Papa John’s International, Inc. — 2021 Q1 Form 10-Q Summary
Business context and reporting period
Quarterly period ended March 28, 2021, compared with the three months ended March 29, 2020. Papa John’s operated 5,468 restaurants in 50 countries and territories at quarter-end, including 589 company-owned and 4,879 franchised restaurants. The company generates revenue from company-owned restaurant sales, franchise royalties and fees, commissary distribution, international operations, marketing funds, technology services and related activities.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenues | $511.7 million | $409.9 million | +24.9% |
| Operating income | $46.9 million | $15.5 million | +228.0% |
| Operating margin | 9.2% | 3.8% | +5.4 percentage points |
| Net income attributable to the company | $33.9 million | $8.4 million | +301.3% |
| Net income attributable to common shareholders | $27.1 million | $5.0 million | +445.5% |
| Diluted earnings per share | $0.82 | $0.15 | +$0.67 |
| Cash flow from operations | $63.2 million | $33.7 million | +$29.5 million |
| Free cash flow | $52.7 million | $24.4 million | +$28.3 million |
- Revenue growth was broad-based: domestic company-owned restaurant sales increased 22.2%, North America franchise royalties and fees increased 68.3%, commissary revenue increased 19.0%, international revenue increased 32.8%, and other revenue increased 31.2%.
- Comparable sales increased 23.3% at domestic company-owned restaurants, 27.1% for North America franchised restaurants and 23.2% internationally. North America franchise restaurant sales increased 27.2% to $711.4 million, and international franchise restaurant sales increased 28.9%, excluding foreign currency effects, to $291.0 million.
- Total costs and expenses declined to 90.8% of revenue from 96.2%, reflecting operating leverage, higher sales volumes, stronger online and mobile ordering margins, and the absence of prior-year temporary franchise support.
- The effective income tax rate decreased to 18.4% from 21.8%, primarily because of higher excess tax benefits from equity award activity.
- Cash and cash equivalents totaled $171.3 million at March 28, 2021, compared with $130.2 million at December 27, 2020.
- Total debt was $350.0 million, consisting of $335.0 million outstanding under the term loan and $15.0 million drawn on the revolving facility. Remaining availability under the PJI Facilities was approximately $339.2 million, including the effect of letters of credit.
- The facilities mature on August 30, 2022. The company was in compliance with all financial covenants; the reported leverage ratio was 2.0 to 1.0 versus a permitted maximum of 4.25 to 1.0, and the interest coverage ratio was 4.5 to 1.0 versus a minimum of 2.50 to 1.0.
- The company paid $10.8 million in dividends during the quarter and declared a second-quarter common dividend of $0.225 per share. It also repurchased 47,000 shares for $4.0 million through March 28, 2021.
Material changes versus the prior comparable period
- Operating income increased $31.4 million on higher comparable sales, increased franchise royalties, higher commissary volumes, stronger international performance and improved technology-platform margins.
- Adjusted operating income, excluding strategic corporate reorganization costs, was $50.7 million versus $15.5 million, and adjusted diluted EPS was $0.90 versus $0.15.
- Net cash provided by operating activities nearly doubled, while investing cash use declined to $6.3 million from $9.6 million. Financing cash use was broadly stable at $16.1 million versus $15.5 million.
- The restaurant system expanded to 5,468 units from 5,400 at December 27, 2020, including 80 openings, 12 closures, one acquisition and one sale during the quarter.
- North America franchise royalties benefited from the end of $5.7 million of temporary royalty relief provided in the prior-year comparable period.
- Stockholders’ deficit improved to $240.1 million from $266.9 million, primarily reflecting current-period earnings and other comprehensive income, although the company continued to report negative book equity.
Guidance, outlook, commentary, risks and unusual items
- Management attributed strong demand partly to COVID-19-related changes in consumer behavior and to the launch of Epic Stuffed Crust pizza. Management expects innovation, loyalty programs and digital ordering initiatives to support continued growth, but stated that the duration of pandemic-related demand is uncertain.
- The company is relocating or reorganizing certain corporate functions around a new Atlanta office expected to open in summer 2021. Total one-time reorganization costs are expected to be approximately $15.0 million to $20.0 million through 2021; $9.9 million had been incurred through March 28, 2021, including $3.9 million in Q1 2021. Additional costs of approximately $5.0 million to $10.0 million were expected during the remainder of 2021.
- Management reported no material supply-chain disruption from COVID-19 at quarter-end, but cannot predict the pandemic’s effects on demand, liquidity or long-term financial condition.
- Key risks include labor and food-cost inflation, commodity volatility, supply-chain concentration, competition, franchisee execution, international and foreign-currency exposure, cybersecurity and data privacy, regulatory changes, litigation, and the potential loss of pandemic-driven demand.
- The company has interest-rate swaps with a total notional value of $350.0 million. The swaps had a fair-value liability of $11.6 million at quarter-end and reduced exposure to variable-rate debt, but create counterparty risk.
- The company remains contingently liable for 80 assigned domestic leases, with estimated maximum undiscounted payments of $13.6 million if primary lessees fail to pay. This liability was not recorded because loss was not considered probable.
- A wage-and-expense reimbursement collective action involving delivery drivers had 9,571 opt-in plaintiffs. The company denied liability and had not accrued a loss because it did not believe a loss was probable or reasonably estimable.
- Projected 2021 average cheese block price was $1.837 per pound based on futures prices, before the effect of certain forward-pricing agreements.
Most important facts for investors to verify
- Whether exceptionally high comparable-sales growth persists as pandemic restrictions ease and year-over-year comparisons normalize.
- The timing and total cost of the Atlanta corporate reorganization, including whether costs remain within the $15.0 million to $20.0 million estimate.
- Debt maturity and refinancing plans for the August 2022 facilities, along with compliance with leverage and fixed-charge covenants.
- Whether labor, cheese, supply-chain and other operating-cost pressures offset the company’s current margin expansion.
- The sustainability of franchisee health, unit openings and international growth, particularly in markets exposed to currency and geopolitical risks.
- The potential financial exposure from the delivery-driver litigation and assigned lease guarantees.
- The impact of participating Series B Preferred Stock on common-share earnings and dilution; the preferred stock represented approximately $251.9 million of temporary equity and its if-converted effect was anti-dilutive in the reported periods.