Papa John’s International, Inc. (NASDAQ: PZZA)(“Papa Johns®”) today announced financial results for the second quarter ended June 25, 2023.
Highlights
- North America comparable sales were down 1% compared with the second quarter of 2022 as the strength of Domestic Company-owned restaurants was offset by lower North America franchised restaurant comparable sales; International comparable sales were down 1% from a year ago and improved 5% from the first quarter.
- 47 net unit openings in the second quarter driven by International growth; On track to achieve 270 to 310 net new units in 2023.
- Global system-wide restaurant sales were $1.22 billion, a 2%(a) increase from the prior year second quarter.
- Total revenues of $515 million were down 2% from the second quarter a year ago driven by lower revenues in our North American commissary segment due to commodity price declines.
- Diluted earnings per common share was $0.54, compared with $0.70 for the second quarter of 2022; Adjusted diluted earnings per common share(b) was $0.59, compared with $0.74 for the second quarter a year ago.
- Announced 10% increase in annual dividend rate to $1.84 per share; declared third quarter dividend of $0.46.
“We are pleased with the solid execution that our teams have demonstrated in what continues to be a challenging operating environment,” said Rob Lynch, President and CEO. “Our company restaurants continued their strong performance with positive comp sales growth and year-over-year margin improvement above and beyond the benefits of moderating food costs. However, this solid performance was not enough to offset the lower-than-anticipated comps our franchisees experienced during the quarter. That being said, our entire system saw sequential sales improvement throughout the quarter with positive North America comp sales in June. This positive momentum has carried over, and accelerated, into the third quarter and we expect it to continue as we optimize our system’s revenue management strategies and expand one of our most popular pizza platforms with the recent introduction of Garlic Epic Stuffed Crust Pizza.”
Commenting on the Company’s International operations, Lynch stated, “Our international business is a long-term growth driver for Papa Johns. We’ve recently established a corporate-owned restaurant portfolio in the UK, our largest international market, allowing us to build a similar success model to the one we’ve created in the US. This model accelerates our ability to scale our company’s capabilities with franchisees in the UK, and worldwide, to grow comps and new unit development. While we know there will be macro-economic challenges ahead, particularly in the short term, we’re confident that we can improve sales and profitability within our UK market, and in our international segment overall.”
Lynch concluded by stating, “The level of operating and fiscal discipline our team has implemented across our business over the past year is remarkable. Our continued investments in sales-driving capabilities and operational excellence, combined with the strength of our balance sheet, gives us confidence that we will produce positive comp sales and attractive new unit development growth in the back half of 2023 and over the long-term.”
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(a) | Excludes the impact of foreign currency. | |
(b) | Represents a non-GAAP financial measure. See “Non-GAAP Measures” for a reconciliation to the most comparable US GAAP measure. | |
Financial Highlights
Three Months Ended | Six Months Ended | |||||||||||||||||||
(In thousands, except per share amounts) | June 25,
| June 26,
| Increase (Decrease) | June 25,
| June 26,
| Increase (Decrease) | ||||||||||||||
Total revenues | $ | 514,530 | $ | 522,665 | $ | (8,135 | ) | $ | 1,041,579 | $ | 1,065,357 | $ | (23,778 | ) | ||||||
Operating income | $ | 34,912 | $ | 38,904 | $ | (3,992 | ) | $ | 72,708 | $ | 53,339 | $ | 19,369 | |||||||
Adjusted operating income (a) | $ | 36,881 | $ | 40,411 | $ | (3,530 | ) | $ | 76,033 | $ | 85,642 | $ | (9,609 | ) | ||||||
Net income attributable to the Company | $ | 17,768 | $ | 25,433 | $ | (7,665 | ) | $ | 40,144 | $ | 35,927 | $ | 4,217 | |||||||
Diluted earnings per common share | $ | 0.54 | $ | 0.70 | $ | (0.16 | ) | $ | 1.20 | $ | 0.99 | $ | 0.21 | |||||||
Adjusted diluted earnings per common share (a) | $ | 0.59 | $ | 0.74 | $ | (0.15 | ) | $ | 1.28 | $ | 1.69 | $ | (0.41 | ) | ||||||
(a) Represents a Non-GAAP financial measure. See “Non-GAAP Measures” for a reconciliation to the most comparable US GAAP measures. | ||||||||||||||||||||
In the second quarter of 2023, the Company completed the purchase of 91 formerly franchised restaurants in the United Kingdom. The restaurants are now operating as International Company-owned restaurants effective June 2, 2023. Our second quarter results include royalty revenues for these restaurants for the period until June 2, 2023, and the restaurants are consolidated after this date with results reflected in International revenues and expenses.
Total revenues of $514.5 million decreased $8.1 million, or 1.6%, in the second quarter of 2023 compared with the prior year period. Excluding the impact of purchasing the 91 International stores in 2023, total revenues decreased $9.8 million, or 1.9%, compared with the prior period. The revenue decline was driven by lower North American commissary revenues, driven by lower sales volume and decreased commodity prices in 2023 as compared to 2022. The decrease was partially offset by comparable sales growth from Domestic Company-owned restaurants.
For the second quarter of 2023, global system-wide restaurant sales were $1.22 billion, up 2.0% from a year ago (excluding the impact of foreign currency). The increase reflected higher equivalent units from net restaurant openings primarily in International markets.
Operating income of $34.9 million for the second quarter of 2023 decreased $4.0 million compared with the second quarter last year. Adjusted operating income(a) was $36.9 million, down $3.5 million from the prior year period. The second quarter of 2023 reflects higher operating income from Domestic Company-owned restaurants as the Back to BETTER initiative drove increased comparable sales and labor efficiencies in this category compared to the prior year. Second quarter 2023 International operating income declined as compared to the prior year as a result of lower comparable sales and incremental marketing costs related to our efforts to reposition the UK market. General and administrative expenses increased as the second quarter of 2023 reflected increased variable compensation expense and costs related to the franchise operating conference, which was held in April 2023 for the first time since 2019.
Diluted earnings per common share was $0.54 for the second quarter of 2023 compared with $0.70 in the second quarter of 2022. Adjusted diluted earnings per common share(a) was $0.59 for the second quarter of 2023 compared with $0.74 in the second quarter of 2022. These changes were driven by the same factors impacting operating income and adjusted operating income as discussed above. In addition, diluted earnings per common share and adjusted diluted earnings per common share reflected higher interest expense compared with the second quarter of 2022. Interest expense increased in 2023 largely due to higher borrowings used to fund share repurchases.
See the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Quarterly Report on Form 10-Q filed with the SEC for additional information concerning our operating results for the three and six months ended June 25, 2023.
Global Restaurant Sales Information
Global restaurant and comparable sales information for the second quarter and six months ended June 25, 2023, compared with the second quarter and six months ended June 26, 2022 are as follows (See “Supplemental Information and Financial Statements” below for related definitions):
Three Months Ended | Six Months Ended | |||||||||||
Amounts below exclude the impact of foreign currency | June 25,
| June 26,
| June 25,
| June 26,
| ||||||||
Comparable sales growth (decline): | ||||||||||||
Domestic Company-owned restaurants | 2.2 | % | (1.5 | )% | 2.8 | % | (1.3 | )% | ||||
North America franchised restaurants | (2.3 | )% | 1.4 | % | (1.6 | )% | 2.1 | % | ||||
North America restaurants | (1.4 | )% | 0.9 | % | (0.7 | )% | 1.4 | % | ||||
International restaurants | (0.7 | )% | (8.0 | )% | (3.3 | )% | (3.6 | )% | ||||
Total comparable sales growth (decline) | (1.3 | )% | (1.4 | )% | (1.3 | )% | 0.1 | % | ||||
System-wide restaurant sales growth (decline): | ||||||||||||
Domestic Company-owned restaurants | 2.5 | % | 1.2 | % | 3.7 | % | 8.9 | % | ||||
North America franchised restaurants | (0.6 | )% | 2.7 | % | 0.1 | % | 1.4 | % | ||||
North America restaurants | — | % | 2.4 | % | 0.8 | % | 2.8 | % | ||||
International restaurants (a) | 8.6 | % | 3.4 | % | 5.8 | % | 8.3 | % | ||||
Total global system-wide restaurant sales growth (decline) | 2.0 | % | 2.6 | % | 2.0 | % | 4.2 | % | ||||
(a) The six months ended June 25, 2023 and June 26, 2022 exclude the impact of franchisee suspended restaurants. | ||||||||||||
Global Restaurant Unit Data
As of June 25, 2023, there were 5,780 Papa Johns restaurants operating in 48 countries and territories, as follows:
Second Quarter | Domestic Company Owned | Franchised North America | Total North America | International Company Owned | International Franchised | Total International | System-wide | |||||||||||
Beginning - March 26, 2023 | 520 | 2,864 | 3,384 | — | 2,349 | 2,349 | 5,733 | |||||||||||
Opened | — | 13 | 13 | — | 55 | 55 | 68 | |||||||||||
Closed | — | (8 | ) | (8 | ) | — | (13 | ) | (13 | ) | (21 | ) | ||||||
Acquired | 1 | — | 1 | 91 | — | 91 | 92 | |||||||||||
Sold | — | (1 | ) | (1 | ) | — | (91 | ) | (91 | ) | (92 | ) | ||||||
Ending - June 25, 2023 | 521 | 2,868 | 3,389 | 91 | 2,300 | 2,391 | 5,780 | |||||||||||
Net Unit Growth | 1 | 4 | 5 | 91 | (49 | ) | 42 | 47 | ||||||||||
Trailing four quarters net store growth/(decline) | 1 | 32 | 33 | 91 | 85 | 176 | 209 | |||||||||||
Free Cash Flow
Free cash flow, a non-GAAP financial measure which the Company defines as net cash provided by operating activities, less purchases of property and equipment, was $59.0 million for the six months ended June 25, 2023, compared with $14.8 million in the prior year period. The year over year change primarily reflects higher cash flow from operating activities as a result of favorable working capital changes partially offset by increases in purchases of property and equipment.
Six Months Ended | ||||||||
(in thousands) | June 25,
| June 26,
| ||||||
Net cash provided by operating activities | $ | 93,735 | $ | 45,585 | ||||
Purchases of property and equipment | (34,759 | ) | (30,744 | ) | ||||
Free cash flow | $ | 58,976 | $ | 14,841 | ||||
We view free cash flow as an important financial measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures.
Cash Dividend
The Company paid cash dividends of $13.9 million ($0.42 per common share) in the second quarter of 2023. On July 31, 2023, our Board of Directors declared a third quarter dividend of $0.46 per common share, representing a 10% increase from the previous dividend. The dividend will be paid on August 25, 2023 to stockholders of record as of the close of business on August 14, 2023.
Conference Call
Papa Johns will host a call with analysts today, August 3, 2023, at 8:00 a.m. Eastern Time. To access the conference call or webcast, please register online at: ir.papajohns.com/events-presentations. A replay of the webcast will be available two hours after the call and archived on the same web page.
About Papa Johns
Papa John’s International, Inc. (NASDAQ: PZZA) opened its doors in 1984 with one goal in mind: BETTER INGREDIENTS. BETTER PIZZA.® Papa Johns believes that using high-quality ingredients leads to superior quality pizzas. Its original dough is made of only six ingredients and is fresh, never frozen. Papa Johns tops its pizzas with real cheese made from mozzarella, pizza sauce made with vine-ripened tomatoes that go from vine to can in the same day and meat free of fillers. It was the first national pizza delivery chain to announce the removal of artificial flavors and synthetic colors from its entire food menu. Papa Johns is co-headquartered in Atlanta, Ga. and Louisville, Ky. and is the world’s third-largest pizza delivery company with more than 5,700 restaurants in approximately 50 countries and territories. For more information about the Company or to order pizza online, visit www.papajohns.com or download the Papa Johns mobile app for iOS or Android.
Forward-Looking Statements
Certain matters discussed in this press release and other Company communications that are not statements of historical fact constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “intend,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “outlook”, “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements include or may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, the current economic environment, commodity and labor costs, currency fluctuations, profit margins, net unit growth, unit level performance, capital expenditures, restaurant and franchise development, labor shortages, labor cost increases, inflation, royalty relief, franchisee support, the effectiveness of our menu innovations and other business initiatives, investments in product and digital innovation, marketing efforts and investments, liquidity, compliance with debt covenants, impairments, strategic decisions and actions, dividends, effective tax rates, regulatory changes and impacts, investments in the UK market, adoption of new accounting standards, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements.
Our forward-looking statements are based on our assumptions which are based on currently available information. Actual outcomes and results may differ materially from those matters expressed or implied in our forward-looking statements as a result of various factors, including but not limited to risks related to: deteriorating economic conditions in the U.S. and international markets, including the United Kingdom; labor shortages at Company and/or franchised stores and our quality control centers; increases in labor costs, commodity costs or sustained higher other operating costs, including as a result of supply chain disruption, inflation or climate change; the potential for delayed new store openings, both domestically and internationally, or lower net unit development due to changing circumstances outside of our control; the increased risk of phishing, ransomware and other cyber-attacks; risks and disruptions to the global economy and our business related to the conflict in Ukraine and other international conflicts; risks related to a possible economic recession or downturn that could reduce consumer spending or demand; and continuing risks related to outbreak of COVID-19 and other health crises. These and other risks, uncertainties and assumptions that are involved in our forward-looking statements are discussed in detail in “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022 as updated by those included in our Quarterly Report on Form 10-Q for the quarter ended June 25, 2023. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.
For more information about the company, please visit www.papajohns.com.
Supplemental Information and Financial Statements
Definitions
“Comparable sales” represents sales for the same base of restaurants for the same fiscal periods. “Comparable sales growth (decline)” represents the ch
