Papa John's Announces Fourth Quarter and Full Year 2012 Results

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Papa John's Announces Fourth Quarter and Full Year 2012 Results

2013 Operating Assumptions and Earnings Guidance Announced

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NAS: PZZA) today announced financial results for the fourth quarter and fiscal year ended December 30, 2012.


Highlights

  • System-wide comparable sales increased 5.2% for North America and 7.0% for International for the fourth quarter; System-wide comparable sales increased 3.6% for North America and 7.1% for International for the full year
  • Earnings per diluted share of $0.74 for the fourth quarter, an increase of 13.8% over restated earnings per diluted share of $0.65 for 2011; Earnings per diluted share of $2.58 for the full year, an increase of 19.4% over restated earnings per diluted share of $2.16 for 2011
  • Earnings per diluted share includes an $0.11 benefit from a 53rdweek of operations for both the fourth quarter and the full year
  • Global net restaurant openings included 134 restaurants for the fourth quarter and 280 restaurants for the full year
  • Share repurchase authorization increased by $50 million in December 2012 and an additional $50 million in February 2013

"We are very pleased with our 2012 results, highlighted by our ninth consecutive year of even or positive comparable sales growth," said Papa John's founder, chairman and chief executive officer, John Schnatter. "Growing EPS by almost 20% and expanding our global footprint in a very competitive environment is not only a testament to the strength of our system but to the power of our brand."

Fourth quarter 2012 revenues were $367.3 million, a 19.9% increase from fourth quarter 2011 revenues of $306.2 million. Fourth quarter 2012 net income was $17.4 million compared to restated fourth quarter 2011 net income of $15.9 million. Fourth quarter 2012 diluted earnings per share were $.74, compared to restated fourth quarter 2011 diluted earnings per share of $.65.

Full year fiscal 2012 revenues were $1.3 billion, a 10.2% increase from fiscal 2011 revenues of $1.2 billion. Full year fiscal 2012 net income was $61.7 million, compared to restated fiscal 2011 net income of $54.7 million. Full year fiscal 2012 diluted earnings per share were $2.58, compared to restated fiscal 2011 diluted earnings per share of $2.16.

The 2012 results include the benefit of a 53rd week of operations and the Incentive Contribution, the impact of which is discussed in "Items Impacting Comparability" and "Revenue and Operating Highlights" below. The full year benefit of the 53rd week was substantially offset by the Incentive Contribution, as defined below. The Company is restating its 2009, 2010, and 2011 financial statements as described in the Form 8-K dated February 24, 2013; this restatement is discussed in more detail in "Restatement of 2009, 2010, and 2011 Financial Statements" below. The corrections had no impact on total revenues, operating income, or operating cash flows, and had no impact on the Company's compliance with debt covenants in any periods presented. Further, the corrected accounting treatment is not expected to have a meaningful impact on the Company's operating results in future periods.

Items Impacting Comparability

The following table reconciles our GAAP financial results to certain items impacting comparability, for the fourth quarter and fiscal year ended December 30, 2012:

   
Three Months EndedYear Ended
 Restated Restated
Dec. 30,Dec. 25,Dec. 30,Dec. 25,
(In thousands, except per share amounts)2012201120122011
 
Total Revenues, as reported$367,284$306,213$1,342,653$1,217,882
53rd week of operations (a) (21,500) - (21,500) -
Total Revenues, as adjusted$345,784 $306,213$1,321,153 $1,217,882
 
Income before income taxes, as reported$26,546$23,437$98,395$84,791
53rd week of operations (a)(4,145)-(4,145)-
Incentive Contribution (b) (250) - 2,971  -
Income before income taxes, as adjusted$22,151 $23,437$97,221 $84,791
 
Net income, as reported$17,359$15,891$61,660$54,735
53rd week of operations (a)(2,634)-(2,634)-
Incentive Contribution (b) (165) - 1,955  -
Net income, as adjusted$14,560 $15,891$60,981 $54,735
 
Earnings per diluted share, as reported$0.74$0.65$2.58$2.16
53rd week of operations (a)(0.11)-(0.11)-
Incentive Contribution (b) (0.01) - 0.08  -
Earnings per diluted share, as adjusted$0.62 $0.65$2.55 $2.16
 

(a) The Company follows a fiscal year ending on the last Sunday of December, generally consisting of 52 weeks made up of four 13-week quarters. In 2012, the Company's fiscal year consisted of 53 weeks, with the additional week added to the fourth quarter (14 weeks) results.

(b) As previously announced, in connection with a new multi-year supplier agreement, the Company received a $5.0 million supplier marketing payment in the first quarter of 2012. The Company is recognizing the supplier marketing payment evenly as income over the five-year term of the agreement ($250,000 per quarter). The Company then contributed the supplier marketing payment to the Papa John's Marketing Fund ("PJMF"), an unconsolidated, non-profit corporation, for the benefit of domestic restaurants. The Company's contribution to PJMF was fully expensed in the first quarter of 2012. PJMF elected to distribute the $5.0 million supplier marketing payment to the domestic system as advertising credits in the first quarter of 2012. Our domestic company-owned restaurants' portion resulted in an increase in income before income taxes of approximately $1.0 million in the first quarter. These transactions together are referred to as the "Incentive Contribution."

The non-GAAP results shown above, which exclude the 53rd week of operations and the Incentive Contribution, should not be construed as a substitute for or a better indicator of the Company's performance than the Company's GAAP results. Management believes presenting the financial information excluding the 53rd week of operations and the impact of the Incentive Contribution is important for purposes of comparison to prior year results. In addition, management uses these non-GAAP measures to allocate resources, and analyze trends and underlying operating performance. Annual cash bonuses, and certain long-term incentive programs for various levels of management, are based on financial measures that exclude the Incentive Contribution.

Global Restaurant and Comparable Sales Information

  
Three Months EndedYear Ended

Dec. 30,

 

Dec. 25,

Dec. 30,

 

Dec. 25,

2012

 

2011

 

2012

 

2011

 
Global restaurant sales growth (a)19.6%6.0%10.6%7.7%
 

Global restaurant sales growth, excluding the impact of foreign currency (a)

19.5%6.0%10.9%7.3%
 
Comparable sales growth (b)
Domestic company-owned restaurants6.9%1.2%5.6%4.1%
North America franchised restaurants4.6%1.8%2.9%3.1%
System-wide North America restaurants5.2%1.7%3.6%3.4%
 
System-wide international restaurants7.0%5.2%7.1%5.1%
 

(a) Includes both company-owned and franchised restaurant sales. Excluding the 53rd week of operations, global restaurant sales growth was 11.6% and 8.6% for the three months and full year ended 2012, respectively.

(b) Represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. Comparable sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation.

Management believes global restaurant and comparable sales 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 generate commissary revenue in the United States and in certain international markets. Global restaurant and comparable sales information is also useful in analyzing industry trends and the strength of our brand. Franchise restaurant sales are not included in company revenues.

Revenue and Operating Highlights

All revenues highlights below are compared to the same period of the prior year, unless otherwise noted. All operating highlights below are compared to the same periods of the prior year, as restated.

Revenues

Consolidated revenues increased $61.1 million, or 19.9%, for the fourth quarter and increased $124.8 million, or 10.2%, for the year. The fourth quarter and full year 2012 include the benefit of the 53rd week of operations which approximated $21.5 million, or 7.0% and 1.8% respectively. The increases in revenues were primarily due to the following:

  • Domestic company-owned restaurant sales increased $30.8 million, or 23.6%, and $66.4 million, or 12.6%, for the three months and full year, respectively. The benefit from the 53rd week of operations was approximately $10.6 million, representing increases of 8.1% and 2.0%, respectively. The remaining increases were primarily due to increases in comparable sales of 6.9% and 5.6%, respectively, and the net acquisition of 50 restaurants in the Denver and Minneapolis markets from a franchisee in the second quarter of 2012.
  • North America franchise royalty revenue increased approximately $3.3 million, or 18.3%, and $5.9 million, or 8.0%, for the three months and full year, respectively. The benefit from the 53rd week of operations was approximately $1.4 million, representing increases of 7.6% and 1.8%, respectively. The remaining increases were primarily due to increases in comparable sales of 4.6% and 2.9%, respectively, and increases in net franchise restaurants over the prior year, slightly offset by reduced royalties attributable to the Company's net acquisition of the 50 restaurants noted above.
  • Domestic commissary sales increased $20.5 million, or 15.9%, and $37.8 million, or 7.4%, for the three months and full year, respectively. The benefit from the 53rd week of operations was approximately $8.5 million, representing increases of 6.6% and 1.7%, respectively. The remaining increases were primarily due to higher commissary product volumes primarily resulting from increases in the volume of restaurant sales.
  • International revenues increased $4.7 million, or 29.1%, and increased $14.4 million, or 24.5%, for the three months and full year, respectively. The benefit from the 53rd week of operations was approximately $800,000, representing increases of 5.0% and 1.4%, respectively. The remaining increases were primarily due to increases in the number of restaurants and increases in comparable sales of 7.0% and 7.1%, respectively, calculated on a constant dollar basis.

Operating Highlights, in comparison to the restated prior year

Fourth quarter 2012 income before income taxes was $26.5 million, compared to $23.4 million, or a 13.3% increase. Income before income taxes was $98.4 million for the year ended December 30, 2012, compared to $84.8 million, or a 16.0% increase. Income before income taxes is summarized in the following table on a reporting segment basis (in thousands):

   
   Three Months Ended Year Ended
 Restated  Restated 
Dec. 30,Dec. 25,IncreaseDec. 30,Dec. 25,Increase
   2012 2011 (Decrease) 2012 2011 (Decrease)
14 weeks13 weeks53 weeks52 weeks
(a)(a)
 
Domestic company-owned restaurants (b)$10,887$6,403$4,484$38,114$28,980$9,134
Domestic commissaries8,3279,420(1,093)34,31730,5323,785
North America franchising18,50216,0322,47069,33266,2223,110
International1,8466521,1943,063(165)3,228
All others1,2923019912,889(441)3,330
Unallocated corporate expenses (c)(14,175)(9,017)(5,158)(48,958)(39,727)(9,231)
Elimination of intersegment profits  (133)  (354)  221   (362)  (610)  248 
Income before income taxes $26,546  $23,437  $3,109  $98,395  $84,791  $13,604 
 

(a) The 53rd week of operations increased income before income taxes by approximately $4.1 million for both the fourth quarter and full year 2012 as follows:

 
  

Increase
(Decrease)

Domestic company-owned restaurants$1,609
Domestic commissaries1,200
North America franchising1,414
International414
All others215
Unallocated corporate expenses  (707)
Income before income taxes $4,145 
 

(b) The full year of 2012 includes the benefit of a $1.0 million advertising credit from the Papa John's Marketing Fund related to the Incentive Contribution.

(c) Includes the impact of the Incentive Contributionin 2012 ($250,000 benefit for the three-month period and a $4.0 million expense for the full year). Prior year amounts have also been restated to include the impact of the correction of the error, as described in "Restatement of 2009, 2010 and 2011 Financial Statements."

The increase in income before income taxes of $3.1 million for the fourth quarter was primarily due to the following:

  • Domestic company-owned restaurants income improved primarily due to comparable sales increases and the 53rd week of operations, partially offset by higher commodities costs.
  • North America Franchising and International improved due to the previously mentioned increase in net restaurants and strong comparable sales results and the benefit from the 53rd week of operations.
  • The improvement in the All others segment was primarily due to an improvement in our eCommerce operations.

These increases were partially offset by the following decreases:

  • Domestic commissaries operating results decreased due to lower margins resulting from lower prices charged to restaurants, slightly offset by increased profits from higher restaurant sales, including the 53rd week of operations.
  • Unallocated corporate expenses increased primarily due to higher legal costs as described later in this paragraph, higher short-term management incentives, humanitarian and non-recurring costs associated with Superstorm Sandy, and the impact of the 53rd week of operations. On February 13, 2013, the Company tentatively agreed to the financial terms of a settlement of the class action litigation Agne v. Papa John's International, Inc. et al., subject to Court approval. A reasonable estimate of the total cost of the settlement has been provided for in the Company's financial statements. Actual costs may vary from our estimates based upon the actual number of claimants who participate.

The increase in income before income taxes of $13.6 million for the full year was primarily due to the following:

  • Domestic company-owned restaurants operating income improved primarily due to comparable sales increases as well as favorable commodity costs and the benefit of the 53rd week of operations.
  • Domestic commissaries income improved primarily due to the increase in net restaurants and higher restaurant sales, including the 53rd week of operations.
  • North America Franchising and International improved due to the previously mentioned increase in net restaurants, strong comparable sales results and the impact of the 53rd week of operations.
  • The improvement in the All others segment was primarily due to an improvement in our eCommerce operations.
  • These increases were partially offset by higher unallocated corporate expenses primarily due to an increase in legal costs as described above, short-term management incentives, the Incentive Contribution in 2012, insurance costs, and higher costs related to our operators' conference.

The effective tax rates were 30.7% and 32.9% for the three months and full year ended December 30, 2012, representing increases of 2.1% and 1.9% from the rates for the comparable prior year periods. Our effective income tax rate may fluctuate from quarter to quarter for various reasons, including the settlement or resolution of specific federal and state issues. The prior year included significant favorable tax resolution items.

The Company's free cash flow for the fiscal years ended 2012 and 2011 was as follows (in thousands):

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Dec. 30, Dec. 25,
20122011
 
Net cash provided by operating activities*$104,379$101,008
Purchases of property and equipment (42,628) (29,319)