Papa John’s International, Inc. — Fiscal 2013 Form 10-K Summary
Business context and reporting period
Papa John’s operates and franchises pizza delivery and carryout restaurants, supported by domestic commissaries, international operations, online ordering, marketing and other franchise services. The fiscal year ended December 29, 2013 and comprised 52 weeks; the comparable 2012 fiscal year comprised 53 weeks, including an additional fourth-quarter week.
At year-end, the system had 4,428 restaurants: 723 company-owned and 3,705 franchised, operating in all 50 states and 34 countries. The company opened 386 units and closed 121 during 2013.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $1.439 billion | $1.343 billion | +7.2% |
| Operating income | $106.5 million | $99.8 million | +6.7% |
| Income before taxes | $106.1 million | $98.4 million | +7.8% |
| Net income attributable to the Company | $69.5 million | $61.7 million | +12.8% |
| Diluted EPS | $1.55 | $1.29 | +20.2% |
| Operating margin | 7.4% | 7.4% | Flat |
| Effective tax rate | 31.2% | 32.9% | Down 1.7 points |
- Domestic company-owned comparable sales increased 6.6%; North America franchised comparable sales increased 3.1%; international franchised comparable sales increased 7.5%.
- Domestic company-owned restaurant operating margin declined to 18.5% from 19.7%, primarily because of higher commodity costs, lower promotional pricing and the absence of certain 2012 supplier incentives.
- Domestic commissary operating margin remained 7.7%. North America franchising income before taxes increased to $70.2 million from $69.3 million, while international income before taxes declined to $2.8 million from $3.1 million.
- Cash flow from operating activities was $101.4 million, compared with $104.4 million in 2012. Capital expenditures were $50.8 million, producing reported free cash flow of $50.6 million versus $61.8 million.
- Cash and cash equivalents were $13.7 million at year-end. Total debt was $157.9 million, consisting entirely of borrowings under the revolving credit facility. Approximately $121.4 million remained available, net of letters of credit.
- The company repurchased 3.5 million shares for $118.6 million and paid $10.8 million in dividends during 2013. A two-for-one stock split was completed in December 2013.
Fourth-quarter information
Fiscal fourth-quarter 2013 results covered 13 weeks and included $387.9 million of revenue, $28.5 million of operating income, $18.8 million of net income attributable to the Company, basic EPS of $0.42 and diluted EPS of $0.41. Fourth-quarter 2012 included 14 weeks, which added approximately $21.5 million of revenue and $4.1 million of operating income; therefore, reported fourth-quarter comparisons require adjustment for the extra week.
Material changes versus the prior comparable period
- On a 52-week comparable basis, revenue increased 8.9%, reflecting higher comparable sales, unit growth, increased commissary volumes and international expansion.
- Domestic company-owned restaurant profit decreased by approximately $0.9 million on an adjusted basis, as higher sales were more than offset by approximately $5.8 million of higher commodity costs and other unfavorable factors.
- International results were pressured by higher losses in company-owned China operations, including costs associated with closing one location, asset dispositions, new-store losses and infrastructure investment. China also moved to the same reporting cycle as domestic operations, adding approximately $2.1 million of revenue and $215,000 of pretax loss.
- Corporate expenses improved on an adjusted basis, partly because 2012 included significant legal costs related to the Agne text-messaging litigation.
- 2013 included approximately $1.0 million of income from amortization of a supplier marketing payment, while 2012 included a larger related expense and advertising-credit effect. Management presents adjusted results to improve comparability.
- Debt increased from $88.3 million to $157.9 million, primarily due to share repurchases. The revolving credit facility was increased from $175 million to $300 million and extended to April 30, 2018.
Guidance, outlook, risks and unusual items
- Management expected 2014 net unit growth of approximately 220 to 250 restaurants, with approximately 70% expected in international markets.
- Development agreements covered approximately 200 additional North America restaurants and approximately 1,000 additional international franchised restaurants, although the company cautioned that not all commitments may be fulfilled.
- The company planned to roll out its FOCUS point-of-sale system to substantially all domestic restaurants beginning in 2014. Execution problems could disrupt operations, sales and franchisee economics.
- Key risks include intense competition, changing consumer preferences, food safety and brand damage, commodity volatility, dependence on limited suppliers, labor and health-care costs, international and currency risks, franchisee credit risk, information-technology outages or data breaches, and reliance on founder and CEO John Schnatter.
- The Perrin collective and class action concerning delivery-driver mileage and expense reimbursement was conditionally certified and expanded to five additional states. Approximately 3,900 drivers had opted in, with a potential additional 5,000 to 10,000 plaintiffs; the company could not reasonably estimate a potential loss.
- The Agne text-messaging class action was settled in 2013 for an actual cost of $2.9 million, which was paid during the year.
- The company remained contingently liable for certain assigned restaurant leases, with estimated maximum undiscounted payments of approximately $2.7 million if primary lessees defaulted. Standby letters of credit totaled approximately $20.7 million, primarily related to insurance programs.
- Cheese represented approximately 35% to 40% of food costs. The filing identified a projected 2014 average cheese block price of $1.922 per pound based on February 18, 2014 futures prices, compared with a 2013 average of $1.759.
Important facts for investors to verify
- Whether 2014 unit-growth expectations and the international development pipeline converted into actual openings and profitable operations.
- The effect of commodity prices, especially cheese, on domestic company-owned restaurant margins and franchisee health.
- China operating performance, store-level economics, impairment exposure and the pace of expansion.
- Progress, cost and operational impact of the FOCUS point-of-sale rollout and continued digital-ordering growth.
- Debt paydown capacity after share repurchases, dividends and capital expenditures, including compliance with the 3.0-to-1.0 leverage and 3.5-to-1.0 interest-coverage covenants.
- Resolution and potential financial exposure from the Perrin litigation and other employment, franchise, food-safety and consumer claims.
- Sustainability of comparable-sales growth and the company’s ability to preserve margins amid labor, insurance, occupancy and commodity-cost inflation.