Papa John’s: Announces Third Quarter 2014 Results

Louisville / KY. (pj) Papa John´s International Inc., the world´s third largest pizza company, announced financial results for the three and nine months ended September 28, 2014. Third quarter earnings per diluted share increased to 0.39 USD in 2014 – up 21.9 percent to the corresponding quarter in 2013 (0.32 USD). Third quarter system-wide comparable sales increased 7.4 percent for North America and 5.5 percent for international.

«I would like to congratulate our corporate and franchise operators for continuing to drive excellent sales and bottom line results», said Papa John´s Founder, Chairman, CEO and President John Schnatter. «Our focus on driving quality, digital innovation, and a better customer experience provides the foundation from which we will continue to consistently grow units and profitability».

Third quarter 2014 revenues were 390.4 million USD, a 12.7 percent increase from third quarter 2013 revenues of 346.3 million USD. Third quarter 2014 net income was 16.1 million USD, compared to third quarter 2013 net income of 14.3 million USD. Third quarter 2014 diluted earnings per share were 0.39 USD, compared to third quarter 2013 diluted earnings per share of 0.32 USD.

Revenues were 1.17 billion USD for the nine months ended September 28, 2014, an 11.6 percent increase from revenues of 1.05 billion USD for the same period in 2013. Net income was 52.1 million USD for the nine months ended September 28, 2014, compared to 50.7 million USD for the same period in 2013. Diluted earnings per share were 1.23 USD for the nine months ended September 28, 2014, compared to 1.13 USD for the same period in 2013.

Revenue Highlights

Consolidated revenues increased 44.1 million USD, or 12.7 percent, for the third quarter of 2014 and increased 121.5 million USD, or 11.6 percent, for the nine months ended September 28, 2014. The increases in revenues were primarily due to the following:

  • Domestic company-owned restaurant sales increased 16.4 million USD, or 10.8 percent, and 51.6 million USD, or 11.1 percent, for the three and nine months, respectively, primarily due to increases of 8.3 percent and 9.1 percent in comparable sales.
  • North America franchise royalty revenue increased approximately 2.7 million USD, or 14.0 percent, and 5.3 million USD, or 8.9 percent, for the three and nine months, respectively, primarily due to increases of 7.1 percent and 7.2 percent in comparable sales. The three-month period was also favourably impacted by lower performance-based royalty incentives.
  • Domestic commissary sales increased 11.2 million USD, or 8.1 percent, and 41.9 million USD, or 9.9 percent, for the three and nine months, respectively, due to increases in the prices of certain commodities, primarily cheese, and increases in sales volumes for the nine-month period.
  • Other sales increased 9.8 million USD, or 72.2 percent, and 11.1 million USD, or 28.7 percent, for the three and nine months, respectively, primarily due to point-of-sale system («Focus») equipment sales to franchisees.
  • International revenues increased 4.0 million USD, or 17.9 percent, and 12.1 million USD, or 19.1 percent, for the three and nine months, primarily due to increases in the number of restaurants and increases in comparable sales of 5.5 percent and 6.9 percent, respectively, calculated on a constant Dollar basis.

Operating Highlights

Third quarter 2014 income before income taxes increased 3.0 million USD, or 13.9 percent. Excluding «Focus» roll-out costs of approximately 1.2 million USD, income before income taxes increased approximately 4.1 million USD, or 19.5 percent. Significant results by segment are detailed as follows:

  • Domestic company-owned restaurants results increased approximately 2.6 million USD primarily due to the 8.3 percent increase in comparable sales, partially offset by the impact of higher commodity costs. The market price for cheese averaged 2.14 USD per pound for the third quarter of 2014, compared to 1.74 USD per pound in the prior year. Additionally, the results for the third quarter of 2014 include approximately 450’000 USD of depreciation expense associated with «Focus» hardware costs.
  • Domestic commissaries results increased approximately 2.4 million USD primarily due to a higher margin, partially offset by higher costs associated with various ongoing commissary initiatives. We manage commissary results on a full year basis and anticipate the 2014 full year profit margin percentage will approximate 2013.
  • North America franchising increased 2.5 million USD primarily due to higher royalties attributable to the 7.1 percent increase in comparable sales and lower performance-based royalty incentives.
  • International income increased approximately 500’000 USD primarily due to an increase in units and comparable sales of 5.5 percent which resulted in both higher royalties and an improvement in United Kingdom commissary results. These increases were partially offset by unfavorable results at our China company-owned restaurant operations, including an impairment charge of approximately 700’000 USD for eight restaurants.
  • The results for the «All others» segment decreased approximately 900’000 USD. The decrease was primarily due to higher infrastructure costs to support our digital ordering business and a lower margin at our print and promotions business.
  • Unallocated corporate expenses were 3.7 million USD higher primarily due to the following:
    • General and administrative costs increased approximately 1.5 million USD primarily due to higher salaries, benefits, and equity compensation costs, increased professional and legal fees and higher insurance costs.
    • Interest costs were approximately 400’000 USD higher due to both a higher average outstanding debt balance and a higher effective interest rate.
    • The prior year included an approximate 375’000 USD benefit from a decrease in the redemption value of a mandatorily redeemable non-controlling interest in a joint venture.
    • Depreciation expense increased approximately 1.0 million USD including depreciation expense of 600’000 USD for «Focus» capitalized software development costs.

Income before income taxes increased 3.7 million USD, or 4.7 percent, for the nine-month period ended September 28, 2014. Excluding «Focus» system roll-out costs of approximately 2.3 million USD, income before income taxes increased by approximately 6.0 million USD, or 7.7 percent for the nine-month period. The increase was primarily due to the same reasons as noted above, except the domestic commissaries segment which decreased approximately 100’000 USD due to higher insurance costs of approximately 1.1 million USD and higher costs associated with ongoing commissary initiatives. These decreases were substantially offset by a higher margin.

The effective income tax rates were 30.0 percent and 32.4 percent for the three and nine months ended September 28, 2014, representing a decrease of 0.1 percent for the three-month period and an increase of 0.5 percent for the nine-month period. Our effective income tax rate may fluctuate from quarter to quarter for various reasons. The higher tax rate for the nine months of 2014 was primarily due to the prior year including both favorable state tax settlements and the reinstatement of certain 2012 tax credits under the American Taxpayer Relief Act of 2012.

«Focus» Update

The company is implementing a new, proprietary point-of-sale system («Focus») in substantially all domestic system-wide restaurants. As of September 28, 2014, we had installed «Focus» in almost 50 percent of our domestic restaurants, including all company-owned restaurants and almost 800 franchised restaurants. Substantial completion is expected to occur by the end of the first quarter of 2015.

The costs related to implementing «Focus» are projected to decrease income before income taxes by approximately 4.0 million USD in 2014, or a 0.06 USD negative impact on diluted earnings per share, as compared to 2013. For the three and nine months ended September 28, 2014, the impact was a 1.2 million USD and 2.3 million USD reduction in income before income taxes, or a 0.02 USD and 0.04 USD reduction in diluted earnings per share, respectively. For additional information, see the Quarterly Report on Form 10-Q for the three- and nine-month periods ended September 28, 2014.

Global Restaurant Unit Data

At September 28, 2014, there were 4’537 Papa John´s restaurants operating in all 50 states and in 36 international countries and territories. Our development pipeline as of September 28, 2014 included approximately 1’300 restaurants (300 units in North America and 1’000 units internationally), the majority of which are scheduled to open over the next six years.

2014 Guidance Update

The company provided the following 2014 guidance updates:

. Updated Guidance Previous Guidance
Diluted earnings per share (a) 1.68 USD to 1.74 USD 1.64 USD to 1.72 USD
North America comparable sales +5.0 percent to +7.0 percent +4.0 percent to +6.0 percent

(a) Includes the approximate 0.06 USD per share impact of implementing «Focus», which was previously estimated to be 0.08 USD per share.

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