Papa John’s(PZZA) - 2021 Q4 - Annual Report

Part I Business Papa John's operates and franchises over 5,650 global pizza restaurants, emphasizing quality, technology, and expansion through segmented operations - As of December 26, 2021, Papa John's had 5,650 restaurants in operation across 50 countries and territories, comprising 600 Company-owned and 5,050 franchised locations[8] - The company's strategy centers on its "BETTER INGREDIENTS. BETTER PIZZA.®" promise, leveraging technology like the Papa Rewards loyalty program, and expanding its global footprint through significant franchisee partnerships[9][11][12] - Major development deals announced in 2021 include opening 100 new locations in Texas and the South by 2029, over 220 restaurants across Latin America and Europe by 2025, and over 1,350 new stores in South China by 2040[12] Restaurant Unit Progression (2020-2021) | | Domestic Company-owned | North America Franchised | International Franchised | System-wide Total | | :--- | :--- | :--- | :--- | :--- | | Beginning (Dec 27, 2020) | 588 | 2,701 | 2,111 | 5,400 | | Opened | 11 | 74 | 304 | 389 | | Closed | 0 | (35) | (104) | (139) | | Ending (Dec 26, 2021) | 600 | 2,739 | 2,311 | 5,650 | | Net Unit Growth | 12 | 38 | 200 | 250 | - As of December 26, 2021, the company employed approximately 14,000 people, with an estimated 115,000 total individuals in the entire Papa John's system, including franchisees and their employees[39][40] Risk Factors The company faces industry, company-specific, debt, and general risks, including COVID-19 impacts, competition, and supply chain dependencies - The COVID-19 pandemic poses ongoing risks, including potential for new government restrictions, supply chain interruptions, and labor shortages, with no expectation to maintain the same high level of sales growth experienced during the pandemic[63][65] - The QSR pizza industry is highly competitive, and the company's "BETTER INGREDIENTS. BETTER PIZZA.®" strategy may result in higher costs and lower margins compared to competitors focused on lower-cost options[66][69] - The franchise model presents risks, as the company's success relies on the financial health and cooperation of independent franchisees, with poor franchisee performance potentially leading to store closures and reduced royalty payments[80][81] - The company is dependent on Leprino Foods as its sole supplier for mozzarella cheese domestically and substantially all of its mozzarella cheese internationally, creating a significant supply chain risk[107] - The company's substantial debt of $490.0 million as of year-end could increase vulnerability to economic changes, limit flexibility, and require a significant portion of cash flow for debt service[114][116] - Failure to maintain the integrity of customer and internal data against cyber-attacks could result in reputational damage, loss of sales, litigation, and significant costs[131] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[140] Properties Papa John's operates 5,650 restaurants globally, primarily leased, and owns its Louisville corporate office while leasing its Atlanta office Restaurant Locations by Region (as of Dec 26, 2021) | Region | Company-owned | Franchised | Total | | :--- | :--- | :--- | :--- | | Total U.S. | 600 | 2,564 | 3,164 | | Canada | — | 175 | 175 | | Total North America | 600 | 2,739 | 3,339 | | International | — | 2,311 | 2,311 | | Worldwide Total | 600 | 5,050 | 5,650 | - Most Company-owned restaurants are in leased spaces, typically with initial five-year terms and renewal options, and the company also leases and subleases approximately 425 restaurant sites to franchisees in the UK[145][147] - The company owns its Louisville, KY corporate office and its UK office and QC Center, while leasing its new Atlanta, GA corporate office and nine of its 12 North American QC Centers[146] Legal Proceedings Legal proceedings information is incorporated by reference from Note 19 of the Consolidated Financial Statements - The company refers to Note 19 for details on legal proceedings[148] Mine Safety Disclosures The company reports no applicable mine safety disclosures for its operations - None[149] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with $72.5 million in 2021 share repurchases and a declared Q1 2022 dividend - On October 28, 2021, the Board approved a new share repurchase program for up to $425.0 million of common stock[166] 2021 Share Repurchase Summary | Metric | Value | | :--- | :--- | | Shares Repurchased | ~594,000 | | Aggregate Cost (Millions USD) | $72.5 | | Average Price per Share (USD) | $121.96 | - A first-quarter 2022 dividend of $0.35 per share was declared on January 27, 2022[164] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2021 saw significant revenue and operating income growth, driven by strong comparable sales and strategic capital realignment - The company delivered its tenth consecutive quarter of system-wide sales growth, with two-year comparable sales increases of 29.4% in North America and 25.6% internationally[176] - The company executed a capital allocation strategy in 2021, including a $425.0 million share repurchase program, issuing $400.0 million in senior notes, refinancing its credit facility, and repurchasing all Series B Preferred Stock[177] - The company incurred approximately $13.1 million in one-time corporate reorganization costs in 2021 related to the opening of its new Atlanta office[182] FY 2021 vs. FY 2020 Key Financials | Metric | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues (Billions USD) | $2.07 | $1.81 | +14.1% | | Operating Income (Millions USD) | $168.2 | $90.3 | +86.4% | | Income Before Taxes (Millions USD) | $150.9 | $75.4 | +100.3% | | Diluted EPS (GAAP) (USD) | $0.12 | $1.28 | -90.6%¹ | | Adjusted Diluted EPS (USD) | $3.51 | $1.40 | +150.7% | - ¹GAAP Diluted EPS in 2021 was significantly impacted by a $3.10 per share reduction related to the one-time cash payment for the repurchase and conversion of Series B Preferred Stock[223] Results of Operations Fiscal 2021 consolidated revenues increased 14.1% to $2.07 billion, with operating income rising to $168.2 million due to strong comparable sales Revenue Growth by Segment (2021 vs 2020) | Segment | 2021 Revenue (Millions USD) | 2020 Revenue (Millions USD) | % Change | | :--- | :--- | :--- | :--- | | Domestic Company-owned | $778.3 | $700.8 | +11.1% | | North America Franchise Royalties | $129.3 | $96.7 | +33.7% | | North America Commissary | $761.3 | $680.8 | +11.8% | | International | $150.8 | $124.0 | +21.6% | | Total Revenues | $2,068.4 | $1,813.2 | +14.1% | Comparable Sales Growth (2021 vs 2020) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | North America Restaurants | 11.8% | 17.6% | | International Restaurants | 13.0% | 12.6% | | Total | 12.1% | 16.3% | - Operating income increased by $78.0 million, driven by higher profits from increased sales, a higher effective royalty rate in North America, and leveraging fixed costs across segments[216][224] Liquidity and Capital Resources In 2021, the company generated $184.7 million in operating cash, implemented a new capital structure, and ended with $490.0 million total debt Cash Flow Summary (in millions) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Operating Activities | $184.7 | $186.4 | | Investing Activities | ($63.5) | ($41.1) | | Financing Activities | ($180.5) | ($43.5) | - In September 2021, the company issued $400.0 million of 3.875% senior notes due 2029 and entered into a new $600.0 million revolving credit facility maturing in 2026[236][404][408] - Total debt outstanding at year-end was $490.0 million, comprised of $400.0 million in senior notes and $90.0 million drawn on the revolving facility[238][403] - Free cash flow, a non-GAAP measure, was $109.7 million in 2021, down from $137.1 million in 2020, primarily due to higher capital expenditures[251] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, foreign currency, and commodity prices, with cheese price volatility being a primary concern - A 10% adverse change in foreign currency exchange rates would negatively impact annual revenue by approximately $15.6 million and operating income by $3.3 million[263] Average Cheese Block Price per Pound (USD) | Year | Q1 | Q2 | Q3 | Q4 | Full Year | | :--- | :--- | :--- | :--- | :--- | :--- | | 2021 (Actual) | $1.676 | $1.680 | $1.676 | $1.786 | $1.705 | | 2020 (Actual) | $1.857 | $1.679 | $2.262 | $2.235 | $2.008 | | 2022 (Projected) | $1.956 | $2.088 | $2.095 | $2.031 | $2.043 | Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for fiscal 2021, including the auditor's report and detailed financial notes - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and on the effectiveness of the company's internal control over financial reporting[269][270] - Critical Audit Matters identified by the auditor were the measurement and valuation of insurance reserves and the allowance for credit losses for franchisee notes receivable, due to the significant judgments and estimates involved[273][275][279] Consolidated Balance Sheet Summary (in thousands) | | Dec 26, 2021 | Dec 27, 2020 | | :--- | :--- | :--- | | Total Current Assets | $255,009 | $306,407 | | Total Assets | $885,704 | $872,770 | | Total Current Liabilities | $287,424 | $288,869 | | Total Liabilities | $1,052,664 | $881,334 | | Total Stockholders' Deficit | ($172,458) | ($266,939) | Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 26, 2021 - The CEO and CFO concluded that the Company's disclosure controls and procedures are effective as of the end of the fiscal year[469] - Management concluded that the company's internal control over financial reporting was effective as of December 26, 2021, based on the COSO 2013 framework[471] - No changes in internal control over financial reporting occurred during the fourth quarter that materially affected, or are likely to materially affect, these controls[473] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the definitive proxy statement - Detailed information on directors, executive officers, and corporate governance is incorporated by reference from the Company's definitive proxy statement[487] Executive Compensation Executive compensation information is incorporated by reference from the company's definitive proxy statement - Detailed information on executive compensation is incorporated by reference from the Company's definitive proxy statement[489] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details securities authorized under equity compensation plans as of December 26, 2021, with further ownership in the proxy statement Equity Compensation Plan Information (as of Dec 26, 2021) | Plan Category | Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price (USD) | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 319,045 | $54.65 | 4,264,031 | | Not approved by security holders | 138,060 | N/A | N/A | Part IV Exhibits, Financial Statement Schedules This section lists financial statements from Item 8 and indexes all exhibits filed with the Form 10-K, including corporate governance and debt agreements - This section provides a list of all financial statements filed with the report and an index of exhibits, including key agreements such as the Indenture for the senior notes and the Amended Credit Agreement[497][501][503]