Papa John’s International, Inc. — Fiscal 2021 Form 10-K Summary
Business context and reporting period
Papa John’s operates and franchises pizza delivery, carryout and, in certain international markets, dine-in restaurants. The filing covers the 52-week fiscal year ended December 26, 2021, compared primarily with the 52-week fiscal year ended December 27, 2020.
- System footprint increased to 5,650 restaurants in 50 countries and territories, comprising 600 company-owned and 5,050 franchised locations.
- Net unit growth was 250, including 50 North American units and 200 international units.
- The company has four reportable segments: Domestic Company-owned restaurants, North America franchising, North America commissaries and International operations.
- Management emphasized menu innovation, digital ordering, customer loyalty, franchise development and international expansion. Over half of domestic sales originated through digital channels.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenues | $2.068 billion | $1.813 billion | 14.1% increase |
| Operating income | $168.2 million | $90.3 million | $78.0 million increase |
| Operating margin | 8.1% | 5.0% | 3.1 percentage-point improvement |
| Income before income taxes | $150.9 million | $75.4 million | $75.5 million increase |
| Net income attributable to the Company | $120.0 million | $57.9 million | 107.1% increase |
| Net income attributable to common shareholders | $4.1 million | $41.7 million | Lower due primarily to a $109.9 million preferred-stock redemption charge |
| GAAP diluted EPS | $0.12 | $1.28 | Decline due primarily to the preferred-stock transaction |
| Adjusted diluted EPS | $3.51 | $1.40 | Increase of $2.11 |
| Cash flow from operating activities | $184.7 million | $186.4 million | Slight decrease |
| Free cash flow | $109.7 million | $137.1 million | Decrease primarily from higher capital expenditures |
Revenue growth was driven by higher company-owned restaurant sales, franchise royalties, commissary volumes and pricing, international royalties and technology-related revenue. Approximately 47% of North America revenue in each of the last two fiscal years came from sales and services provided to franchisees, including commissary products, marketing fund contributions and technology services.
- Total comparable sales growth was 12.1%; North America comparable sales grew 11.8% and international comparable sales grew 13.0%.
- Domestic company-owned comparable sales grew 11.3%, while North America franchised comparable sales grew 12.0%.
- Global system-wide restaurant sales increased 15.4%, excluding foreign currency effects.
- Total costs and expenses declined to 91.9% of revenue from 95.0%, reflecting operating leverage and the absence of certain 2020 franchise assistance costs, partly offset by higher labor and commodity costs.
- The effective tax rate declined to 17.2% from 19.6%, partly because of a $2.7 million benefit from finalization of the 2020 federal tax return and excess tax benefits from equity activity.
Liquidity, capital allocation and debt
- Cash and cash equivalents were $70.6 million at year-end, compared with $130.2 million in 2020.
- Outstanding debt was $490.0 million, consisting of $400.0 million of 3.875% senior notes due September 2029 and $90.0 million drawn under a $600.0 million revolving facility maturing September 2026.
- Remaining revolver availability was approximately $510.0 million. The company reported a 2.0-to-1.0 leverage ratio versus a permitted maximum of 5.25-to-1.0 and a 5.0-to-1.0 interest coverage ratio versus a minimum of 2.0-to-1.0; all financial covenants were satisfied.
- Financing cash outflows included $188.6 million to repurchase and convert all Series B Convertible Preferred Stock, $72.5 million of common-stock repurchases and $40.4 million of common dividends.
- The Board authorized a $425.0 million common-stock repurchase program. Approximately $411.5 million remained available as of February 17, 2022, after additional post-year-end repurchases.
- Annual common dividends increased from $0.90 to $1.40 per share during 2021; a $0.35 per-share first-quarter 2022 dividend was declared and paid in February 2022.
- Management expects cash, operating cash flow and borrowing capacity to fund near-term cash requirements, dividends, interest payments and planned repurchases.
Material changes versus the prior comparable period
- Revenue, operating income and pre-tax income increased substantially, supported by continued pandemic-era demand, menu innovation, loyalty-program activity and unit growth.
- Operating income excluding special items increased 88.4% to $181.3 million from $96.2 million.
- The temporary franchise assistance program ended in the third quarter of 2020, improving 2021 franchise royalty rates and reducing discretionary marketing-fund support.
- The company incurred $13.1 million of 2021 corporate reorganization costs related to its Atlanta office, compared with $6.0 million in 2020. Cumulative reorganization costs were approximately $19.1 million, and management stated that significant remaining costs were not expected.
- Capital expenditures increased to $68.6 million from $35.7 million, primarily for company-owned restaurant development, technology upgrades, growth initiatives and the Atlanta office.
- Debt increased from $350.0 million to $490.0 million as the company refinanced its credit structure and funded capital returns, including the preferred-stock transaction.
- The Series B Convertible Preferred Stock was fully repurchased and converted in 2021; the transaction reduced GAAP diluted EPS by $3.10 per share.
Guidance, outlook, commentary and risks
- Management did not provide a clear quantitative 2022 revenue or earnings outlook in the filing. It stated that annual comparable-sales and revenue growth rates achieved during the pandemic are not expected to continue at the same level.
- Labor shortages, wage pressure, food-cost inflation, supply-chain disruptions and store-development constraints are expected to remain priorities in 2022.
- Management expects 2022 capital expenditures of approximately $75 million to $85 million, primarily for company-owned stores and technology.
- Projected 2022 cheese prices were materially above 2021 levels, increasing commodity-cost risk; management may use menu-price increases and cost reductions where competitive conditions permit.
- Growth initiatives include agreements to open more than 220 international restaurants by 2025, 100 domestic restaurants by 2029 and more than 1,350 restaurants in South China by 2040.
- Key risks include COVID-19 and other public-health developments, labor availability and costs, commodity inflation, reliance on a sole or limited number of suppliers, intense competition, franchisee financial health, foreign currency movements, cyber and technology disruptions, privacy regulation, food safety, litigation, insurance claims and debt covenant restrictions.
- International operations represented approximately 7.3% of 2021 consolidated revenue. A 10% adverse foreign-currency movement was estimated to reduce annual revenue by approximately $15.6 million and operating income by approximately $3.3 million.
- Material contingencies include approximately $88.1 million of insurance reserves, $47.9 million of net franchisee loans, approximately $11.5 million of maximum potential lease-guarantee payments and ongoing employment and antitrust litigation for which no liability was recorded because a loss was not considered probable or reasonably estimable.
Most important facts for an investor to verify
- Reconcile GAAP EPS of $0.12 with adjusted EPS of $3.51 and understand the $109.9 million preferred-stock redemption charge.
- Assess whether comparable-sales growth can be sustained as pandemic-related demand normalizes and labor, commodity and delivery costs remain elevated.
- Review debt agreements, variable-rate exposure, interest-rate swaps, covenant headroom and the company’s continued use of debt to fund repurchases and dividends.
- Evaluate the economic performance, financing capacity and execution ability of franchisees behind the announced domestic and international development pipeline.
- Monitor 2022 capital expenditures, store openings, supply-chain reliability and the effect of higher projected cheese prices on restaurant and commissary margins.
- Review insurance-reserve assumptions, franchisee-loan credit allowances and the status of disclosed litigation and lease guarantees.
- Confirm the effect of future repurchases and dividends on liquidity, leverage and share count.