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 25, 2016. Highlights:
- Third quarter earnings per diluted share of 0.57 USD in 2016, or an increase of 26.7 percent over 2015 third quarter earnings
- System-wide comparable sales increases of 5.5 percent for North America and 7.6 percent for International in the third quarter
- 36 worldwide net unit openings in the third quarter
- Increased 2016 diluted earnings per share guidance to a range of 2.46 to 2.52 USD from the prior range of 2.35 to 2.45 USD
«We are pleased that our strong performance continued in the 3rd quarter, with excellent comp sales, earnings and unit growth», said Papa John’s founder, chairman and CEO John Schnatter. «With continued enhancements to our digital platforms, expansion of our international footprint, and the introduction of our new pan pizza, 2016 is shaping up to be another outstanding year for Papa John’s».
Third quarter 2016 revenues were 422.4 million USD, an 8.5 percent increase from third quarter 2015 revenues of 389.3 million USD. Third quarter 2016 net income was 21.5 million USD, a 19.5 percent increase from third quarter 2015 net income of 18.0 million USD. Third quarter 2016 diluted earnings per share were 0.57 USD, a 26.7 percent increase compared to third quarter 2015 diluted earnings per share of 0.45 USD.
Revenues were 1.27 billion USD for the nine months ended September 25, 2016, a 4.4 percent increase from revenues of 1.22 billion USD for the same period in 2015. Net income was 70.2 million USD for the first nine months of 2016, compared to 51.0 million USD for the same period in 2015. Net income for the first nine months of 2016 increased 19.0 percent, compared to 2015 adjusted net income of 59.0 million USD, which excludes the prior year legal settlement (adjusted), as detailed in the «Item Impacting Comparability Non-GAAP Presentation» table. Diluted earnings per share were 1.86 USD for the first nine months of 2016, compared to 1.27 USD for the same period in 2015 (adjusted diluted earnings per share of 1.47 USD in the same period of 2015, or a 26.5 percent increase).
Global Restaurant and Comparable Sales Information
| Q3/2016 | Q3/2015 | 9M-2016 | 9M-2015 | |||||||||
| Global restaurant sales growth (a) | 7.6% | 3.9% | 5.2% | 5.9% | ||||||||
| Global restaurant sales growth, excluding the impact of foreign currency (a) | 8.9% | 7.0% | 6.8% | 8.5% | ||||||||
| Comparable sales growth (b) | ||||||||||||
| Domestic company-owned restaurants | 6.3% | 4.7% | 4.2% | 6.8% | ||||||||
| North America franchised restaurants | 5.1% | 2.4% | 3.0% | 4.4% | ||||||||
| System-wide North America restaurants | 5.5% | 3.0% | 3.4% | 5.0% | ||||||||
| System-wide international restaurants | 7.6% | 8.0% | 6.2% | 7.5% |
(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.
Revenue and Operating Highlights
All revenue and operating highlights below are compared to the same period of the prior year, unless otherwise noted.
Revenue Highlights: Consolidated revenues increased 33.2 million USD, or 8.5 percent, for the third quarter of 2016 and increased 53.4 million USD, or 4.4 percent, for the nine months ended September 25, 2016. The increases in revenues were primarily due to the following:
- Domestic company-owned restaurant sales increased 19.0 million USD, or 10.5 percent, and 45.7 million USD, or 8.1 percent, for the three and nine months, respectively, primarily due to increases of 6.3 percent and 4.2 percent in comparable sales and increases of 5.1 percent and 4.8 percent in equivalent units, including 20 restaurants acquired from franchisees during the first quarter of 2016.
- Domestic franchise royalties and fees increased approximately 2.5 million USD, or 11.2 percent, and 5.4 million USD, or 7.5 percent, for the three and nine months, respectively, primarily due to increases of 5.1 percent and 3.0 percent in comparable sales and reduced levels of royalty incentives in 2016.
- Domestic commissary and other sales increased 9.7 million USD, or 6.1 percent, and decreased 3.7 million USD, or 0.7 percent, for the three and nine months, respectively. The increase of 9.7 million USD for the three-month period was primarily due to higher commissary sales from an increase in volumes. The decrease of 3.7 million USD for the nine-month period was primarily due to the prior year inclusion of approximately 9.8 million USD of point of sale equipment sales to franchisees which had no significant impact on 2015 operating results. This decrease was partially offset by higher domestic commissary sales volumes.
- International revenues increased approximately 1.9 million USD, or 7.2 percent, and 6.1 million USD, or 7.7 percent, for the three and nine months, respectively, primarily due to the following:
- International revenues for 2016 include sublease rental revenue in the United Kingdom of approximately 2.2 million USD and 5.6 million USD for the three- and nine-months, respectively, which were shown net of the rental expenses in the prior year.
- Royalties were higher due to an increase in the number of restaurants and increases in comparable sales of 7.6 percent and 6.2 percent for the three- and nine-month periods, respectively, calculated on a constant dollar basis. Commissary revenues were also higher for the nine-month period due to an increase in the number of restaurants and increases in comparable sales.
- China Company-owned restaurant revenues were 1.4 million USD and 4.0 million USD lower than the prior year three- and nine-month periods, respectively, primarily due to negative comparable sales and fewer restaurants in 2016.
Foreign currency exchange rates reduced International revenues by approximately 3.7 million USD and 7.7 million USD for the three- and nine-months periods, respectively.
Operating Highlights: The tables below summarize income before income taxes on a reporting segment basis for the three and nine months ended September 25, 2016 and September 27, 2015, and reconcile our GAAP financial results to the adjusted (non-GAAP measure as detailed in the «Item Impacting Comparability Non-GAAP Presentation» table) financial results, excluding the legal settlement in 2015, for the nine months ended September 27, 2015:
| (In thousands) | Q3/2016 | Q3/2015 | Change | ||||||||||||
| Domestic company-owned restaurants | USD | 11’576 | USD | 8’088 | USD | 3’488 | |||||||||
| Domestic commissaries | 11’311 | 10’192 | 1’119 | ||||||||||||
| North America franchising | 21’856 | 19’172 | 2’684 | ||||||||||||
| International | 3’083 | 3’184 | (101 | ) | |||||||||||
| All others | 392 | (556 | ) | 948 | |||||||||||
| Unallocated corporate expenses | (16’360 | ) | (13’482 | ) | (2’878 | ) | |||||||||
| Elimination of intersegment profits | (231 | ) | (341 | ) | 110 | ||||||||||
| Total income before income taxes | USD | 31’627 | USD | 26’257 | USD | 5’370 | |||||||||
.
| Nine Months Ended… | As Reported, | Legal Settlement | Adjusted | Adjusted | ||||||||||||||||||||
| (In thousands) | 2016-09-25 | 2015-09-27 | Expense | 2015-09-27 | Change | |||||||||||||||||||
| Domestic company-owned restaurants | USD | 47’088 | USD | 41’185 | USD | – | USD | 41’185 | USD | 5’903 | ||||||||||||||
| Domestic commissaries | 34’539 | 32’694 | – | 32’694 | 1’845 | |||||||||||||||||||
| North America franchising | 67’881 | 61’545 | – | 61’545 | 6’336 | |||||||||||||||||||
| International | 8’996 | 6’807 | – | 6’807 | 2’189 | |||||||||||||||||||
| All others | 868 | (230 | ) | – | (230 | ) | 1’098 | |||||||||||||||||
| Unallocated corporate expenses | (49’771 | ) | (60’636 | ) | 12’278 | (48’358 | ) | (1’413 | ) | |||||||||||||||
| Elimination of inter-segment profits | (1’365 | ) | (1’141 | ) | – | (1’141 | ) | (224 | ) | |||||||||||||||
| Total income before income taxes | USD | 108’236 | USD | 80’224 | USD | 12’278 | USD | 92’502 | USD | 15’734 | ||||||||||||||
.
Third quarter 2016 income before income taxes increased approximately 5.4 million USD, or 20.5 percent, compared to the prior year period. The increase of 5.4 million USD was primarily due to the following:
- Domestic company-owned restaurants increased approximately 3.5 million USD primarily due to a 6.3 percent increase in comparable sales, a 5.1 percent increase in equivalent units, and lower commodity costs.
- Domestic commissaries income increased approximately 1.1 million USD primarily due to higher sales volumes.
- North America franchising income increased approximately 2.7 million USD primarily due to higher royalties attributable to the 5.1 percent increase in comparable sales and lower sales and development incentives.
- International income decreased approximately 100’000 USD primarily due to a non-recurring charge of approximately 800’000 USD to record our United Kingdom lease arrangements on a straight line basis. This decrease was substantially offset by higher royalties from an increase in the number of restaurants and an increase in comparable sales. Foreign currency exchange rates also had a negative impact of approximately 400’000 USD, which was primarily attributable to the United Kingdom.
- All others income increased approximately 900’000 USD primarily due to improved operating results in our online and mobile ordering business and our print and promotions subsidiary.
- Unallocated corporate expenses increased approximately 2.9 million USD primarily due to increases in management incentive costs from higher annual operating results and higher interest costs due to an increase in outstanding debt.
Income before income taxes increased 28.0 million USD for the nine month period ended September 25, 2016, compared to the prior year period and increased 15.7 million USD, or 17.0 percent, compared to the adjusted 2015 income before income taxes. The increase of 15.7 million USD was primarily due to the same reasons noted for the three-month period, except as follows:
- International income increased approximately 2.2 million USD primarily due to higher royalties and commissary revenues primarily due to an increase in units and higher comparable sales and lower advertising spending. These increases were partially offset by the previously mentioned charge of 800’000 USD for our United Kingdom lease arrangements. Foreign currency exchange rates had a negative impact of approximately 1.7 million USD.
The effective income tax rates were 28.4 percent and 30.9 percent for the three and nine months ended September 25, 2016, representing increases of 0.7 percent and 0.3 percent for the three- and nine-month periods, respectively. Our effective income tax rates 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 nine months of 2016 and 2015, was as follows (in thousands):
| 9M-2016 | 9M-2015 | |||||||||
| Net cash provided by operating activities (a) | USD | 115’982 | USD | 119’738 | ||||||
| Purchases of property and equipment (b) | (38’954 | ) | (26’508 | ) | ||||||
| Free cash flow | USD | 77’028 | USD | 93’230 | ||||||
(a): The decrease of approximately 3.8 million USD was primarily due to the payment of approximately 12.5 million USD in the first quarter of 2016 for the previously mentioned legal settlement and other unfavorable changes in working capital items, partially offset by higher net income.
(b): The increase of 12.4 million USD was primarily due to new restaurant builds, initiatives in our online and mobile ordering business, and construction costs for our new domestic commissary in Georgia, which is expected to open in 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 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 liquidity or 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 and nine months ended September 25, 2016.
Global Restaurant Unit Data: At September 25, 2016, there were 4’971 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 | ||||||||||||||||
| Third Quarter | ||||||||||||||||||||
| Beginning – June 26, 2016 | 734 | 2’668 | 3’402 | 1’533 | 4’935 | |||||||||||||||
| Opened | 3 | 25 | 28 | 47 | 75 | |||||||||||||||
| Closed | (1 | ) | (18 | ) | (19 | ) | (20 | ) | (39 | ) | ||||||||||
| Ending – September 25, 2016 | 736 | 2’675 | 3’411 | 1’560 | 4’971 | |||||||||||||||
| Year-to-date | ||||||||||||||||||||
| Beginning – December 27, 2015 | 707 | 2’681 | 3’388 | 1’505 | 4’893 | |||||||||||||||
| Opened | 10 | 66 | 76 | 117 | 193 | |||||||||||||||
| Closed | (1 | ) | (52 | ) | (53 | ) | (62 | ) | (115 | ) | ||||||||||
| Acquired (divested) | 20 | (20 | ) | – | – | – | ||||||||||||||
| Ending – September 25, 2016 | 736 | 2’675 | 3’411 | 1’560 | 4’971 | |||||||||||||||
| Unit growth (decline) | 29 | (6 | ) | 23 | 55 | 78 | ||||||||||||||
| % increase (decrease) | 4.1 | % | (0.2 | %) | 0.7 | % | 3.7 | % | 1.6 | % | ||||||||||
.
Our development pipeline as of September 25, 2016 included approximately 1’400 restaurants (220 units in North America and 1’180 units internationally), the majority of which are scheduled to open over the next six years.
Item Impacting Comparability – Non-GAAP Presentation
The following table reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures, for the nine months ended September 25, 2016 and September 27, 2015:
| (In thousands, except per share amounts) | 9M-2016 | 9M-2015 | ||||||
| Income before income taxes, as reported | USD | 108’236 | USD | 80’224 | ||||
| Legal settlement expense | – | 12’278 | ||||||
| Income before income taxes, as adjusted | USD | 108’236 | USD | 92’502 | ||||
| Net income, as reported | USD | 70’190 | USD | 50’987 | ||||
| Legal settlement expense | – | 7’986 | ||||||
| Net income, as adjusted | USD | 70’190 | USD | 58’973 | ||||
| Diluted earnings per share, as reported | USD | 1.86 | USD | 1.27 | ||||
| Legal settlement expense | – | 0.20 | ||||||
| Diluted earnings per share, as adjusted | USD | 1.86 | USD | 1.47 | ||||
.
The 2015 legal settlement expense represents a pre-tax expense of 12.3 million USD for a collective and class action litigation, Perrin versus Papa John’s International Inc. and Papa John’s USA Inc.
The non-GAAP adjusted results shown above, which exclude the 2015 legal settlement, 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 the financial information excluding the legal settlement is important for purposes of comparison to prior year results. In addition, management uses this metric to evaluate the company’s underlying operating performance and to analyze trends.
Share Repurchase Activity
The following table reflects our repurchases for the three and nine months ended September 25, 2016 and subsequent repurchases through October 25, 2016 (in thousands):
| Period | Number of Shares | Cost | |||||
| Three Months Ended September 25, 2016 | 180 | USD | 13’052 | ||||
| Nine Months Ended September 25, 2016 | 1’987 | USD | 109’407 | ||||
| September 26, 2016 through October 25, 2016 | 56 | USD | 4’377 | ||||
.
There were 37.4 million and 37.7 million diluted weighted average shares outstanding for the three and nine months ended September 25, 2016, representing decreases of 6.4 percent and 6.2 percent, respectively, over the prior year comparable periods. Approximately 36.9 million actual shares of the company’s common stock were outstanding as of September 25, 2016.
2016 Guidance
The company provided the following 2016 guidance updates and reaffirmed all other guidance:
| Updated Guidance | Previous Guidance | |||||
| Diluted earnings per share* | 2.46 USD to 2.52 USD | 2.35 USD to 2.45 USD |
*The earnings guidance presented excludes any potential impact of a refranchising in 2016 of our Company-owned China market, for which we have previously disclosed our plans to sell, and any related non-operating items.
OTHER TOPICS FROM THIS SECTION FOR YOU:
- CA-1 Robot: Circus Group Launches Munich Showroom
- Ferrero: opens new production facility in Illinois
- HungryPanda: Raises 55 Million to Accelerate Growth
- McCormick: Reports Third Quarter 2024 Performance
- Subway Sandwiches: Continues to Expand Its Global Presence
- Nissin Foods: Acquires Frozen Food Manufacturer ABC Pastry
- SnackFutures Ventures: makes investment in Doughnut Start-Up
- PepsiCo: To Acquire Siete Foods For 1.2 Billion
- Europastry S.A.: goes public on the Spanish stock exchange
- Insomnia Cookies: Reaches 300 Store Locations Globally
- Reborn Coffee: Announces Joint Venture in Thailand
- Campbell: Launches Next Chapter of Growth
- Mondelez: to acquire a majority stake in Evirth
- Syngenta Group: Reports H1-2024 Earnings
- General Mills: Reports Fiscal 2025 First-quarter Result
- Pret A Manger: Sales rise 10 percent in H1-2024
- General Mills: Sells Its North American Yogurt Business
- HSA Group: acquires majority stake in Bisco-Misr
- One Rock Capital: Plans Acquisition of Europe Snacks
- T.Hasegawa acquires Abelei Flavors
