Papa John’s International, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
For the 13 weeks ended March 26, 2023, Papa John’s operated and franchised 5,733 restaurants in 48 countries and territories, including 520 company-owned and 5,213 franchised locations. Revenue is generated from company-owned restaurant sales, franchise royalties and fees, commissary sales, international operations, marketing funds, technology services, and related activities.
Financial Performance and Position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $527.0 million | $542.7 million | Down 2.9% |
| Operating income | $37.8 million | $14.4 million | Up $23.4 million |
| Operating margin | 7.2% | 2.7% | Up 450 basis points |
| Net income attributable to the Company | $22.4 million | $10.5 million | Up $11.9 million |
| Diluted EPS | $0.65 | $0.29 | Up $0.36 |
| Adjusted diluted EPS | $0.68 | $0.95 | Down $0.27 |
| Net cash provided by operating activities | $40.8 million | $25.4 million | Up $15.4 million |
| Free cash flow | $22.4 million | $15.2 million | Up $7.2 million |
Net margin was approximately 4.2%, compared with approximately 1.9% in the prior-year quarter. Reported operating income benefited from the absence of $11.2 million of prior-year refranchising and impairment losses and lower prior-year unusual charges. Adjusted operating income was $39.2 million, down from $45.2 million.
- Domestic company-owned restaurant revenue declined 9.5% to $179.9 million, primarily reflecting the 2022 refranchising; excluding that impact, revenue increased 4.9%.
- North America franchise royalties and fees increased 5.3% to $36.1 million.
- North America commissary revenue increased 1.4% to $212.6 million, although volumes declined excluding the refranchising impact.
- International revenue declined 9.1% to $31.5 million, primarily due to lower United Kingdom royalties and commissary revenue.
- Comparable sales were up 3.4% for domestic company-owned restaurants, down 0.8% for North America franchised restaurants, and down 5.8% internationally. Total comparable sales declined 1.3%.
- Global system-wide restaurant sales increased 2.0%, and the Company opened 27 net new restaurants during the quarter.
Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $46.7 million at March 26, 2023, compared with $47.4 million at December 25, 2022.
- Total debt outstanding was $813.1 million, including $400.0 million of 3.875% senior notes and $413.1 million under revolving facilities, versus $605.0 million at year-end 2022.
- Approximately $195.0 million remained available under the $600.0 million PJI Revolving Facility.
- The Company reported a 3.5-to-1.0 leverage ratio against a maximum permitted 5.25-to-1.0 ratio and a 3.8-to-1.0 interest coverage ratio against a minimum 2.0-to-1.0 requirement. The Company was in compliance with its debt covenants.
- Financing activities included $208.2 million of net borrowings, $209.6 million of share repurchases, and $14.6 million of common-stock dividends.
- The Company repurchased 2.5 million shares at an average price of $83.10, including approximately 2.2 million shares purchased from Starboard-affiliated funds for $179.6 million. Approximately $90.2 million remained under the repurchase authorization.
- Capital expenditures were $18.4 million in the quarter. Management estimated 2023 capital expenditures of approximately $80 million to $90 million.
Material Changes Versus the Prior Comparable Period
- GAAP profitability improved substantially because Q1 2022 included $25.8 million of unusual refranchising, impairment, Ukraine-related, and legal settlement adjustments. Q1 2023 included $1.4 million of executive severance costs.
- Adjusted profitability weakened: adjusted operating income declined 13.4%, and adjusted diluted EPS declined from $0.95 to $0.68, reflecting higher labor, commodity, utility, interest, technology, and incentive compensation costs, along with weaker international performance.
- Net interest expense more than doubled to $9.0 million due to higher interest rates and increased revolving-facility borrowings used substantially to fund share repurchases.
- Operating cash flow increased principally because of favorable working-capital movements and lower inventory and receivable balances.
- Total stockholders’ deficit increased to $475.3 million from $270.7 million, primarily due to the $212.4 million cost of share repurchases and related costs.
Guidance, Outlook, Risks, and Unusual Items
- Management expects 2023 global development of 270 to 310 net new units and stated that unit growth is expected to accelerate. The Company also announced a development agreement for 650 restaurants in India by 2033.
- The “Back to BETTER” initiative is intended to improve store execution, speed of service, customer satisfaction, orders, and restaurant-level margins.
- Management identified continuing inflation, rising interest rates, labor and commodity costs, supply-chain disruption, and weaker United Kingdom sales and profitability as key operating challenges. Strategic store closures and refranchising in the UK may occur.
- The Company estimates approximately $10 million of actual exposure under a proposed delivery-driver reimbursement settlement, within a maximum aggregate settlement amount of $20 million. Final court approval remained pending; $5 million had been funded and remained accrued.
- A proposed $5 million antitrust settlement remained accrued and subject to court approval.
- The Company had contingent liability for 52 assigned domestic leases, with estimated maximum undiscounted payments of $8.7 million if primary lessees fail to pay.
- Interest-rate, foreign-currency, commodity-price, cyberattack, food safety, litigation, recession, competitive, and geopolitical risks remain material. International revenue was adversely affected by approximately $2.9 million from foreign-currency movements.
- The Board declared a $0.42-per-share dividend, approximately $13.8 million in aggregate, payable May 26, 2023. Future dividends remain discretionary.
Investor Verification Checklist
- Reconcile GAAP earnings growth with the prior-year unusual charges and assess the decline in adjusted operating income and adjusted EPS.
- Monitor United Kingdom comparable sales, profitability, store closures, refranchising activity, and the effectiveness of the repositioning strategy.
- Evaluate leverage, interest expense, revolving-facility availability, and covenant headroom after debt-funded share repurchases.
- Verify the sustainability of operating cash flow and free cash flow after planned $80 million to $90 million of 2023 capital expenditures, dividends, and repurchases.
- Track the proposed driver and antitrust settlements, including final court approvals and ultimate cash payments.
- Assess whether the 270-to-310-unit development outlook and longer-term international expansion plans are consistent with franchisee economics and demand trends.