Papa John’s International, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 27, 2022, compared with the three months ended March 28, 2021. Papa John’s operated 5,524 restaurants in 49 countries and territories at quarter-end, including 608 company-owned and 4,916 franchised restaurants. The company generates revenue from company-owned restaurant sales, franchise royalties and fees, commissary distribution, international operations, marketing funds, technology and other services.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $542.7 million | $511.7 million | +6.0% |
| Operating income | $14.4 million | $46.9 million | -69.2% |
| Operating margin | 2.7% | 9.2% | -6.5 percentage points |
| Net income attributable to the company | $10.5 million | $33.9 million | -69.0% |
| Diluted EPS | $0.29 | $0.82 | -$0.53 |
| Adjusted diluted EPS | $0.95 | $0.91 | +$0.04 |
| Cash flow from operations | $25.4 million | $63.2 million | -$37.8 million |
| Free cash flow | $15.2 million | $52.7 million | -$37.6 million |
Revenue growth was led by a 13.4% increase in North America commissary revenue, primarily reflecting higher pricing from increased commodity costs, and a 4.7% increase in North America franchise royalties and fees. Domestic company-owned restaurant revenue rose 0.8%, while international revenue was essentially flat, partly because of unfavorable foreign exchange.
Total costs and expenses increased to $517.1 million, or 95.3% of revenue, from $464.9 million, or 90.8%, in the prior-year quarter. Domestic restaurant expense, commissary expense, international expense and other expense ratios all increased, mainly because of higher labor, food, commodity and inflation-related costs. General and administrative expense rose to $65.9 million from $50.0 million.
Total comparable sales increased 1.6%, including 2.8% for North America franchised restaurants and 0.8% internationally. Global system-wide restaurant sales increased 5.3%, excluding foreign currency effects. The company reported 5.3% domestic company-owned restaurant sales growth on a system-wide basis, but domestic company-owned comparable sales declined 1.2% against a 23.3% increase in the prior-year period.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $80.7 million at March 27, 2022, compared with $70.6 million at December 26, 2021.
- Total debt outstanding was $537.0 million, consisting of $400.0 million of 3.875% senior notes due 2029 and $137.0 million drawn on the revolving facility, compared with $490.0 million at year-end.
- The $600.0 million revolving facility had approximately $463.0 million of remaining availability at quarter-end.
- The company was in compliance with its debt covenants. The leverage ratio was 2.2x versus a maximum permitted 5.25x, and the interest coverage ratio was 4.8x versus a minimum required 2.0x.
- Cash flow from operations declined primarily because of working-capital timing, including accrued liabilities and accounts receivable. Capital expenditures were $10.2 million in the quarter, and full-year 2022 capital expenditures were estimated at approximately $85.0 million.
- The company repurchased 301,000 shares for $32.7 million during the quarter and repurchased an additional 223,000 shares for $23.0 million after quarter-end. Approximately $369.1 million remained available under the repurchase authorization as of April 29, 2022.
- The company declared a $0.35-per-share second-quarter dividend, approximately $12.6 million in aggregate.
Material changes versus the prior comparable period
- Reported profitability declined substantially because of special items and higher operating costs. Adjusted operating income was $45.2 million versus $50.7 million, a 10.9% decrease.
- Q1 2022 included $25.8 million of refranchising and impairment-related items, including an $8.4 million charge associated with the sale of the company’s 51% interest in a 90-restaurant Texas joint venture and a $17.4 million pre-tax charge related to Russia-related receivables and reacquired franchise rights.
- The company accrued a $5.0 million legal settlement related to the employee and franchise employee antitrust litigation. The proposed settlement remained subject to court approval and other customary contingencies.
- Q1 2021 included $3.9 million of strategic corporate reorganization costs, which did not recur in Q1 2022.
- Cash flow from operations fell 60% and free cash flow fell 71% year over year, while debt increased by $47.0 million from year-end.
- The company launched NY Style pizza and stated that the product, together with Epic Stuffed Crust, supported sales performance.
Guidance, outlook, commentary and risks
Management accelerated its 2022 development outlook to 280–320 net new restaurants globally, representing approximately 5% growth at the midpoint. It expects 1,400–1,800 net new restaurants worldwide by the end of 2025 compared with the start of 2021. Management also cited long-term development agreements, including a planned South China expansion and additional development by Sun Holdings.
Management expects to use selective menu pricing, product mix and operating improvements to address inflation. The filing identifies labor shortages, wage pressure, food and commodity inflation, supply-chain disruption, staffing-related service limitations, foreign exchange volatility, cyber risks, changing consumer behavior, competition and the Russia-Ukraine conflict as material risks.
Papa John’s suspended corporate operations and support for its 188 franchised restaurants in Russia and fully reserved or impaired related assets. Management stated that it did not expect additional Russia-related financial statement charges for amounts recorded on the balance sheet, although the broader geopolitical, supply-chain and economic effects remain risks.
The company also disclosed contingent liability for approximately 65 domestic lease guarantees, with a maximum estimated undiscounted exposure of $10.8 million if primary lessees fail to pay. A further $1.6 million of potential lease-guarantee exposure related to the Texas joint venture was disclosed after the quarter-end sale.
Most important facts for investors to verify
- Whether comparable sales and restaurant development remain positive after lapping unusually strong 2021 results.
- Whether labor, commodity, transportation and energy inflation continue to compress company-owned restaurant and commissary margins.
- Whether adjusted earnings improvements translate into sustainable GAAP earnings and operating cash flow after special items end.
- Debt drawdowns, interest expense, covenant headroom and the company’s ability to fund capital expenditures, dividends and share repurchases.
- The final court approval and cash cost of the proposed $5.0 million antitrust settlement.
- The financial and operational effects of the Russia-Ukraine conflict, including any disruption to international operations or supply chains despite the stated full reservation of Russia-related assets.
- Execution of the 280–320 net new restaurant target for 2022 and the longer-term 1,400–1,800 unit development objective.