Papa John’s International, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 26, 2021, compared with September 27, 2020. Papa John’s operated 5,569 restaurants in 50 countries and territories, including 591 company-owned and 4,978 franchised locations. Revenue is generated primarily from company-owned restaurant sales, franchise royalties and fees, commissary sales, international operations, marketing funds, technology and related services.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $512.8 million | $472.9 million | $1.540 billion | $1.343 billion |
| Revenue growth | 8.4% | — | 14.6% | — |
| Operating income | $38.6 million | $24.5 million | $130.1 million | $70.6 million |
| Operating margin | 7.5% | 5.2% | 8.4% | 5.3% |
| Net income attributable to the Company | $29.3 million | $15.7 million | $95.4 million | $44.8 million |
| Diluted EPS | $0.79 | $0.35 | $(0.59) | $0.99 |
| Cash flow from operations | — | — | $193.6 million | $168.5 million |
| Free cash flow | — | — | $145.9 million | $134.0 million |
Q3 comparable sales increased 7.3% globally, including 6.9% in North America and 8.3% internationally. Global system-wide restaurant sales increased 11.2%, excluding foreign currency. The company opened 46 restaurants net during the quarter and 169 restaurants net during the first nine months.
Cash and cash equivalents were $105.8 million at September 26, 2021, compared with $130.2 million at December 27, 2020. Total assets were $890.0 million, while total liabilities were $1.019 billion and total stockholders’ deficit was $137.0 million.
Material changes versus the prior comparable period
- Revenue increased $39.8 million, or 8.4%, in Q3 and $196.1 million, or 14.6%, for the first nine months.
- Operating income increased $14.0 million in Q3 and $59.5 million for the first nine months. Operating margin expanded by 230 basis points and 310 basis points, respectively.
- North America franchise royalties and fees increased 26.3% in Q3 and 41.0% year to date, reflecting higher comparable sales, higher effective royalty rates and the end of the temporary franchise assistance program.
- North America commissary revenue increased 4.3% in Q3 and 11.2% year to date, primarily from higher volumes and, for the nine-month period, higher commodity-related pricing.
- International revenue increased 14.9% in Q3 and 26.3% year to date, aided by comparable sales, unit growth and favorable foreign exchange.
- Labor and commodity cost pressures continued, but company-owned restaurant expense ratios were broadly stable because higher revenue leveraged fixed costs.
- General and administrative expense included $2.2 million of strategic corporate reorganization costs in Q3 and $9.4 million year to date.
- Year-to-date diluted EPS was reduced by $3.14 by the $109.9 million one-time deemed dividend associated with the repurchase and conversion of all outstanding Series B Convertible Preferred Stock.
Debt, liquidity and capital allocation
- Total debt was $425.0 million at September 26, 2021, consisting of $400.0 million of 3.875% senior notes due 2029 and $25.0 million drawn under the revolving facility.
- The company entered into a new $600.0 million senior secured revolving facility maturing September 14, 2026. Remaining availability, including letters of credit, was approximately $572.3 million.
- The company was in compliance with its debt covenants. The reported leverage ratio was 1.9x versus a maximum of 5.25x, and the interest coverage ratio was 5.0x versus a minimum of 2.0x.
- Operating cash flow increased to $193.6 million from $168.5 million. Capital expenditures were $41.3 million, compared with $24.3 million in the prior-year period.
- Financing cash flow was an outflow of $177.1 million, primarily reflecting the $188.6 million repurchase and conversion of Series B preferred stock, partly offset by debt issuance proceeds.
- The company paid $27.6 million of common dividends during the first nine months and declared a fourth-quarter dividend of $0.35 per share.
- After quarter-end, the board authorized a new indefinite $425.0 million common-stock repurchase program. Subsequent to quarter-end, the company repurchased 158,000 additional shares for $19.8 million.
Outlook, commentary, risks and unusual items
- Management reported the ninth consecutive quarter of system-wide sales growth and identified menu innovation, customer retention, technology and unit development as key growth drivers.
- Management expects continued investment in recruiting, referral and appreciation bonuses, recruiting events, delivery aggregator partnerships and technology because labor availability remains challenging.
- The company stated that COVID-19 has supported demand but that the duration of elevated demand and the effects of changing restrictions, including those related to the Delta variant, cannot be predicted.
- Strategic corporate reorganization costs are expected to total approximately $17.0 million to $20.0 million through 2021. Approximately $15.3 million had been incurred through September 26, 2021, with an additional $2.0 million to $5.0 million expected during the remainder of 2021.
- Key risks include labor shortages and wage inflation, commodity volatility, supply-chain disruption, food safety, competition, changing consumer behavior, international and foreign-exchange exposure, cyber and technology risks, litigation and the uncertain persistence of pandemic-related demand.
- The company remains contingently liable for 71 domestic leases, with estimated maximum undiscounted payments of $12.1 million if primary lessees fail to pay. The liability was not recorded because occurrence was not considered probable.
- The Durling driver-reimbursement collective action includes 9,571 opt-in drivers. The company denies liability and had recorded no liability because it did not believe a loss was probable or reasonably estimable.
Most important facts for investors to verify
- Whether comparable-sales momentum and pandemic-related customer gains persist as restrictions ease.
- The effect of labor availability, wage increases, commodity prices and supply-chain conditions on restaurant and commissary margins.
- Execution and final cost of the Atlanta corporate reorganization.
- Debt-service capacity and covenant headroom after the refinancing and planned share repurchases.
- The pace and returns of domestic and international restaurant development.
- The sustainability of dividends and the new $425.0 million repurchase authorization relative to operating cash flow.
- Potential exposure from litigation, lease guarantees, cyber incidents and other contingencies not fully quantified in the filing.