Business Context and Reporting Period
Papa John’s International, Inc. filed an unaudited Form 10-Q for the quarter ended September 29, 2013, covering three and nine months compared with September 23, 2012. At quarter-end, the company operated 4,296 restaurants in all 50 states and 35 countries, including 711 company-owned and 3,585 franchised locations.
Financial Performance and Liquidity
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $346.3 million | $325.5 million | $1.051 billion | $975.4 million |
| Operating income | $21.4 million | $21.2 million | $78.0 million | $72.8 million |
| Income before taxes | $21.3 million | $20.9 million | $78.2 million | $71.8 million |
| Net income attributable to the company | $14.3 million | $13.0 million | $50.7 million | $44.3 million |
| Diluted EPS | $0.65 | $0.55 | $2.27 | $1.84 |
| Operating cash flow | Not separately provided | Not separately provided | $74.8 million | $94.8 million |
| Free cash flow | Not separately provided | Not separately provided | $36.3 million | $68.3 million |
- Domestic company-owned restaurant operating margin was 16.8% in Q3 and 18.5% for the nine months, compared with 17.5% and 19.7%, respectively, in the prior-year periods. The nine-month 2012 margin was 19.4% excluding a $1.0 million advertising credit.
- Domestic commissary and other margin was 6.4% in Q3 and 7.5% for the nine months, versus 7.2% and 8.2% in the prior-year periods.
- Cash and cash equivalents were $13.7 million at September 29, 2013, compared with $16.4 million at December 30, 2012.
- Debt was $120.0 million under a $300 million unsecured revolving credit facility, with approximately $160.3 million of remaining availability after letters of credit. The company was in compliance with all covenants.
- Capital expenditures were $38.5 million for the nine months, primarily for New Jersey dough-production equipment and technology investments.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6.4% in Q3 and 7.8% for the nine months. Domestic company-owned comparable sales increased 5.1% and 5.0%, respectively; international comparable sales increased 8.1% and 7.7% on a constant-dollar basis.
- International revenue grew 24.2% in Q3 and 21.4% for the nine months, supported by unit growth and higher comparable sales.
- Income before taxes increased only 1.9% in Q3, but increased 8.8% for the nine months. Excluding the Incentive Contribution, increases were 1.9% and 3.1%, respectively.
- Higher commodity costs reduced domestic company-owned restaurant margins, while higher distribution costs reduced commissary margins. International results benefited from improved United Kingdom performance but remained affected by losses in company-owned China operations.
- Diluted weighted-average shares declined 6.9% in Q3 and 7.2% for the nine months due primarily to share repurchases, supporting EPS growth.
- Operating cash flow declined $19.9 million and free cash flow declined $32.1 million, principally because of unfavorable working-capital timing and higher capital expenditures.
- The company repurchased $69.1 million of common stock during the nine months, or approximately 1.1 million shares, and paid its first quarterly dividend of $0.25 per share.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2013 full-year domestic commissary pre-tax income margin to approximate 2012 levels.
- Based on October 28, 2013 futures prices, management presented estimated cheese block prices of $1.699 per pound for 2014 versus an estimated $1.748 for 2013 and actual 2012 pricing of $1.692. These are estimates and remain subject to commodity volatility.
- The company initiated a quarterly dividend program and subsequently declared a two-for-one stock split, effective through a stock dividend to shareholders of record December 12, 2013. Future dividends remain subject to Board approval.
- The company’s $5.0 million supplier marketing payment is being recognized over five years. The related Incentive Contribution increased pre-tax income by $0.25 million in Q3 2013 and $0.75 million for the nine months, while materially affecting the comparability of 2012 results.
- A Telephone Consumer Protection Act class-action settlement was finalized after quarter-end at an actual cost of $2.9 million, $0.4 million below the prior estimate.
- The Perrin delivery-driver reimbursement collective action remains unresolved. Approximately 3,900 drivers had opted in from a potential class of 28,800, and additional state classes could add approximately 14,000 plaintiffs. The company stated that a potential loss cannot reasonably be estimated and that an adverse outcome could materially affect results.
- Key disclosed risks include commodity inflation, supply-chain and commissary disruptions, food safety, competition, franchisee performance, international operations, interest rates, foreign currency, litigation, labor and regulatory costs, and information-technology or security breaches.
Most Important Facts to Verify
- Whether strong comparable-sales growth can offset pressure from commodities, distribution costs and company-owned restaurant margins.
- The sustainability of cash generation after increased capital expenditures, dividends and substantial share repurchases.
- Debt usage, interest-rate exposure and compliance with the revolving-credit-facility covenants.
- The ultimate cost and timing of the Perrin litigation and any other franchisee-related claims.
- The effect of the supplier Incentive Contribution on year-over-year comparisons and underlying earnings.
- Whether international growth, particularly in China and the United Kingdom, improves segment profitability.