Louisville / KY. (pj) Papa John’s International Inc., the world’s third largest pizza company, announced financial results for the three months and full year ended December 31, 2017. Highlights:
- GAAP earnings per diluted share of USD 0.81 and adjusted earnings per diluted share of USD 0.65 in the fourth quarter of 2017, excluding Special items; adjusted earnings per diluted share down 6 percent from the fourth quarter 2016
- GAAP earnings per diluted share of USD 2.83 and adjusted earnings per diluted share of USD 2.62 for full year 2017, excluding Special items; adjusted earnings per diluted share up 3 percent over 2016
- System-wide North America comparable sales decrease of 3.9 percent for the fourth quarter and increase of 0.1 percent for the full year
- International comparable sales increases of 2.6 percent for the fourth quarter and 4.4 percent for the full year
- 98 net unit openings in the fourth quarter and 102 for the full year, of which all 102 were International
«We know our potential is so much greater than our results, and we are taking significant steps to reinvigorate our record of profitable growth and value creation,» said Steve Ritchie, CEO and President of Papa John’s. «Actions are underway to improve our brand proposition, how we connect with customers, and how we operate at the unit level. These actions build on all the strengths of the Papa John’s brand and include a fresh perspective around marketing driven by new media and creative partnerships, hiring a new PR partner, and bringing online a new engine to drive our Papa Rewards loyalty system. Based on these initiatives, we expect to see marked improvements in sales later in 2018. Our franchise partners in the US are fully aligned with our initiatives and are excited about this next chapter of the Papa John’s brand.»
GAAP and adjusted net income and diluted earnings per share results excluding Special items are summarized below. All highlights are compared to the same period of the prior year, unless otherwise noted on both a 53 week basis as well as a 52 week basis.
|(In thousands, except per share amounts)|
|Three Months Ended||Year Ended|
|December 31, 2017||December 25, 2016||%Change||December 31, 2017||December 25, 2016||%Change|
|GAAP net income- 53 weeks||USD||28’509||USD||32’630||-12.6||%||USD||102’292||USD||102’820||-0.5||%|
|Adjusted net income- 53 weeks||USD||22’793||USD||25’608||-11.0||%||USD||94’716||USD||95’798||-1.1||%|
|Adjusted net income- 52 weeks||USD||18’893||USD||25’608||-26.2||%||USD||90’816||USD||95’798||-5.2||%|
|GAAP diluted EPS- 53 weeks||USD||0.81||USD||0.88||-8.0||%||USD||2.83||USD||2.74||3.3||%|
|Special items (*)||(0.16||)||(0.19||)||-15.8||%||(0.21||)||(0.19||)||10.5||%|
|Adjusted diluted EPS- 53 weeks||USD||0.65||USD||0.69||-5.8||%||USD||2.62||USD||2.55||2.7||%|
|Adjusted diluted EPS- 52 weeks||USD||0.54||USD||0.69||-21.7||%||USD||2.51||USD||2.55||-1.6||%|
|(*) See Special items detail in «Items Impacting Comparability – Non-GAAP Presentation» table.|
Revenue and Operating Highlights
Consolidated revenues for the fourth quarter were USD 467.6 million, increasing USD 27.9 million, or 6.4 percent, compared to the fourth quarter of 2016. The fourth quarter and full year 2017 results include the benefit of the 53rd week of operations which contributed approximately USD 31.0 million. Excluding the 53rd week, the revenues for the fourth quarter of 2017 decreased USD 2.9 million or 0.7 percent. This decrease is primarily due to the decrease in company-owned restaurant sales due to negative comparable sales of 4.7 percent and the impact of refranchising 42 Domestic company-owned restaurants in the fourth quarter of 2016. These decreases were somewhat offset by increases in International revenues due to higher comparable sales of 2.6 percent and an increase in equivalent units as well as an increase in North America commissary sales due to higher commodity prices. Foreign currency exchange rates during the fourth quarter of 2017 favorably impacted International revenues by approximately USD 1.8 million.
Consolidated revenues for the full year 2017 were USD 1.78 billion, increasing USD 69.7 million, or 4.1 percent, compared to 2016. Excluding the 53rdweek, 2017 revenues increased USD 38.8 million, or 2.3 percent, compared to 2016. This increase was primarily due to higher North America commissary sales from commodity price increases and higher volumes. International revenues also increased due to higher comparable sales of 4.4 percent and an increase in equivalent units. The increased revenues from International were somewhat offset by the impact of unfavorable foreign currency exchange rates approximating USD 4.1 million. North America franchise revenues also increased primarily due to the impact of refranchising 42 Domestic company-owned restaurants in the fourth quarter of 2016; this increase was more than offset by a related decrease in Domestic company-owned restaurant sales.
Consolidated income before income taxes of USD 32.1 million for the fourth quarter of 2017 decreased USD 18.5 million, or 36.6 percent, compared to the fourth quarter of 2016. Excluding the impact of Special items, adjusted income before income taxes was USD 33.7 million for the fourth quarter of 2017, a decrease of USD 5.7 million, or 14.5 percent, compared to the fourth quarter of 2016 as detailed below. Adjusted income before income taxes as a percentage of consolidated revenues was 7.2 percent for the fourth quarter of 2017, a decrease of 1.8 percent compared to the fourth quarter of fiscal 2016.
- Domestic company-owned restaurant operating income decreased USD 6.1 million, or as a percentage of related revenues decreased 3.3 percent. This was primarily attributable to the impact of negative comparable sales, higher vehicle and workers’ compensation insurance costs and higher commodities prices. The higher labor costs from higher minimum wages were offset by lower restaurant bonuses due to the lower sales and operating results. The decrease in operating income was somewhat offset by the benefit from the 53rd week of operations of approximately USD 2.4 million.
- North America commissary and other operating income increased approximately USD 500’000 but as a percentage of related revenues, decreased 0.4 percent. The benefit from the 53rd week of operations was approximately USD 2.0 million. The operating income decrease excluding the benefit of the 53rd week was due primarily to higher online operating costs due to digital initiatives as well as lower operating income in our print and promotions subsidiary from lower revenues. North America commissary operating income approximated the prior year.
- International operating income increased USD 3.3 million, or 1.5 percent as a percentage of related international revenues. The benefit from the 53rd week of operations was approximately USD 700’000. The additional increase in operating income was primarily due to both higher revenues on higher comparable sales and equivalent units and the favorable timing of marketing spend in the United Kingdom, which had no impact on full year results.
- General and administrative costs increased USD 450’000, improving 0.5 percent as a percentage of consolidated revenues. Excluding the impact of the 53rd week of USD 900’000, general and administrative costs were down USD 450’000 primarily attributable to lower management incentive costs of USD 4.7 million, substantially offset by higher salaries and benefits.
- Interest expense increased USD 2.9 million, or 154.2 percent, for the fourth quarter. This increase was attributable to both an increase in average outstanding debt, which is primarily due to share repurchases, as well as higher interest rates.
Consolidated income before income taxes was USD 140.3 million, a decrease of USD 18.5 million, or 11.6 percent, for the year ended December 31, 2017. Excluding the impact of Special items, adjusted income before income taxes was USD 142.0 million, a decrease of USD 5.7 million, or 3.8 percent for the year ended December 31, 2017, which was driven by the fourth quarter results, as previously discussed. Adjusted income before income taxes as a percentage of consolidated revenues was 8.0 percent, a decrease of 0.6 percent for the full year.
The effective income tax rates were 9.6 percent and 24.1 percent for the fourth quarter and full year 2017, respectively, representing decreases of 22.6 percent and 7.2 percent from the prior year comparable periods. The decreases in the effective income tax rates for the fourth quarter and full year are primarily attributable to the impact of the «Tax Cuts and Jobs Act,» (the «Tax Act») which was signed into law on December 22, 2017. The Tax Act contains substantial changes to the Internal Revenue Code including a reduction of the U.S. corporate tax rate from 35 percent to 21 percent effective January 1, 2018. As a result of the enactment of this tax legislation in 2017, deferred tax assets and liabilities were remeasured. This remeasurement yielded a one-time benefit of approximately USD 7 million in the fourth quarter of 2017. See «Items Impacting Comparability-Non-GAAP Presentation» table for more details. Given the substantial changes associated with the Tax Act, the estimated remeasurement of deferred taxes for fourth quarter and the full year 2017 are provisional and subject to further interpretation and clarification of the Tax Act.
Diluted earnings per share («EPS») decreased 8.0 percent for the fourth quarter of 2017 and increased 3.3 percent for the full year. Excluding Special items, adjusted diluted EPS was USD 0.65 for the fourth quarter, a decrease of 5.8 percent. The decrease is primarily attributable to the lower operating income results previously discussed, which more than offset the favorable impact of the 53rd week. The 2017 full year adjusted diluted EPS was USD 2.62, an increase of 2.7 percent over 2016 EPS of USD 2.55. This full year increase includes the USD 0.11 favorable impact of the 53rd week, a favorable tax rate and lower share count. These favorable items were somewhat offset by other decreases in income, as previously discussed.
Global Restaurant and Comparable Sales Information
|Three Months Ended||Year Ended|
|December 31, 2017||December 25, 2016||December 31, 2017||December 25, 2016|
|Global restaurant sales growth (a)||9.9||%||5.3||%||5.8||%||5.2||%|
|Global restaurant sales growth, excluding the impact of foreign currency (a)||9.6||%||7.0||%||6.3||%||6.8||%|
|Comparable sales growth (b)|
|Domestic company-owned restaurants||(4.7||%)||4.8||%||0.4||%||4.4||%|
|North America franchised restaurants||(3.5||%)||3.4||%||(0.1||%)||3.1||%|
|System-wide North America restaurants||(3.9||%)||3.8||%||0.1||%||3.5||%|
|System-wide international restaurants||2.6||%||5.6||%||4.4||%||6.0||%|
|(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, for the full year of 2017 and 2016 was as follows (in thousands):
|Full Year Ended|
|December 31||December 25|
|Net cash provided by operating activities (a)||USD||134’975||USD||150’257|
|Purchases of property and equipment||(52’594||)||(55’554||)|
|Free cash flow||USD||82’381||USD||94’703|
|(a) The decrease of USD 15.3 million was primarily due to changes in working capital amounts.|
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 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for additional information concerning our operating results and cash flow for the full year ended December 31, 2017.
Global Restaurant Unit Data
At December 31, 2017, there were 5’199 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|
|Beginning – September 24, 2017||705||2’736||3’441||1’660||5’101|
|Ending – December 31, 2017||708||2’733||3’441||1’758||5’199|
|Beginning – December 25, 2016||702||2’739||3’441||1’656||5’097|
|Ending – December 31, 2017||708||2’733||3’441||1’758||5’199|
|Unit growth (decline)||6||(6||)||–||102||102|
The 2017 International franchise closures include 66 India closures for the year ended December 31, 2017. There was no significant impact on our 2017 operating results from the closure of the market.
Our development pipeline as of December 31, 2017 includes 1’190 restaurants (200 units in North America and 990 units internationally), the majority of which are scheduled to open over the next six years.
Items 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 fourth quarter and full year ended December 31, 2017 and December 25, 2016:
|Three Months Ended||Full Year Ended|
|December 31,||December 25,||December 31,||December 25,|
|(In thousands, except per share amounts)||2017||2016||2017||2016|
|GAAP income before income taxes||USD||32’064||USD||50’573||USD||140’342||USD||158’809|
|Refranchising and impairment (gains)/losses||1’674||(10’222||)||1’674||(10’222||)|
|Adjusted income before income taxes||USD||33’738||USD||39’453||USD||142’016||USD||147’689|
|Adjusted income before income taxes – 52 weeks||USD||27’838||USD||39’453||USD||136’116||USD||147’689|
|GAAP net income||USD||28’509||USD||32’630||USD||102’292||USD||102’820|
|Special items, net of income taxes:|
|Refranchising and impairment (gains)/losses||1’323||(6’455||)||1’323||(6’455||)|
|U.S. tax legislation effect on deferred taxes||(7’020||)||–||(7’020||)||–|
|Equity compensation tax benefit||(19||)||–||(1’879||)||–|
|Adjusted net income||USD||22’793||USD||25’608||USD||94’716||USD||95’798|
|Adjusted net income – 52 weeks||USD||18’893||USD||25’608||USD||90’816||USD||95’798|
|GAAP diluted earnings per share||USD||0.81||USD||0.88||USD||2.83||USD||2.74|
|Refranchising and impairment (gains)/losses||0.04||(0.17||)||0.04||(0.17||)|
|U.S. tax legislation effect on deferred taxes||(0.20||)||–||(0.20||)||–|
|Equity compensation tax benefit||–||–||(0.05||)||–|
|Adjusted diluted earnings per share||USD||0.65||USD||0.69||USD||2.62||USD||2.55|
|Adjusted diluted earnings per share – 52 weeks||USD||0.54||USD||0.69||USD||2.51||USD||2.55|
Refranchising and impairment (gains)/losses includes impairment charges in 2016 and 2017 related to our company-owned stores in China that are held for sale. 2016 also includes a refranchising gain from the sale of the company–owned Phoenix market with 42 restaurants to a franchisee.
The legal settlement represents the favorable 2016 finalization related to the collective and class action litigation, Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc.
U.S. 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.
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.
The non-GAAP adjusted results shown 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 these 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, to analyze trends, and to determine compensation.
Share Repurchase Activity
There were 35.1 million and 36.5 million diluted weighted average shares outstanding for the fourth quarter and full year ended December 31, 2017, representing decreases of 6.1 percent and 2.9 percent, respectively, over the prior year comparable periods. Approximately 34.1 million actual shares of the company’s common stock were outstanding as of December 31, 2017.
The Company expects to repurchase shares in an amount equal to the remaining authorization by the end of 2019. 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. The Company continues to evaluate the use of an accelerated share repurchase program to execute a portion of the share repurchase authorization. There can be no assurance as to the amount, timing or prices of repurchases, whether through an accelerated share repurchase program or otherwise. The specific timing and amount of repurchases will vary based on prevailing market conditions and other factors. 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.
We paid a cash dividend of approximately USD 7.8 million ( USD 0.225 per common share) during the fourth quarter of 2017. Subsequent to the fourth quarter, on February 2, 2018, our Board of Directors declared a fourth quarter dividend of USD 0.225 per common share (approximately USD 7.6 million based on the current number of shares outstanding). The dividend was paid on February 23, 2018 to shareholders of record as of the close of business on February 12, 2018. 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.
2018 Key Operating Assumptions and Financial Outlook
In 2018, the Company is targeting the following performance:
- Diluted EPS of USD 2.40 to USD 2.60 in comparison to the USD 2.83 2017 GAAP EPS. Excluding the USD 0.11 impact of the 53rd week in 2017, EPS decrease is 4.5 percent to 12.0 percent on adjusted 2017 EPS of USD 2.72. 2018 Diluted EPS outlook also includes the following assumptions:
- EPS will decrease USD 0.30 to USD 0.40 due to lower operating results, primarily from expected continued pressure on Domestic restaurants’ sales, higher delivery and insurance costs for our company-owned restaurants and the higher costs for technology and marketing investments.
- EPS will decrease USD 0.05 to USD 0.10 related to the impact of the new revenue recognition standard.
- EPS will increase an additional USD 0.04 to USD 0.10 for the favorable impact of U.S. tax legislation above the USD 0.20 favorable impact in 2017. Our preliminary 2018 income tax rate estimates are 20 percent to 24 percent. These estimates are provisional and subject to further interpretation and clarification of the legislation. The tax rate excludes any tax impact from a potential divestiture of our China company-owned operations.
- EPS will increase USD 0.05 to USD 0.10 due to share repurchases.
- North America comparable sales of negative 3 percent to flat
- International comparable sales of 3.0 percent – 5.0 percent
- Net global new unit growth of 3.0 percent – 5.0 percent
- Block cheese prices are projected to be in the low USD 1.60’s
- Capital expenditures of USD 45 – USD 55 million
- Total Debt/Ebitda ratio of 3.0x to 3.5x