Papa John’s International, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 27, 2020, compared with September 29, 2019. Papa John’s operated 5,360 restaurants in 48 countries and territories: 597 company-owned and 4,763 franchised. Revenue is generated from company-owned restaurant sales, franchise royalties and fees, commissary distribution, international operations, marketing funds, online services and related activities.
Management reported that the COVID-19 pandemic increased demand for delivery and carryout, while substantially all North American traditional restaurants remained open. Approximately 90 international franchised stores were temporarily closed at quarter-end, principally in Latin America and Europe.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $472.9 million | $403.7 million | $1.343 billion | $1.202 billion |
| Operating income | $24.5 million | $4.9 million | $70.6 million | $24.7 million |
| Operating margin | 5.2% | 1.2% | 5.3% | 2.1% |
| Income before taxes | $20.9 million | $0.7 million | $59.3 million | $9.9 million |
| Net income attributable to the Company | $15.7 million | $0.4 million | $44.8 million | $7.0 million |
| Diluted EPS | $0.35 | $(0.10) | $0.99 | $(0.06) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $168.5 million | $50.0 million |
Q3 comparable sales increased 18.2% for domestic company-owned restaurants, 25.6% for North American franchised restaurants and 20.7% internationally. Nine-month comparable sales increased 15.6%, 20.0% and 9.4%, respectively.
Nine-month free cash flow, defined by the Company as operating cash flow less capital expenditures and preferred dividends, was $134.0 million versus $15.8 million in the prior-year period. Capital expenditures were $24.3 million. Cash and cash equivalents increased to $140.1 million at September 27, 2020 from $27.9 million at December 29, 2019.
Debt, liquidity and capital structure
- Total debt outstanding was $350.0 million, consisting of $345.0 million under the term loan and $5.0 million under the revolving facility, versus $370.0 million at December 29, 2019.
- The secured facilities mature August 30, 2022. Remaining availability, including the effect of outstanding letters of credit, was approximately $348.8 million.
- The Company was in compliance with its debt covenants. Reported leverage was 2.5-to-1.0 versus a permitted 5.0-to-1.0, and the interest coverage ratio was 3.7-to-1.0 versus a minimum of 2.25-to-1.0.
- Interest rate swaps had a $350 million notional value and a $15.3 million liability at September 27, 2020. The weighted average interest rate on the credit facilities, including swaps, was 3.8%.
- Common dividends of $0.225 per share per quarter continued. A fourth-quarter common dividend and a $2.3 million preferred dividend were declared after quarter-end.
- On November 4, 2020, the Board authorized up to $75 million of common-stock repurchases through December 31, 2021, subject to market, regulatory and covenant conditions.
Material changes versus the prior comparable period
- Revenue increased 17.1% in Q3 and 11.8% for the nine months, driven by higher company-owned and franchised sales, commissary volumes, international royalties and online-related revenue.
- Operating income rose $19.6 million in Q3 and $45.9 million for the nine months. Operating margin expanded by approximately 400 basis points in Q3 and 320 basis points for the nine months.
- North America franchise royalties and fees increased 58.8% in Q3 and 29.5% for the nine months, partly reflecting reduced temporary royalty relief.
- Total costs and expenses declined as a percentage of revenue to 94.8% from 99.2% in Q3 and to 94.7% from 98.1% for the nine months.
- Operating cash flow increased $118.5 million for the nine months, primarily from higher net income and favorable working-capital timing.
- Temporary franchise support, consisting of royalty relief and marketing-fund investments, concluded in Q3 2020. The support totaled $13.5 million in Q3 and $29.3 million for the nine months.
- The Company adopted ASU 2016-13 on December 30, 2019, recording a $1.1 million after-tax reduction to opening retained earnings; management stated that the overall financial-statement impact was not material.
Guidance, outlook, risks and unusual items
The filing does not provide specific revenue, earnings or unit-growth guidance. Management stated that the duration of pandemic-related demand increases and their effect on future operations, liquidity and financial condition remain uncertain.
- The Company plans to open a new headquarters in Atlanta and relocate selected corporate functions while retaining information technology, finance, supply chain and legal operations in Louisville. The transition is expected to be completed by summer 2021.
- One-time reorganization costs are estimated at approximately $15 million to $20 million through 2021, including approximately $4 million to $5 million expected in Q4 2020. No significant reorganization costs were incurred in Q3.
- Key risks include a potential decline in pandemic-related demand, additional store closures, labor and retention challenges, supply-chain disruption, commodity-cost volatility, foreign-exchange exposure, food safety and cybersecurity events, competition, franchisee health and litigation.
- Cheese prices were elevated: the reported 2020 projected full-year average block price was $2.052 versus $1.767 in 2019, before the effect of certain forward-pricing agreements.
- The Company remains contingently liable for 85 assigned domestic leases, with estimated maximum undiscounted payments of $15.1 million if primary lessees fail to pay. The liability was not accrued because payment was not considered probable.
- The Durling delivery-driver collective action and Danker securities litigation remained outstanding. The Company recorded no liability for either matter because it did not believe a loss was probable or reasonably estimable.
Most important facts to verify
- Whether elevated comparable sales and delivery demand persist after COVID-19 restrictions and consumer behavior normalize.
- Progress, employee-retention effects and total costs of the Atlanta headquarters reorganization.
- Debt refinancing or repayment plans before the August 2022 maturity and continued compliance with leverage and interest-coverage covenants.
- The sustainability of cash flow and dividends after temporary franchise support ended and before planned share repurchases.
- Exposure to cheese and other commodity costs, international foreign-exchange movements and supply-chain constraints.
- Developments and potential exposure from the delivery-driver and securities litigation, lease guarantees and other contingencies.