2017
Net cash provided by operating activities (a) USD 72,795 USD 134,975
Purchases of property and equipment (b) (42,028 ) (52,593 )
Free cash flow USD 30,767 USD 82,382

(a) The decrease of USD 62.2 million was primarily due to lower net income, somewhat offset by favorable changes in working capital items.
(b) The decrease of USD 10.6 million was primarily due to higher capital expenditures in 2017 related to the construction of the company’s new domestic commissary in Georgia, which opened in the third quarter of 2017.

We define free cash flow as net cash provided by operating activities (from the Consolidated Statements of Cash Flows) less the purchases of property and equipment. We view free cash flow as an important measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the company’s performance than the company’s GAAP measures.

Amended Credit Agreement

As previously disclosed, the company amended its Credit Agreement on October 9, 2018. The updated Credit Agreement reduced the maximum amount available under our revolving credit facility by USD 200 million, adjusted the interest rate and fees payable under the Credit Agreement and modified certain financial covenants including redefining the earnings before interest, income taxes, and depreciation and amortization («Ebitda») to exclude the Special charges. The company was in compliance with all financial covenants as of December 30, 2018. Additional information concerning the amended Credit Agreement is included in our previous disclosure filed with the SEC and our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018.

Global Restaurant Unit Data

At December 30, 2018, there were 5,303 Papa John’s restaurants operating in all 50 states and in 46 international countries and territories, as follows:

Domestic Company- owned Franchised North America Total North America International System-wide
Fourth Quarter
Beginning – October 1, 2018 647 2,709 3,356 1,891 5,247
Opened – 23 23 111 134
Closed (2 ) (40 ) (42 ) (36 ) (78 )
Ending – December 30, 2018 645 2,692 3,337 1,966 5,303
Year-to-date
Beginning – January 1, 2018 708 2,733 3,441 1,758 5,199
Opened 6 83 89 304 393
Closed (7 ) (186 ) (193 ) (96 ) (289 )
Acquired – 62 62 34 96
Sold (62 ) – (62 ) (34 ) (96 )
Ending – December 30, 2018 645 2,692 3,337 1,966 5,303
Unit growth (decline) (63 ) (41 ) (104 ) 208 104
% increase (decrease) (8.9 %) (1.5 %) (3.0 %) 11.8 % 2.0 %

.
The company has added 104 net worldwide units over the trailing four quarters ended December 30, 2018. Our development pipeline as of December 30, 2018 included approximately 1,030 restaurants (130 units in North America and 900 units internationally), the majority of which are scheduled to open over the next six years.

Non-traditional restaurant closings in our North America operations, included in the table above, were ten for the fourth quarter of 2018 and 64 for the full year. These non-traditional restaurant closings include restaurants located within stadium and university venues.

Share Repurchase Activity

The company did not repurchase any shares after August 9, 2018. For the year ended December 30, 2018, the company repurchased approximately 2.7 million shares for an aggregate cost of approximately USD 158.0 million. As previously disclosed, in connection with the execution of our amended Credit Agreement, the company cannot repurchase any additional shares when our Leverage Ratio (as defined in the Credit Agreement) is higher than 3.75 to 1.0.

There were 31.5 million and 32.3 million diluted weighted average shares outstanding for the fourth quarter and year ended December 30, 2018, representing decreases of 10.0 percent and 11.6 percent over the prior year comparable periods respectively. Approximately 31.7 million actual shares of the company’s common stock were outstanding as of December 30, 2018.

Cash Dividend

We paid a cash dividend of approximately USD 7.1 million (USD 0.225 per common share) during the fourth quarter of 2018. Subsequent to the fourth quarter, on January 31, 2019, our Board of Directors declared a first quarter dividend of USD 0.225 per common share, or USD 8.0 million, including the Series B Preferred Stock dividend on an as-converted basis to common stock. The dividend was paid on February 22, 2019 to shareholders of record as of the close of business on February 11, 2019. 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. In addition, the amended Credit Agreement limits any increase in dividends per share when the Leverage Ratio (as defined in the Credit Agreement) is higher than 3.75 to 1.0.

Revenue Recognition and Income Statement Presentation

On January 1, 2018, we adopted the new revenue recognition standard using the modified retrospective method. Under the modified retrospective method, prior period results were not restated to reflect the impact of Topic 606, resulting in reduced comparability between 2018 and 2017 operating results. The impact of adoption includes the following:

(in thousands, except for per share amounts) Q4/2018 Q4/2018
Total revenue impact (a) USD (1,726 ) USD 4,010
Pre-tax income impact (b) (263 ) (3,362 )
Diluted (loss) / earnings per share impact (0.01 ) (0.08 )

(a) The decrease in total revenues of USD 1.7 million for the three months ended is primarily attributable to the required reporting of USD 3.3 million in new store franchise equipment incentives as a reduction of North America and United Kingdom commissary revenue. Previously, these incentives were reported as General and administrative expenses. There was no consolidated pre-tax income impact from this reporting change. For the twelve months, the revenue increase of USD 4.0 million is primarily due to the requirement to present revenues and expenses related to marketing funds we control on a «gross» basis. This increase was partially offset by lower company-owned restaurant revenues attributable to the revised method of accounting for the loyalty program and required reporting of franchise new store equipment incentives as a reduction of revenue. The marketing fund gross up is reported in the new financial statement line items, Other revenues and Other expenses, as discussed further below.
(b) The USD 263,000 and USD 3.4 million decreases in pre-tax income for the three and twelve months ended December 30, 2018, respectively, are primarily due to the revised method of accounting for the loyalty program and franchise fees.

While not required as part of the adoption of Topic 606, our Statement of Operations includes newly created Other revenues and Other expenses line items. Other revenues and Other expenses include the Topic 606 «gross up» of revenues and expenses derived from certain domestic and international marketing fund co-ops we control. Additionally, Other revenues and Other expenses include various reclassifications from North America commissary and other, International expenses and G+A expenses to better reflect and aggregate various domestic and international services provided by the company for the benefit of franchisees. Related 2017 amounts have also been reclassified to conform to the new 2018 presentation. Refer to the ‘Investor Relations’ section on our company website for details of Statement of Operations presentation reclassifications for each quarter of 2017.

Other Business Matters

In September 2018, the company began a process to evaluate a wide range of strategic options with the goal of improving sales, maximizing value for all shareholders and serving the best interest of the company’s stakeholders. As part of this strategic review, the Special Committee also engaged legal and financial advisors. After extensive discussions with a wide group of strategic and financial investors, the Special Committee concluded that an investment agreement with funds affiliated with Starboard Value LP (together with its affiliates, «Starboard») was in the best interest of shareholders. On February 3, 2019, the company entered into a Securities Purchase Agreement (the «Securities Purchase Agreement») with Starboard pursuant to which Starboard made a USD 200 million strategic investment in the company’s newly designated Series B convertible preferred stock, par value USD 0.01 per share (the «Series B Preferred Stock»), with the option to make an additional USD 50 million investment in the Series B Preferred Stock through March 29, 2019. In addition, the company has the right to offer up to 10,000 shares of Series B Preferred Stock to Papa John’s franchisees who satisfy accredited investor requirements under the federal securities laws (subject to verification) on the same terms as Starboard.

The company will use approximately half of the proceeds from the sale of the Series B Preferred Stock to reduce the outstanding principal amount under the company’s unsecured revolving credit facility. The remaining proceeds are expected to be used to make investments in the business and for general corporate purposes.

In connection with Starboard’s investment, the company expanded its Board of Directors to include two new independent directors, Jeffrey C. Smith, Chief Executive Officer of Starboard, who was appointed Chairman of the Board, and Anthony M. Sanfilippo, former Chairman and Chief Executive Officer of Pinnacle Entertainment, Inc. The Board of Directors believes Smith’s business expertise and new perspectives will help support the company’s strategy to capitalize on its differentiated «BETTER INGREDIENTS. BETTER PIZZA.» market position and build a better pizza company for the benefit of its shareholders, team members, franchisees and customers. In addition, the company’s President and Chief Executive Officer Steve Ritchie has been appointed to the Board. With the addition of the new directors, the Board currently comprises nine directors, seven of whom are independent. Additional information concerning the Securities Purchase Agreement is included in our Current Reports on Form 8-K filed on February 4, 2019 and February 19, 2019.

2019 Key Operating Assumptions and Financial Outlook

In 2019, the company is targeting the following performance:

  • GAAP EPS of USD 0.00 to USD 0.50 for the full-year, including anticipated Special charges of USD 30 million to USD 50 million (a)
  • Adjusted EPS of USD 1.00 to USD 1.20, excluding Special charges that are anticipated for 2019
  • North America comparable sales of negative 1.0 percent to negative 5.0 percent
  • International comparable sales of flat to positive 3.0 percent
  • Net global new unit growth of 75 to 150 net units
  • Income tax rate of 21.0 percent to 24.0 percent
  • Block cheese prices are projected to be in the low to mid USD 1.60’s
  • Capital expenditures of USD 45 million – USD 50 million

(a) Special charges include assistance provided to the entire North America franchise system, including potential contributions to the National Marketing Fund, and costs associated with the Special Committee of the Board of Directors.


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