Papa John’s: Announces Q3/2015 Results

Louisville / KY. (pj) Papa John’s International Inc., the world’s third largest pizza company, announced financial results for the three and nine months ended September 27, 2015. Highlights:

• Third quarter earnings per diluted share of 0.45 USD in 2015 compared to 0.39 USD in 2014, an increase of 15.4 percent
• System-wide comparable sales increases of 3.0 percent for North America and 8.0 percent for International
• 52 worldwide net unit openings during the quarter

«I would like to congratulate our operators and team members on another solid quarter of sales, earnings and unit growth», said Papa John’s founder, chairman and CEO John Schnatter. «The team delivered solid comp sales in the third quarter, and we again posted exceptional double-digit two year comp sales in both our domestic and international businesses. Our unwavering focus on quality, combined with our strong digital channels, continues to drive the Papa John’s brand forward».

Third quarter 2015 revenues were 389.3 million USD, a 0.3 percent decrease from third quarter 2014 revenues of 390.4 million USD. The lower revenues were primarily due to anticipated lower point-of-sale system (FOCUS) equipment sales as the rollout is now complete as well as lower PJ Food Service (PJFS) sales from lower commodity costs. Third quarter 2015 net income was 18.0 million USD, compared to third quarter 2014 net income of 16.1 million USD. Third quarter 2015 diluted earnings per share were 0.45 USD, or a 15.4 percent increase, compared to third quarter 2014 diluted earnings per share of 0.39 USD.

Revenues were 1.22 billion USD for the nine months ended September 27, 2015, a 4.1 percent increase from revenues of 1.17 billion USD for the same period in 2014. Net income was 51.0 million USD for the first nine months of 2015 (59.0 million USD, or a 13.1 percent increase, excluding the after-tax expense of a legal settlement as detailed in the “Item Impacting Comparability” table), compared to 52.1 million USD for the same period in 2014. Diluted earnings per share were 1.27 USD for the first nine months of 2015 (1.47 USD, or a 19.5 percent increase, excluding the prior quarter legal settlement), compared to 1.23 USD for the same period in 2014.

Revenue Highlights

All revenue highlights below are compared to the same period of the prior year, unless otherwise noted. Consolidated revenues decreased 1.1 million USD, or 0.3 percent, for the third quarter of 2015 and increased 47.9 million USD, or 4.1 percent, for the nine months ended September 27, 2015. The decrease for the three-month period was primarily due to the anticipated lower FOCUS equipment sales as the rollout is now complete as well as lower PJFS sales from lower commodity costs. The following summarizes changes in our revenues for the three- and nine-month periods:

• Domestic company-owned restaurant sales increased 11.0 million USD, or 6.5 percent, and 46.0 million USD, or 8.9 percent, for the three and nine months, respectively, primarily due to increases of 4.7 percent and 6.8 percent in comparable sales.
• North America franchise royalty revenue was relatively flat for the three months as the increase in revenue from a 2.4 percent increase in comparable sales was offset by higher royalty incentives. The increase of 4.8 million USD, or 7.3 percent, for the nine months was primarily due to an increase of 4.4 percent in comparable sales and lower royalty incentives.
• International revenues increased approximately 600’000 USD, or 2.3 percent, and 3.2 million USD, or 4.2 percent, for the three and nine months, respectively, primarily due to increases in the number of restaurants and increases in comparable sales of 8.0 percent and 7.5 percent, calculated on a constant dollar basis. This was somewhat offset by the negative impact of foreign currency exchange rates of approximately 2.1 million USD and 5.9 million USD for the three and nine months, respectively.
• Other sales decreased approximately 9.3 million USD, or 39.7 percent, and increased 400’000 USD, or 0.8 percent, for the three and nine months, respectively. As previously discussed, the decrease for the three-month period was primarily due to the lower FOCUS equipment sales. The higher levels of FOCUS equipment sales in the third quarter of 2014 had no significant impact on operating results.
• Domestic commissary sales decreased 3.4 million USD, or 2.3 percent, and 6.6 million USD, or 1.4 percent, for the three and nine months, respectively, primarily due to lower revenues associated with lower cheese prices, somewhat offset by increases in restaurant sales volumes. PJFS pricing for cheese is based on a fixed dollar markup; when cheese prices decrease, revenues decrease with no overall impact on the related dollar margin.

Operating Highlights

All operating highlights below are compared to the same period of the prior year, unless otherwise noted. Third quarter 2015 income before income taxes increased approximately 2.0 million USD, or 8.4 percent. This increase was primarily due to the following:

• Domestic company-owned restaurants were relatively flat for the quarter as higher profits from the 4.7 percent increase in comparable sales and from lower commodity costs were offset by incremental insurance expense of approximately 2.9 million USD primarily from higher non-owned automobile claims costs. The market price for cheese averaged 1.68 USD per pound for the third quarter of 2015, compared to 2.14 USD per pound in the prior period.
• Domestic commissaries income increased approximately 1.3 million USD primarily due to a higher margin and incremental profits from higher restaurant volumes. These increases were partially offset by incremental insurance expense of approximately 1.6 million USD primarily from higher automobile claims costs.
• North America franchising was relatively flat as higher royalties attributable to the 2.4 percent comparable sales increase were substantially offset by higher royalty incentives.
• International income increased approximately 1.7 million USD primarily due to the previously mentioned increase in units and comparable sales of 8.0 percent, which resulted in both higher royalties and an increase in United Kingdom commissary results. This was somewhat offset by the negative impact of foreign currency exchange rates of approximately 900’000 USD. Additionally, the prior year included an impairment charge of approximately 700’000 USD for eight company-owned restaurants in China.

These increases were partially offset by higher unallocated corporate expenses of approximately 1.2 million USD primarily due to higher health insurance claims costs.

Income before income taxes increased 10.6 million USD, or 13.0 percent, for the nine-month period ended September 27, 2015, excluding the 12.3 million USD legal settlement. This increase was primarily due to the same reasons noted for the quarter, except for the following:

• Domestic company-owned restaurants increased approximately 9.1 million USD primarily due to higher profits from the 6.8 percent increase in comparable sales and from lower commodity costs, partially offset by incremental insurance expense of 3.9 million USD primarily from higher non-owned automobile claims costs and higher depreciation expense of 1.1 million USD associated with FOCUS equipment. The market price for cheese averaged 1.62 USD per pound for the first nine months of 2015, compared to 2.16 USD per pound in the prior year.
• North America franchising increased 5.2 million USD primarily due to higher royalties attributable to the 4.4 percent comparable sales increase and lower royalty incentives.
• Unallocated corporate expenses increased 13.0 million USD primarily due to higher salaries and benefits, including an increase in health insurance claims costs, and increased legal and interest costs. In addition, management incentive compensation costs have increased in 2015 due to higher annual operating results.
• The effective income tax rates were 27.7 percent and 30.6 percent for the three and nine months ended September 27, 2015, representing decreases of 2.2 percent and 1.8 percent for the three- and nine-month periods, respectively. The rates for 2015 include higher benefits from various tax deductions and credits.

The effective income tax rates were 27.7 percent and 30.6 percent for the three and nine months ended September 27, 2015, representing decreases of 2.2 percent and 1.8 percent for the three- and nine-month periods, respectively. The rates for 2015 include higher benefits from various tax deductions and credits.

2015 Guidance Update

Despite the higher insurance costs, the company is reaffirming its current 2015 diluted earnings per share guidance range of 2.04 USD to 2.10 USD, excluding the 0.20 USD impact of the legal settlement, but expects to be near the low end of the range. Additionally, net unit openings are expected to be at the low end of the 2015 guidance range of 220 to 250, with approximately 75 percent of the net unit growth in International markets.