Papa John’s International, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 25, 2022, compared with the periods ended September 26, 2021. Papa John’s operated 5,589 restaurants in 47 countries and territories, including 521 company-owned and 5,068 franchised locations. Revenue is generated from company-owned restaurant sales, franchise royalties and fees, commissary sales, international operations, marketing funds, technology services and other activities.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $510.5 million | $512.8 million | $1.576 billion | $1.540 billion |
| Operating income | $19.5 million | $38.6 million | $72.8 million | $130.1 million |
| Operating margin | 3.8% | 7.5% | 4.6% | 8.4% |
| Net income attributable to the Company | $8.3 million | $29.3 million | $44.3 million | $95.4 million |
| Diluted EPS | $0.23 | $0.79 | $1.22 | $(0.59) |
| Adjusted diluted EPS | $0.54 | $0.83 | $2.23 | $2.76 |
| Operating cash flow | Not separately provided | Not separately provided | $76.6 million | $193.6 million |
| Free cash flow | Not separately provided | Not separately provided | $28.1 million | $145.9 million |
Q3 revenue declined 0.4%, while nine-month revenue increased 2.4%. The nine-month increase was driven primarily by higher North America commissary revenue, pricing and franchise royalties, partly offset by lower company-owned restaurant and international revenue.
Costs and expenses increased to 96.0% of revenue in Q3 and 94.6% for the nine-month period, compared with 92.5% and 91.6%, respectively, in the prior-year periods. Higher food, labor, delivery, technology and other operating costs compressed margins.
At September 25, 2022, cash and cash equivalents were $36.6 million, compared with $70.6 million at December 26, 2021. Total debt was $557.0 million, consisting of $400.0 million of 3.875% senior notes and $157.0 million drawn on the revolving facility. Revolving facility availability was approximately $443.0 million. The company reported compliance with its debt covenants; the actual leverage ratio was 2.4x versus a 5.25x maximum, and the interest coverage ratio was 4.2x versus a 2.0x minimum.
Material changes versus the prior comparable period
- Q3 comparable sales declined 3.4% overall; North America declined 0.8% and international declined 10.1%. For nine months, total comparable sales declined 1.1%.
- North America commissary revenue rose 14.2% in Q3 and 15.1% year to date, largely from pricing increases, although margins declined because of commodity inflation and lower volumes.
- Domestic company-owned restaurant revenue declined 13.3% in Q3 and 8.3% year to date, primarily reflecting the refranchising of 90 restaurants. Excluding that impact, revenue increased 0.5% in Q3 and 0.8% year to date.
- International revenue declined 20.0% in Q3 and 12.0% year to date, primarily due to weaker United Kingdom performance and unfavorable foreign currency effects.
- Net interest expense increased 91.6% in Q3 and 59.4% year to date because of higher average revolving debt.
- Operating cash flow fell $117.1 million year to date, reflecting lower earnings and reduced accrued expenses. The company spent $95.0 million on share repurchases and paid $39.9 million in common dividends during the first nine months.
- Stockholders’ deficit increased to $258.6 million from $172.5 million at year-end 2021, primarily reflecting share repurchases, dividends and other comprehensive losses.
Guidance, outlook, risks and unusual items
- Management expected 240 to 260 net new restaurants globally during 2022 and 1,400 to 1,800 net new restaurants by the end of 2025 relative to the start of 2022.
- Management identified inflation, labor shortages, supply-chain disruption, commodity costs and softer consumer demand as continuing pressures. Strategic pricing, premium menu innovation, Papa Rewards and technology investments are intended to support demand and productivity.
- The United Kingdom remains a significant risk area because of inflation, rising interest rates, the energy crisis, slowing growth, currency volatility and higher VAT. Management is evaluating franchisee support, including potential royalty relief, loans or loan forgiveness, which could create future costs.
- The company recorded Q3 charges of approximately $10.0 million for legal settlements, $3.2 million for receivable reserves associated with a terminated U.K. franchisee and $0.9 million for related lease impairment.
- Year-to-date special items included an $8.4 million refranchising loss, $17.4 million of Ukraine-related receivable and franchise-rights charges, $15.0 million of legal settlements, $1.5 million of executive-transition costs and the Q3 U.K.-related charges.
- The company reached a settlement in principle of up to $20.0 million in the Durling delivery-driver litigation, with estimated actual exposure of approximately $10.0 million, subject to court approval and claims. A separate antitrust settlement involved a $5.0 million aggregate payment, also subject to approval.
- Capital expenditures were expected to be approximately $75 million to $85 million for 2022. The company declared a fourth-quarter dividend of $0.42 per share payable November 25, 2022.
- Key risks include further deterioration in the U.K., the Ukraine conflict, labor and commodity inflation, supply-chain concentration, foreign exchange volatility, cyberattacks, litigation, franchisee financial distress and the ability to maintain dividends and comply with debt covenants.
Important facts for investors to verify
- Whether U.K. franchisee support, store closures or additional impairments materially affect future earnings and cash flow.
- The sustainability of margins after pricing actions as cheese, labor, fuel and other input costs remain elevated.
- The pace of comparable-sales recovery and net new restaurant development, particularly internationally.
- Future borrowing needs, interest expense, revolving-facility utilization and compliance with leverage and interest-coverage covenants.
- The final cost and court approval status of the disclosed legal settlements.
- The effect of continued share repurchases and dividends on liquidity, leverage and the company’s stockholders’ deficit.