Papa John’s International, Inc. — Q2 2021 Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 27, 2021, compared with June 28, 2020. Papa John’s operated 5,523 restaurants in 49 countries and territories at quarter-end, including 589 company-owned and 4,934 franchised restaurants. The company generates revenue from company-owned restaurants, franchise royalties and fees, commissary sales, international operations, marketing funds, technology and other services.
Key Financial Metrics
| Metric | Three Months 2021 | Three Months 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total revenue | $515.0 million | $460.6 million | $1,026.8 million | $870.5 million |
| Revenue growth | 11.8% | — | 18.0% | — |
| Operating income | $44.6 million | $30.5 million | $91.5 million | $46.0 million |
| Operating margin | 8.7% | 6.6% | 8.9% | 5.3% |
| Net income attributable to the company | $32.3 million | $20.6 million | $66.1 million | $29.1 million |
| Net income attributable to common shareholders | $(79.9) million | $15.7 million | $(49.5) million | $20.9 million |
| Diluted EPS | $(2.30) | $0.48 | $(1.47) | $0.65 |
| Adjusted diluted EPS | $0.93 | $0.48 | $1.94 | $0.65 |
| Operating cash flow | Not separately provided | Not separately provided | $128.0 million | $87.7 million |
| Free cash flow | Not separately provided | Not separately provided | $100.1 million | $67.0 million |
Revenue growth reflected higher company-owned restaurant sales, franchise royalties, commissary volumes and pricing, international royalties and comparable sales, and technology and marketing revenue. Total comparable sales increased 9.0% in the quarter and 16.6% year to date; global system-wide restaurant sales increased 12.2% and 19.0%, respectively, excluding foreign currency effects.
Operating income benefited from revenue growth, higher franchise royalty rates following the end of temporary franchise assistance, international sales growth and stronger online and mobile ordering margins. Company-owned restaurant expense margins weakened modestly because of higher commodity costs and labor initiatives. Management reported effective tax rates of 18.0% for the quarter and 18.2% year to date.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $96.2 million at June 27, 2021, compared with $130.2 million at December 27, 2020.
- Total debt outstanding was $425.0 million, consisting of $330.0 million under the term loan and $95.0 million under the revolving facility, versus $350.0 million at year-end 2020.
- Remaining availability under the credit facilities, including letters of credit, was approximately $259.2 million. The facilities mature August 30, 2022.
- The company was in compliance with its debt covenants. Reported leverage was 2.2-to-1 versus a permitted maximum of 4.25-to-1; interest coverage was 4.8-to-1 versus a minimum of 2.50-to-1.
- Six-month financing cash outflows were $142.9 million, primarily due to the $188.6 million cash payment to repurchase and convert all outstanding Series B preferred stock.
- The company paid $14.8 million of common dividends during the first six months. On August 3, 2021, the board increased the annualized common dividend 55.6%, from $0.90 to $1.40 per share, and declared a $0.35 third-quarter dividend.
- Through June 27, 2021, the company repurchased 116,000 common shares for $10.9 million. An additional 41,000 shares were acquired after quarter-end; approximately $59.8 million remained authorized as of July 30, 2021.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased $156.3 million, operating income increased $45.5 million, and operating cash flow increased $40.4 million.
- North America franchise royalties and fees increased 49.5% year to date, partly because temporary royalty assistance ended in the third quarter of 2020.
- International revenue increased 33.4% year to date, supported by comparable sales growth, unit growth and favorable foreign currency translation.
- Restaurant count increased 176 locations over the trailing four quarters, including 55 net openings in the second quarter.
- GAAP common-share EPS turned negative because the Series B preferred-stock transaction generated a $109.9 million deemed dividend. This noncash earnings allocation reduced EPS by $3.15 in the quarter and $3.23 year to date; all Series B preferred stock was eliminated through repurchase and conversion.
- Debt increased $75.0 million from year-end, primarily reflecting revolver borrowings used in part to fund the preferred-stock transaction.
Outlook, Commentary, Risks and Unusual Items
Management highlighted an eighth consecutive quarter of system-wide sales growth, menu innovation, customer loyalty programs and an expanding development pipeline. The Atlanta corporate office and related reorganization were expected to be completed in fall 2021.
The company expects total strategic corporate reorganization costs of approximately $17.0 million to $20.0 million through 2021. Approximately $13.2 million had been incurred through June 27, 2021, with approximately $4.0 million to $7.0 million expected in the remainder of 2021.
The filing does not provide formal full-year revenue, earnings or comparable-sales guidance. Management stated that COVID-19 supported demand and that the delivery and carryout model remained favorable, but it could not predict how demand would develop as restrictions were lifted or reimposed, including because of the Delta variant.
- Key risks include COVID-19-related changes in demand, labor availability and store operations; commodity inflation, especially cheese; supply-chain disruption; higher labor and operating costs; international currency and geopolitical exposure; competition and changing consumer preferences; technology, cybersecurity and data-privacy risks; and execution of the Atlanta reorganization.
- The company remained exposed to interest-rate risk despite $350.0 million of interest-rate swaps and to foreign-currency risk because international operations are not historically hedged.
- The company was contingently liable for 75 assigned domestic leases, with estimated maximum undiscounted payments of $12.8 million if primary lessees fail to pay.
- A conditionally certified delivery-driver collective action involving 9,571 opt-in drivers remained pending. The company denied liability and had recorded no liability because it did not believe a loss was probable or reasonably estimable.
- Management reported no material changes to the risk factors in the 2020 Form 10-K and concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether strong comparable sales and franchise development continue after pandemic-related demand benefits moderate.
- The effect of commodity, labor and supply-chain inflation on company-owned restaurant and commissary margins.
- Progress and final cost of the Atlanta office and corporate reorganization.
- Debt refinancing or repayment plans before the August 2022 facility maturity, including covenant headroom and revolver usage.
- The sustainability of the increased dividend and ongoing share repurchases relative to cash flow and leverage.
- The final outcome and potential exposure from pending litigation and lease guarantees.
- The distinction between GAAP EPS, which was reduced by the one-time preferred-stock transaction, and management’s non-GAAP adjusted EPS.