Papa John’s: Announces First Quarter 2016 Results

Louisville / KY. (pj) Papa John’s International Inc., the world’s third largest pizza company, announced financial results for the first quarter ended March 27, 2016. The company reported 0.69 USD earnings per diluted share in the first quarter compared to 0.55 USD in Q1/2015, an increase of 25.5 percent. System-wide comparable sales increased 0.1 percent for North America and 5.7 percent for international. The company is reaffirming its previously issued 2016 guidance.

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

Global Restaurant and Comparable Sales Information

		Q1/2016			Q1/2015
Global restaurant sales growth		2.3	%		7.4	%
Global restaurant sales growth, excluding the impact of foreign currency		4.2	%		9.6	%
Comparable sales growth
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	%

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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 USD for the first quarter of 2016, a decrease of 3.7 million USD, or 0.9 percent. 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 USD, or 4.3 percent, primarily due to an increase in equivalent units, including 20 restaurants acquired from franchisees during the first quarter, and a 1.0 percent increase in comparable sales.
• Domestic franchise royalties and fees increased approximately 850’000 USD, or 3.3 percent, primarily due to reduced levels of royalty incentives in the first quarter of 2016.
• Domestic commissary and other sales decreased 15.0 million USD, or 8.1 percent. The decrease was due to the prior year inclusion of approximately 8.5 million USD 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 USD 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 USD, or 8.0 percent, primarily due to the first quarter of 2016 including sublease rental revenue in the United Kingdom of approximately 1.6 million USD, 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 percent, 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 USD.

Operating Highlights

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

(In thousands)

Q1/2016

Q1/2015

Change

Domestic company-owned restaurants

USD

20’187

USD

18’480

USD

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

USD

41’409

USD

36’436

USD

4’973

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

• Domestic company-owned restaurants increased approximately 1.7 million USD primarily due to lower commodity costs, including meats and dough.
• North America franchising increased approximately 1.3 million USD primarily due to reduced royalty and development incentives.
• International income increased approximately 1.7 million USD 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 USD.
• Unallocated corporate expenses were approximately 900’000 USD 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 USD due to a lower margin, which was partially offset by higher sales volumes.

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

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

		Q1/2016				Q1/2015
Net cash provided by operating activities (a)		USD	29’969			USD	40’249
Purchases of property and equipment			(10’249	)			(7’558	)
Free cash flow		USD	19’720			USD	32’691

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^{The decrease of approximately 10.3 million USD was primarily due to the payment of approximately 12.5 million USD 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:

First Quarter		Domestic Company owned			Franchised North America			Total North America			International			System-wide
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
percent increase (decrease)		3.1	%		-0.7	%		0.1	%		0.5	%		0.2	%

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^{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):

Period		Number of Shares		Cost
First Quarter 2016		1’286		USD	66’033
March 27, 2016 through April 26, 2016		262		USD	14’625

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There were 38.3 million diluted weighted average shares outstanding for the first quarter of 2016, representing a decrease of 5.5 percent 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.