Papa John’s: Announces First Quarter 2018 Results

Louisville / KY. (pj) Papa John’s International Inc., the world’s third largest pizza company, reported unaudited results for the first quarter ended April 01, 2018. Highlights:

• First quarter earnings per diluted share of USD 0.50 in 2018 compared to USD 0.77 in the first quarter of 2017
• North America comparable sales decrease of 5.3 percent
• International comparable sales increases of 0.3 percent; international franchise sales increase of 21.1 percent, excluding the impact of foreign currency
• 13 net unit openings in first quarter of 2018 driven by International operations
• Free cash flow of USD 31.7 million in the first quarter as compared to USD 32.3 million in the first quarter of 2017
• 2018 outlook reaffirmed

«Although first quarter results were lower than the prior year, they were consistent with our expectations. We remain focused on enhancing our value perception and driving our strategic initiatives,» said Steve Ritchie, President and CEO of Papa John’s.

Operating Highlights

Consolidated revenues decreased USD 21.9 million, or 4.9 percent, for the first quarter of 2018 primarily due to lower comparable sales for North America restaurants and lower North America commissary sales due to lower volumes. These decreases were partially offset by higher International revenues due to an increase in equivalent units and the favorable impact of foreign exchange rates of approximately USD 2.8 million. Additionally, the first quarter of 2018 included an increase in Other revenues of approximately USD 2.7 million primarily due to the required reporting of franchise marketing fund contributions as revenues (previously netted with expenses) under the newly adopted revenue recognition standard (see below).

Consolidated income before income taxes of USD 22.4 million for the first quarter of 2018 decreased USD 19.5 million, or 46.6 percent, compared to the first quarter of 2017. Income before income taxes, as a percentage of consolidated revenues, was 5.2 percent for the first quarter of 2018, as compared to 9.3 percent for the first quarter of 2017. Significant changes in the components of income before income taxes are as follows:

• Domestic Company-owned restaurants operating margin decreased USD 8.6 million, or 2.7 percent as a percentage of related revenues, primarily due to lower comparable sales, increased labor costs including higher minimum wages and increased non-owned automobile costs.
• North America franchise royalties and fees decreased USD 2.8 million, or 10 percent as compared to the first quarter of 2017, primarily due to lower comparable sales, and an increase in royalty waivers to franchisees.
• North America commissary operating margin decreased USD 1.4 million, or 0.4 percent as a percentage of related revenues, primarily due to lower sales volumes.
• International operating margin increased USD 1.3 million primarily due to higher royalties from increased equivalent units and the favorable impact of foreign exchange rates.
• Other operating margin decreased USD 718,000, or 3.7 percent, primarily due to higher advertising spend in the United Kingdom. The «Revenue Recognition and Income Statement Presentation» section below provides more information on our newly reported «Other revenues» and «Other expenses» income statement line items.
• General and administrative (G+A) costs increased USD 3.3 million, or 9.1 percent, primarily due to an increase in bad debt expense, higher legal fees and an increase in various technology initiative costs.
• Net interest expense increased USD 3.1 million for the first quarter due to an increase in average outstanding debt, which is primarily due to share repurchases, as well as higher interest rates.

The first quarter 2018 effective income tax rate was 22.3 percent, representing a decrease of 6.3 percent from the prior year comparable period rate of 28.6 percent. This decrease was primarily due to the reduction of the U.S. corporate tax rate effective January 1, 2018 as part of the Tax Cuts and Jobs Act. This decrease was offset by an approximate 3.8 percent increase in the income tax rate for share based compensation tax deductions, which were unfavorable in 2018 due to the lower stock price of the company as restrictions lapsed on equity awards.

Diluted earnings per share decreased 35.1 percent to USD 0.50 for the first quarter of 2018. This decrease was primarily due to a decrease in net income as previously discussed.

We believe North America, international and global restaurant and comparable sales growth information, as defined in the table above, is useful in analyzing our results since our franchisees pay royalties that are based on a percentage of franchise sales. Franchise sales also generate commissary revenue in the United States and in certain international markets. Franchise restaurant and comparable sales growth information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of franchise restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in company revenues.

Global Restaurant Unit Data

At April 1, 2018, there were 5,212 Papa John’s restaurants operating in all 50 states and in 45 international countries and territories. The company has added 130 net worldwide units over the trailing four quarters ended April 1, 2018. Our development pipeline as of April 1, 2018 included approximately 1,110 restaurants (160 units in North America and 950 units internationally), the majority of which are scheduled to open over the next six years.

Revenue Recognition and Income Statement Presentation

On January 01, 2018, we adopted the new revenue recognition standard using the modified retrospective method. Under the modified retrospective method, prior period results were not restated to reflect the impact of Topic 606, resulting in reduced comparability between 2018 and 2017 operating results. The impact of adoption includes the following:

• USD 21.5 million reduction in retained earnings for the opening balance sheet cumulative adjustment.
• USD 2.4 million increase in total revenues primarily due to the requirement to present revenues and expenses related to marketing funds we control on a «gross» basis. This gross up is reported in the new financial statement line items, Other revenues and Other expenses, as discussed further below; this change in reporting had no significant impact on consolidated pre-tax income results.
• USD 485,000 decrease in pre-tax income for the first quarter primarily due to the revised method of accounting for franchise fees.
• EPS decrease of approximately USD 0.01 in the first quarter.

Additional detail on the adoption and 2018 impact of the new revenue recognition standard can be found in our Form 10-Q for the three months ended April 1, 2018 filed with the SEC.

While not required as part of the adoption of Topic 606, our income statement includes newly created Other revenues and Other expenses line items. Other revenues and Other expenses include the Topic 606 «gross up» of revenues and expenses derived from certain domestic and international marketing fund co-ops we control, as previously discussed. Additionally, Other revenues and Other expenses include various reclassifications from North America commissary and other, International expenses and General and administrative expenses to better reflect and aggregate various domestic and international services provided by the company for the benefit of franchisees. Related Quarter 1 of 2017 amounts have also been reclassified to conform to the new 2018 presentation, as detailed in the «Summary of Income Statement Presentation Reclassifications» included with this press release. These reclassifications had no impact on reported total revenues or total costs and expenses.

2018 Outlook

The company is reaffirming its previously issued 2018 outlook, as we expect our initiatives will result in improved sales and operating results in the last half of the year.