Papa John’s International, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
The filing covers the 52-week fiscal year ended December 25, 2022, compared with the year ended December 26, 2021. Papa John’s operates and franchises pizza delivery and carryout restaurants, Quality Control Centers, marketing funds, technology services, and related businesses. At year-end, the system had 5,706 restaurants in 48 countries and territories: 522 company-owned and 5,184 franchised.
The business is primarily franchised, with revenue generated from company-owned restaurant sales, franchise royalties and fees, commissary sales, marketing funds, technology services, and other activities. Approximately 85% of Domestic transactions were generated through digital channels in 2022.
Key financial metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Total revenue | $2.102 billion | $2.068 billion | +1.6% |
| Operating income | $109.0 million | $168.2 million | -35.2% |
| Operating margin | 5.2% | 8.1% | -290 basis points |
| Net income attributable to the Company | $67.8 million | $120.0 million | -43.5% |
| Diluted EPS | $1.89 | $0.12 | Prior year reduced by a $3.10 preferred-stock redemption charge |
| Adjusted diluted EPS | $2.94 | $3.51 | -16.2% |
| Cash flow from operations | $117.8 million | $184.7 million | -36.2% |
| Free cash flow | $39.4 million | $109.7 million | -64.1% |
Revenue growth was driven primarily by higher North America commissary revenue, which increased 14.2% to $869.6 million, and higher North America franchise royalties and fees, which increased 6.3% to $137.4 million. Domestic company-owned restaurant sales declined 9.0% to $708.4 million, while International revenue declined 13.8% to $129.9 million.
Costs increased faster than revenue. Domestic company-owned restaurant costs rose to 82.6% of related revenue from 79.9%, primarily due to food, labor, and commodity inflation. North America commissary costs increased to 93.3% of related revenue from 92.4%, reflecting higher commodity and delivery costs. Net interest expense increased to $25.3 million from $17.3 million.
Material changes versus the prior comparable period
- Comparable sales declined 0.8% system-wide, compared with 12.1% growth in 2021. Domestic company-owned comparable sales declined 1.0%, North America franchised comparable sales increased 1.2%, and International comparable sales declined 5.3%.
- Global system-wide restaurant sales increased 2.9%, compared with 15.4% growth in 2021. Excluding suspended Russian restaurants, the company reported 244 net new units in 2022, compared with 250 in 2021.
- The company refranchised its 51% controlling interest in a 90-restaurant Texas joint venture for $14.0 million net of transaction costs. The transaction generated an $8.4 million non-cash refranchising loss but is expected to support future royalty growth.
- Corporate support for 188 franchised restaurants in Russia was suspended following the conflict in Ukraine. The company recorded $17.4 million of one-time non-cash Ukraine-related charges, including receivable reserves and impairment of reacquired franchise rights.
- The company recorded $15.0 million for legal settlements and approximately $5.2 million of costs associated with the termination of significant UK franchisees. Total adjusted operating income declined 13.2% to $157.5 million.
- Share repurchases totaled $125.0 million, or approximately 1.343 million shares, and common dividends totaled $54.8 million. The company declared a first-quarter 2023 dividend of $0.42 per share.
Debt, liquidity, cash flow, and balance sheet
- Total debt was $605.0 million at December 25, 2022, consisting of $400.0 million of 3.875% senior notes due 2029 and $205.0 million drawn under the revolving credit facility.
- The $600.0 million revolving facility had $395.0 million of remaining availability at year-end and matures in September 2026.
- The company was in compliance with its debt covenants. The actual leverage ratio was 2.6x versus a maximum permitted 5.25x, and the interest coverage ratio was 4.1x versus a minimum of 2.0x.
- Cash and cash equivalents declined to $47.4 million from $70.6 million. The company stated that cash, operating cash flow, and borrowing capacity should be sufficient for expected requirements over the next twelve months and beyond.
- Capital expenditures were $78.4 million in 2022. Management estimated 2023 capital expenditures of approximately $80 million to $90 million, primarily for company-owned restaurant development and technology enhancements.
- Stockholders’ deficit increased to $270.7 million from $172.5 million, primarily reflecting share repurchases, dividends, and debt-funded capital allocation.
Guidance, outlook, management commentary, and risks
- Management expects 270 to 310 net new restaurants globally in 2023 and previously announced a target of 1,400 to 1,800 net new restaurants from 2022 through the end of 2025.
- Management expects inflationary pressure on food, labor, benefits, fuel, energy, delivery, and other operating costs to continue in 2023. Pricing actions and expense controls may not fully offset these pressures.
- The United Kingdom remains a major concern. High inflation, rising interest rates, energy costs, slower economic growth, foreign-exchange volatility, and higher VAT contributed to negative comparable sales and weaker franchisee profitability. The company expects to provide approximately $2 million to $3 million of targeted marketing incentives and may need to reposition or close unprofitable locations.
- Key risks include franchisee financial stress, labor shortages and wage inflation, commodity volatility, supply-chain disruption, reliance on Leprino Foods as the sole domestic mozzarella supplier, intense competition, foreign-exchange exposure, cybersecurity and digital-ordering interruptions, food safety issues, litigation, regulatory changes, and interest-rate risk.
- The company has not historically hedged its foreign-currency exposure. A 10% adverse currency movement was estimated to reduce annual revenue by approximately $13.6 million and operating income by approximately $1.5 million based on 2022 results.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting as of December 25, 2022. The critical audit matter was the measurement and valuation of $67.3 million of insurance reserves.
Most important facts for investors to verify
- Whether the planned 2023 unit growth of 270 to 310 restaurants is achieved without additional franchisee support, closures, or credit losses.
- Whether UK comparable sales, franchisee profitability, and restaurant stability improve after the planned operational and marketing initiatives.
- Whether food, labor, fuel, energy, and delivery costs stabilize sufficiently to recover company-owned and commissary margins.
- Whether operating cash flow can support the planned $80 million to $90 million of capital expenditures, dividends, and share repurchases while maintaining covenant headroom.
- The ultimate cash cost and final court approval of the proposed delivery-driver settlement, which has a maximum aggregate amount of $20.0 million and an estimated company exposure of approximately $10.0 million.
- The collectability of franchisee receivables and loans, particularly in Russia and the UK, given the increase in the allowance for notes receivable to $14.5 million from $1.5 million.
- The effect of currency movements, interest rates, commodity prices, supply-chain disruptions, and digital-system reliability on future revenue and margins.