Papa John’s(PZZA) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents Papa John's unaudited condensed consolidated financial statements for Q1 2022 and Q1 2021, detailing financial position, performance, and cash flows, with notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (March 27, 2022 vs. December 26, 2021) | Metric (in thousands) | March 27, 2022 (in thousands) | December 26, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------- | :---------------------------- | :------------------------------- | :-------------------- | :------- | | Total Assets | $885,626 | $885,704 | $(78) | -0.01% | | Total Liabilities | $1,088,747 | $1,052,664 | $36,083 | 3.43% | | Total Stockholders' Deficit | $(208,444) | $(172,458) | $(35,986) | 20.87% | - Assets held for sale increased significantly to $19.3 million as of March 27, 2022, from zero at December 26, 2021, primarily due to the refranchising of a 90-restaurant joint venture[8] - Long-term debt, less current portion, net, increased by $47.4 million, from $480.7 million at December 26, 2021, to $528.1 million at March 27, 2022[8] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations Highlights (Three Months Ended March 27, 2022 vs. March 28, 2021) | Metric (in thousands, except per share) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :---------------------------- | :---------------------------- | :-------------------- | :------- | | Total Revenues | $542,692 | $511,746 | $30,946 | 6.05% | | Total Costs and Expenses | $517,097 | $464,884 | $52,213 | 11.23% | | Refranchising and impairment loss | $(11,160) | $0 | $(11,160) | N/A | | Operating Income | $14,435 | $46,862 | $(32,427) | -69.19% | | Net Income attributable to the Company| $10,494 | $33,883 | $(23,389) | -69.03% | | Diluted Earnings Per Common Share | $0.29 | $0.82 | $(0.53) | -64.63% | | Dividends Declared Per Common Share | $0.350 | $0.225 | $0.125 | 55.56% | - Operating income significantly decreased by 69.2% due to a $11.2 million refranchising and impairment loss and increased operating costs[10] - Diluted EPS decreased by $0.53, or 64.6%, primarily due to the refranchising and impairment loss and higher operating expenses[10] Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income Highlights (Three Months Ended March 27, 2022 vs. March 28, 2021) | Metric (in thousands) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | Change (in thousands) | % Change | | :-------------------------------------------------- | :---------------------------- | :---------------------------- | :-------------------- | :------- | | Net income before attribution to noncontrolling interests | $11,427 | $35,283 | $(23,856) | -67.61% | | Other comprehensive income, net of tax | $655 | $2,197 | $(1,542) | -70.19% | | Comprehensive income attributable to the Company | $11,149 | $36,080 | $(24,931) | -69.10% | - Other comprehensive income, net of tax, decreased by 70.2%, driven by foreign currency translation adjustments and interest rate swaps[14] Condensed Consolidated Statements of Stockholders' Deficit Condensed Consolidated Statements of Stockholders' Deficit Highlights (Three Months Ended March 27, 2022 vs. December 26, 2021) | Metric (in thousands) | March 27, 2022 (in thousands) | December 26, 2021 (in thousands) | Change (in thousands) | % Change | | :---------------------------- | :---------------------------- | :------------------------------- | :-------------------- | :------- | | Total Stockholders' Deficit | $(208,444) | $(172,458) | $(35,986) | 20.87% | | Treasury Stock (at cost) | $(832,603) | $(806,472) | $(26,131) | 3.24% | | Retained Earnings | $181,124 | $183,157 | $(2,033) | -1.11% | - The total stockholders' deficit increased by $36.0 million, primarily due to the acquisition of Company common stock for $32.7 million and cash dividends of $12.7 million, partially offset by net income[15] - Accumulated other comprehensive loss improved from $(9.97) million to $(9.32) million, driven by a decrease in net unrealized foreign currency translation loss and interest rate swap losses[16] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (Three Months Ended March 27, 2022 vs. March 28, 2021) | Metric (in thousands) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :---------------------------- | :---------------------------- | :-------------------- | :------- | | Net cash provided by operating activities | $25,394 | $63,217 | $(37,823) | -59.83% | | Net cash used in investing activities | $(8,315) | $(6,299) | $(2,016) | 32.01% | | Net cash used in financing activities | $(6,787) | $(16,080) | $9,293 | -57.79% | | Cash and cash equivalents at end of period | $80,669 | $171,272 | $(90,603) | -52.90% | - Net cash provided by operating activities decreased by $37.8 million, primarily due to unfavorable working capital changes, including a decrease in accrued expenses and accounts receivable[21] - Net cash used in investing activities increased by $2.0 million, mainly due to higher purchases of property and equipment[21] Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, not including all annual financial statement footnotes[23] 2. Significant Accounting Policies - Management's estimates for financial statements include allowances for credit losses, intangible assets, contract assets/liabilities, right-of-use assets, lease liabilities, and insurance/tax reserves[24] - Papa John's Marketing Fund, Inc. (PJMF) is consolidated as a variable interest entity (VIE) due to the Company's control over its significant activities[25] Allowance for Credit Losses (March 27, 2022) | (in thousands) | Accounts Receivable (in thousands) | Notes Receivable (in thousands) | | :--------------------------------- | :--------------------------------- | :------------------------------ | | Balance at December 26, 2021 | $2,364 | $1,500 | | Current period provision for expected credit losses | $2,613 | $12,560 | | Balance at March 27, 2022 | $4,851 | $14,054 | - The Company recorded $14.6 million in one-time, non-cash reserves for certain accounts and notes receivable, primarily linked to a master franchisee with operations in Russia[38] 3. Leases - The Company subleases approximately 430 restaurant properties to franchisees in the UK, generating $3.0 million in sublease income for Q1 2022[39] - Contingent liability for assigned property leases is $10.8 million as of March 27, 2022, and an additional $1.6 million for 12 domestic leases post-quarter refranchising[40][41] Supplemental Cash Flow Information Related to Leases (Three Months Ended) | (in thousands) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | | :------------------------------------------------- | :---------------------------- | :---------------------------- | | Operating cash flows from finance leases | $262 | $278 | | Financing cash flows from finance leases | $1,241 | $1,059 | | Operating cash flows from operating leases | $9,612 | $9,483 | | Right-of-use assets obtained (new finance lease liabilities) | $569 | $7,014 | | Right-of-use assets obtained (new operating lease liabilities) | $20,801 | $28,428 | | Cash received from sublease income | $3,092 | $2,987 | 4. Papa John's Marketing Fund, Inc. - PJMF collects a percentage of revenues from domestic Company-owned and franchised restaurants for advertising and promotional programs, reporting contributions and expenditures on a gross basis[45] PJMF Assets and Liabilities (in thousands) | (in thousands) | March 27, 2022 (in thousands) | December 26, 2021 (in thousands) | | :---------------------- | :---------------------------- | :------------------------------- | | Total Assets | $40,010 | $41,263 | | Total Liabilities | $43,720 | $47,091 | 5. Revenue Recognition - Contract liabilities, primarily franchise fees, unredeemed gift cards, and loyalty program obligations, totaled $32.0 million at March 27, 2022, a decrease of $3.5 million from December 26, 2021[47][48] - The Company recognized $9.3 million in revenue from deferred revenue during Q1 2022[47] Estimated Future Revenue from Performance Obligations (in thousands) | Performance Obligations by Period | Less than 1 Year (in thousands) | 1-2 Years (in thousands) | 2-3 Years (in thousands) | 3-4 Years (in thousands) | 4-5 Years (in thousands) | Thereafter (in thousands) | Total (in thousands) | | :-------------------------------- | :------------------------------ | :----------------------- | :----------------------- | :----------------------- | :----------------------- | :------------------------ | :------------------- | | Franchise fees | $2,011 | $1,783 | $1,601 | $1,390 | $1,127 | $2,134 | $10,046 | 6. Common Stock - The Company had 35.7 million common shares outstanding at March 27, 2022, a slight decrease from 35.8 million at December 26, 2021[52] Share Repurchase Activity (Three Months Ended) | (in thousands, except average price per share) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | | :--------------------------------------------- | :---------------------------- | :---------------------------- | | Total Number of Shares Purchased | 301 | 15 | | Average Price Paid per Share | $108.76 | $84.63 | | Aggregate Cost of Shares Purchased | $32,709 | $1,267 | | Maximum Dollar Value Remaining | $392,091 | $71,031 | - The Board approved a $425.0 million share repurchase program on October 28, 2021, with $369.1 million remaining available as of April 29, 2022[53] - Dividends of $12.6 million ($0.35 per share) were recorded in Q1 2022, with a similar dividend declared for Q2 2022[55] 7. Earnings Per Share Earnings Per Common Share (Three Months Ended) | (in thousands, except per share data) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | | :------------------------------------ | :---------------------------- | :---------------------------- | | Net income attributable to common shareholders | $10,434 | $27,113 | | Basic earnings per common share | $0.29 | $0.83 | | Diluted earnings per common share | $0.29 | $0.82 | - Diluted EPS decreased from $0.82 in Q1 2021 to $0.29 in Q1 2022, reflecting a significant decline in net income attributable to common shareholders[58] 8. Debt Long-term Debt, Net (in thousands) | (in thousands) | March 27, 2022 (in thousands) | December 26, 2021 (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Senior notes | $400,000 | $400,000 | | Revolving facilities | $137,000 | $90,000 | | Total long-term debt, net | $528,088 | $480,730 | - The Company's total outstanding debt increased to $537.0 million as of March 27, 2022, primarily due to increased borrowings on revolving facilities[61] - The Amended Credit Agreement provides a $600.0 million senior secured revolving credit facility, maturing September 14, 2026, with an accordion feature for up to $500.0 million additional capacity[65][66] - The Company has interest rate swap agreements with a total notional value of $350.0 million, which were de-designated as cash flow hedges following the issuance of senior notes[72] 9. Commitments and Contingencies - The Company reached a settlement in principle for $5.0 million in the 'In re Papa John's Employee & Franchise Employee Antitrust Litigation' class action, subject to court approval[75] - No liability was recorded for the 'Durling et al v. Papa John's International, Inc.' lawsuit as of March 27, 2022, as a loss is not considered probable or reasonably estimable[76] 10. Divestitures and Impairment - On March 28, 2022, the Company refranchised its 51% ownership in a 90-restaurant joint venture in Texas for $14.0 million, resulting in a one-time, non-cash charge of $8.4 million[78][79] - An impairment loss of $2.8 million was recorded for reacquired franchise rights due to the financial and operational impact of the conflict in Ukraine[80] 11. Segment Information - The Company operates four reportable segments: domestic Company-owned restaurants, North America franchising, North America commissaries, and international operations[82] Segment Revenues (Three Months Ended) | (In thousands) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | | :---------------------------- | :---------------------------- | :---------------------------- | | Domestic Company-owned restaurants | $198,765 | $197,234 | | North America franchising | $34,268 | $32,715 | | North America commissaries | $209,679 | $184,878 | | International | $42,707 | $42,604 | | All others | $57,273 | $54,315 | | Total revenues | $542,692 | $511,746 | Segment Operating Income (Three Months Ended) | (In thousands) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | | :---------------------------- | :---------------------------- | :---------------------------- | | Domestic Company-owned restaurants | $1,989 | $15,324 | | North America franchising | $32,137 | $30,443 | | North America commissaries | $9,334 | $9,713 | | International | $4,455 | $8,364 | | All others | $3,719 | $6,118 | | Total operating income | $14,435 | $46,862 | - Domestic Company-owned restaurants operating income significantly decreased due to an $8.4 million refranchising charge[87] - International operating income includes $3.5 million in one-time, non-cash reserves for accounts receivable and impairment of reacquired franchise rights[87] Note 12. Related Party Transactions - The Company and PJMF entered into a new Endorsement Agreement with ABG-Shaq, LLC (affiliated with Shaquille O'Neal), effective March 15, 2022, for Mr. O'Neal's personal services and personality rights[90][92] - Consideration includes $5.625 million in aggregate cash payments over three years, royalty fees for co-branded pizza sales, and a grant of 55,898 restricted stock units (RSUs) to Mr. O'Neal[93][94] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of Papa John's financial condition and operational results for Q1 2022, covering key developments, sales trends, cost drivers, and special items Overview - As of March 27, 2022, Papa John's operated 5,524 restaurants globally, comprising 608 Company-owned and 4,916 franchised locations across 49 countries[95] - Revenues are primarily derived from Company-owned restaurant sales, franchise royalties, sales of franchise/development rights, and sales of food/paper products to franchisees[95] Recent Developments and Trends - The launch of NY Style pizza in Q1 2022, combined with Epic Stuffed Crust, contributed to positive results, building on record Q1 sales from the prior year[96] - The Company aims for 280-320 net new restaurants globally in 2022 (approx. 5% growth) and expects to open 1,400-1,800 net new restaurants worldwide by the end of 2025[97] - Papa John's suspended corporate operations and support for 188 franchised restaurants in Russia, resulting in $17.4 million in one-time, non-cash charges for reserves and impairments[100][102] - Staffing challenges intensified in early 2022 due to the Omicron variant, impacting customer service and operations, leading the Company to invest in wages, bonuses, and college tuition programs[103] Global Restaurant Sales Information Comparable Sales Growth (Three Months Ended) | Segment | March 27, 2022 | March 28, 2021 | | :---------------------------- | :------------- | :------------- | | Domestic Company-owned restaurants | (1.2%) | 23.3% | | North America franchised restaurants | 2.8% | 27.1% | | North America restaurants | 1.9% | 26.2% | | International restaurants | 0.8% | 23.2% | | Total comparable sales growth | 1.6% | 25.4% | System-wide Restaurant Sales Growth (Excluding Foreign Currency Impact) (Three Months Ended) | Segment | March 27, 2022 | March 28, 2021 | | :---------------------------- | :------------- | :------------- | | Domestic Company-owned restaurants | 0.8% | 22.2% | | North America franchised restaurants | 4.0% | 27.0% | | North America restaurants | 3.3% | 25.9% | | International restaurants | 11.6% | 28.9% | | Total global system-wide restaurant sales growth | 5.3% | 26.6% | - Total comparable sales growth was 1.6% in Q1 2022, significantly lower than the 25.4% growth in Q1 2021, reflecting a challenging comparison against a strong prior year[106] - International system-wide restaurant sales growth was 11.6% (excluding foreign currency), driven by increases in comparable sales and equivalent units[106] Results of Operations Consolidated Revenues (Three Months Ended) | Revenue Source (in thousands) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :---------------------------- | :---------------------------- | :-------------------- | :------- | | Domestic Company-owned restaurant sales | $198,765 | $197,234 | $1,531 | 0.78% | | North America franchise royalties and fees | $34,268 | $32,715 | $1,553 | 4.75% | | North America commissary revenues | $209,679 | $184,878 | $24,801 | 13.41% | | International revenues | $34,617 | $34,607 | $10 | 0.03% | | Other revenues | $65,363 | $62,312 | $3,051 | 4.90% | | Total revenues | $542,692 | $511,746 | $30,946 | 6.05% | - Consolidated revenues increased by 6.0% to $542.7 million, primarily driven by a 13.4% increase in North America commissary revenues due to higher commodity pricing[110][114] Operating Costs as a Percentage of Related Revenues (Three Months Ended) | Cost Category | March 27, 2022 | March 28, 2021 | Increase (Decrease) | | :------------------------------------ | :------------- | :------------- | :------------------ | | Domestic Company-owned restaurant expenses | 81.3% | 79.0% | 2.3% | | North America commissary expenses | 94.0% | 92.3% | 1.7% | | International expenses | 57.5% | 56.7% | 0.8% | | Other expenses | 92.6% | 89.6% | 3.0% | | General and administrative expenses | 12.1% | 9.8% | 2.3% | - Total costs and expenses increased by 4.5% as a percentage of revenues, primarily due to higher labor and food costs in Company-owned restaurants and increased commodity costs in commissaries[118][119] - General and administrative expenses increased by $15.9 million, or 31.8%, primarily due to $14.6 million in one-time, non-cash provisions related to the Ukraine conflict and a $5.0 million legal settlement charge[122][123] Items Impacting Comparability; Non-GAAP Measures Reconciliation of GAAP to Adjusted Financial Results (Three Months Ended) | (In thousands, except per share amounts) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | | :--------------------------------------- | :---------------------------- | :---------------------------- | | GAAP operating income | $14,435 | $46,862 | | Refranchising and impairment loss | $25,796 | — | | Legal settlement | $5,000 | — | | Strategic corporate reorganization costs | — | $3,883 | | Adjusted operating income | $45,231 | $50,745 | | GAAP diluted earnings per common share | $0.29 | $0.82 | | Adjusted diluted earnings per common share | $0.95 | $0.91 | - Adjusted diluted EPS increased by $0.04 to $0.95 in Q1 2022, excluding special items such as refranchising losses, impairment losses, and legal settlement charges[134][139] - Special items for Q1 2022 totaled $30.8 million pre-tax, including an $8.4 million refranchising loss, $17.4 million in reserves/impairments related to Ukraine, and a $5.0 million legal settlement[126][141] Liquidity and Capital Resources Cash Flow Summary (Three Months Ended) | Cash Flow Activity (in thousands) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | | :---------------------------------------- | :---------------------------- | :---------------------------- | | Operating activities | $25,394 | $63,217 | | Investing activities | $(8,315) | $(6,299) | | Financing activities | $(6,787) | $(16,080) | | Change in cash and cash equivalents (excl. FX) | $10,292 | $40,838 | - Cash flow from operating activities decreased by $37.8 million, primarily due to unfavorable working capital changes[144] - Total outstanding debt was $537.0 million as of March 27, 2022, with $463.0 million remaining availability under the PJI Revolving Facility[147] Financial Covenants Compliance (March 27, 2022) | Covenant | Permitted Ratio | Actual Ratio as of March 27, 2022 | | :-------------------- | :---------------- | :-------------------------------- | | Leverage ratio | Not to exceed 5.25 to 1.0 | 2.2 to 1.0 | | Interest coverage ratio | Not less than 2.00 to 1.0 | 4.8 to 1.0 | Free Cash Flow (Three Months Ended) | (in thousands) | March 27, 2022 (in thousands) | March 28, 2021 (in thousands) | | :-------------------------------------- | :---------------------------- | :---------------------------- | | Net cash provided by operating activities | $25,394 | $63,217 | | Purchases of property and equipment | $(10,233) | $(7,076) | | Dividends paid to preferred stockholders | — | $(3,412) | | Free cash flow | $15,161 | $52,729 | Forward-Looking Statements - The report contains forward-looking statements regarding business performance, revenue, earnings, unit growth, and other financial measures, subject to various risks and uncertainties[161] - Key risks include managing difficulties from the coronavirus pandemic, labor shortages, increased food and labor costs due to inflation and supply chain disruptions[161] - Other risks involve potential delays in new store openings, cyber-attacks, competitive pricing, changes in consumer preferences, and increased risks from international operations, including the conflict in Ukraine[161][165] Item 3. Quantitative and Qualitative Disclosures About Market Risk Details the Company's exposure to market risks, including interest rate, foreign currency, and commodity price risks, outlining strategies and impacts Interest Rate Risk - The Company is exposed to interest rate changes on its PJI Revolving Facility and uses interest rate swaps to minimize this risk, though these swaps were de-designated as cash flow hedges in Q3 2021[166] Foreign Currency Exchange Rate Risk - Foreign currency fluctuations unfavorably impacted International revenues by approximately $1.2 million and operating income by $0.6 million in Q1 2022[168] - International operations, primarily distribution sales and royalties from franchised restaurants outside the US and Canada, accounted for 6-7% of total revenues[167] Commodity Price Risk - The Company is exposed to commodity price volatility, particularly for cheese, its largest food cost item, despite having some forward pricing agreements[169] Average Block Price for Cheese (Actual and Projected) | Quarter | 2022 Projected Block Price | 2021 Actual Block Price | | :-------- | :------------------------- | :---------------------- | | Quarter 1 | $1.966 | $1.676 | | Quarter 2 | $2.352 | $1.680 | | Quarter 3 | $2.374 | $1.676 | | Quarter 4 | $2.318 | $1.786 | | Full Year | $2.253 | $1.705 | - Projected average block price for cheese in 2022 is significantly higher than 2021, with the full-year estimate at $2.253 compared to $1.705[171] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures, reporting no material changes in internal control over financial reporting during the quarter - The Company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 27, 2022[172] - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[173] PART II. OTHER INFORMATION Item 1. Legal Proceedings Incorporates by reference legal proceedings detailed in Note 9 of the financial statements, covering ongoing lawsuits and claims - The Company is involved in various lawsuits, claims, and investigations, with accruals made where appropriate, as detailed in Note 9 of the financial statements[174] Item 1A. Risk Factors Updates risk factors, highlighting new or materially changed risks related to the global economy, the Ukraine conflict, and its impact on costs and supply chains - The ongoing conflict between Russia and Ukraine poses a new material risk, impacting the global economy, increasing costs for transportation, energy, and commodities[176][179] - The Company has suspended corporate support for its master franchisee in Russia, and all related assets have been fully reserved or impaired, with no expected further financial charges[178] - Further escalation of geopolitical tensions could lead to cyberattacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates, exacerbating existing risks[179] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details the Company's share repurchase activities and use of proceeds, including the ongoing share repurchase program and shares acquired for tax withholdings - The Company repurchased 301,000 shares at an aggregate cost of $32.7 million during Q1 2022 under its $425.0 million share repurchase program[181] - Approximately $369.1 million remained available under the share repurchase program as of April 29, 2022, with an additional 223,000 shares acquired post-quarter for $23.0 million[182] - The Company acquired approximately 69,000 shares from employees to satisfy minimum tax withholding obligations related to equity award issuances[183] Item 6. Exhibits Lists the exhibits filed with the Form 10-Q, including amendments to employment agreements, endorsement agreements, certifications, and financial statements in iXBRL format - Exhibit 10.1: Amendment to Employment Agreement with Robert Lynch[185] - Exhibit 10.2: Endorsement Agreement with ABG-Shaq, LLC (Shaquille O'Neal)[185] - Exhibits 31.1, 31.2, 32.1, 32.2: Certifications of CEO and CFO under Sarbanes-Oxley Act[185] - Exhibit 101: Financial statements in iXBRL format[185]