Papa John’s International, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
The filing covers the 13 and 26 weeks ended June 26, 2022, compared with June 27, 2021. Papa John’s operated 5,571 restaurants in 49 countries and territories, including 519 company-owned and 5,052 franchised locations. The company generates revenue from company-owned restaurants, franchise royalties and fees, commissary distribution, international operations, marketing funds, technology services and related activities.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $522.7 million | $515.0 million | $1.065 billion | $1.027 billion |
| Operating income | $38.9 million | $44.6 million | $53.3 million | $91.5 million |
| Operating margin | 7.4% | 8.7% | 5.0% | 8.9% |
| Net income attributable to the company | $25.4 million | $32.3 million | $35.9 million | $66.1 million |
| Diluted EPS | $0.70 | $(2.30) | $0.99 | $(1.47) |
| Net cash from operating activities | Not separately provided for quarter | Not separately provided for quarter | $45.6 million | $128.0 million |
| Free cash flow | Not separately provided for quarter | Not separately provided for quarter | $14.8 million | $100.1 million |
Q2 revenue increased 1.5%, while six-month revenue increased 3.8%. Excluding the 90-restaurant refranchising transaction, revenue increased 5.2% in Q2 and 5.7% year to date. North America commissary revenue grew 17.5% in Q2 and 15.5% year to date, primarily from pricing related to higher input costs. North America franchise royalties and fees grew 7.5% and 6.1%, respectively.
Q2 costs and expenses were 92.6% of revenue versus 91.3% in the prior-year quarter. Year-to-date costs and expenses were 93.9% of revenue versus 91.1%. Company-owned restaurant expense ratios increased to 82.9% in Q2 and 82.0% year to date, driven by food and labor inflation. Commissary expense ratios also increased.
At June 26, 2022, cash and cash equivalents were $52.1 million, compared with $70.6 million at December 26, 2021. Debt totaled $545.0 million, consisting of $400.0 million of 3.875% senior notes and $145.0 million drawn on the revolving facility. Approximately $455.0 million remained available under the $600.0 million revolving facility. The company reported compliance with its debt covenants, with a 2.3-to-1.0 leverage ratio against a maximum of 5.25-to-1.0 and a 4.5-to-1.0 interest coverage ratio against a minimum of 2.0-to-1.0.
Material changes versus the prior comparable period
- Domestic company-owned restaurant sales declined 12.6% in Q2 and 5.9% year to date, principally reflecting the refranchising of 90 restaurants. Excluding refranchising, sales increased 1.2% in Q2 and 0.9% year to date.
- Comparable sales were down 1.4% globally in Q2 and up 0.1% year to date. North America comparable sales increased 0.9% in Q2 and 1.4% year to date, while international comparable sales declined 8.0% and 3.6%, respectively.
- Operating income declined 12.8% in Q2 and 41.7% year to date. On an adjusted basis excluding special items, operating income declined 15.7% in Q2 and 13.2% year to date.
- Six-month cash flow from operations fell $82.4 million to $45.6 million, reflecting lower business performance, lower accrued expenses and timing of marketing payments.
- The company repurchased 753,000 shares for $75.5 million during the first six months and repurchased an additional 229,000 shares for $19.5 million after quarter-end through July 29, 2022. Approximately $329.8 million remained authorized at July 29.
- The company refranchised its 51% interest in a 90-restaurant Texas joint venture for $14.0 million net proceeds and recorded an $8.4 million non-cash refranchising loss.
Guidance, outlook, risks and unusual items
Management expected 280 to 320 net new restaurants globally during 2022 and 1,400 to 1,800 net new restaurants worldwide by the end of 2025 relative to the beginning of 2022. Capital expenditures for 2022 were estimated at approximately $75 million to $85 million.
Management cited new product launches, targeted loyalty marketing, selective pricing and digital ordering initiatives as growth drivers. Staffing shortages continued to affect service levels and, in limited cases, the ability to take or deliver orders. Delivery aggregators and delivery-as-a-service providers helped preserve incremental orders but carry somewhat lower margins.
Six-month special items included $17.4 million of non-cash Russia-related reserves and impairments, the $8.4 million refranchising loss, a $5.0 million legal settlement accrual, $2.8 million of impairment related to reacquired franchise rights and $1.5 million of executive transition advisory and severance costs. The Russia-related assets were fully reserved or impaired, and the company stated that no additional Russia-related charges were recorded on the balance sheet.
Principal risks include food, labor, fuel and transportation inflation; commodity volatility, including cheese, proteins and wheat; labor shortages; supply-chain disruption; the Ukraine conflict and international sanctions; foreign-exchange movements; weaker consumer sentiment; competition and pricing pressure; cyberattacks; technology or delivery-system failures; litigation; food safety matters; and the ability to maintain dividends and repurchases while funding capital needs. The company also has contingent exposure on approximately 62 assigned domestic leases, with estimated maximum undiscounted payments of $10.2 million if primary lessees default.
The company accrued a proposed $5.0 million settlement in the employee and franchise employee antitrust litigation, subject to court approval. It did not record a liability for the Durling delivery-driver lawsuit because management did not believe a loss was probable or reasonably estimable.
Important facts for investors to verify
- Whether pricing and product innovation can offset continuing food, labor, delivery and commodity inflation without further margin compression.
- The sustainability of operating cash flow and free cash flow after dividends, share repurchases and planned capital expenditures.
- Revolving debt utilization, interest expense, variable-rate exposure and continued compliance with leverage and interest-coverage covenants.
- The effect of the 90-store refranchising transaction and the suspension of corporate support for 188 Russia-based restaurants on future revenue, royalties and store-count comparisons.
- Progress toward the 2022 and 2025 unit-development objectives amid staffing, site availability, geopolitical and supply-chain risks.
- The status and final cost of the antitrust settlement and the potential exposure from the unresolved delivery-driver litigation.
- The company’s ability to maintain the $0.42 quarterly dividend and discretionary share repurchases given reduced cash generation and a stockholders’ deficit of $233.8 million at quarter-end.