Exhibit 99.1
For more information, contact:
David Flanery
Chief Financial Officer
502-261-4753
PAPA JOHN’S REPORTS THIRD
QUARTER 2006 EARNINGS
October Comparable Sales Results Announced;
2006 Earnings Guidance Updated
Highlights
· Third quarter earnings per share of $0.40 in 2006 vs. $0.31 in 2005 ($0.31 in 2006 vs. $0.25 in 2005, excluding the consolidation of the company’s franchisee-owned cheese purchasing entity, BIBP Commodities, Inc. (BIBP)).
· Third quarter 2006 EPS includes $0.03 from the favorable settlement of certain income tax issues.
· 18 net restaurant openings during the quarter.
· Domestic system-wide comparable sales for the quarter increased 4.5%.
· Domestic system-wide comparable sales for October decreased 1.8%.
· Earnings guidance for 2006 updated to a range of $1.45 to $1.49 per share, excluding the impact of consolidating BIBP.
Louisville, Kentucky (October 31, 2006) – Papa John’s International, Inc. (NASDAQ: PZZA) today announced revenues of $239.7 million for the third quarter of 2006, representing an increase of 2.8% from revenues of $233.1 million for the same period in 2005. Net income for the third quarter of 2006 was $13.1 million, or $0.40 per share (including a net gain of $3.0 million, or $0.09 per share, from the consolidation of the results of the franchisee-owned cheese purchasing company, BIBP Commodities, Inc. (BIBP), a variable interest entity and $950,000, or $0.03 per share, from the finalization of certain income tax examination issues), compared to last year’s net income of $10.8 million, or $0.31 per share (including a net gain of $1.9 million, or $0.06 per share, from the consolidation of BIBP). Excluding the impact of BIBP, pre-tax income from continuing operations for the third quarter of 2006 increased $1.0 million (or $0.02 per share, after-tax) from the corresponding 2005 period.
As discussed below, revenues were $723.6 million for the nine months ended September 24, 2006, which are substantially flat with revenues for the same period in 2005. Net income for the nine months ended September 24, 2006 was $44.4 million, or $1.33 per share (including net income of $10.4 million, or $0.31 per share, from the consolidation of BIBP and $950,000, or $0.03 per share, from the previously mentioned finalization of certain income tax examination issues), compared to last year’s net income of $31.6 million, or $0.92 per share (including a net gain of $800,000, or $0.02 per share, from the consolidation of BIBP). Excluding the impact of BIBP, pre-tax income from continuing operations increased $5.1 million (or $0.10 per share, after-tax) from the corresponding 2005 period.
“Our third quarter results were very good, with our system continuing to outperform the competition in a very challenging environment, while we continue to make both domestic and international investments to sustain our longer-term growth,” commented Papa John’s president and chief executive officer, Nigel Travis.
Revenues Comparison
The primary reasons for the $6.6 million, or 2.8%, increase in revenues for the third quarter of 2006, as compared to the same period in 2005, were a $3.5 million increase in commissary revenues reflecting increased volumes and an increase in domestic franchise royalties of $874,000 as a result of the 4.5% increase in comparable sales and additional equivalent units for the quarter. In addition, international revenues increased $1.4 million as a result of additional company-owned restaurants located in the United Kingdom and Mexico. Revenues for domestic company-owned restaurants were substantially consistent with the prior year quarter due to offsetting factors as discussed on a year-to-date basis, below.
For the nine-month period ended September 24, 2006, consolidated revenues were $723.6 million, which is substantially flat with the corresponding 2005 period. Commissary revenues and domestic franchise royalties increased $10.7 million and $2.8 million, respectively, for the nine months ended September 24, 2006, as compared to the corresponding 2005 period. The revenue increases in the commissary operations and franchise royalties occurred for the same reasons mentioned above for the third quarter-only results. The increases were substantially offset by decreases in revenues for company-owned restaurants and restaurants classified as variable interest entities (VIEs). Company-owned restaurant revenues declined $8.6 million, as the 5.0% increase in comparable sales on a year-to-date basis was more than offset by a decline in the number of equivalent units reflecting the sale of 84 company restaurants to a new franchisee at the beginning of the fourth quarter of 2005 (partially offset by the acquisition of 43 franchised restaurants during the current quarter). Revenues from VIE restaurants declined $3.1 million reflecting the sale of restaurants by two franchisees to third parties during 2005 and 2006, eliminating the VIE classification under Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (FIN 46), and the related consolidation of the operating results of such restaurants at that time.
2
Operating Results and Cash Flow
Operating Results
Our pre-tax income from continuing operations for the third quarter of 2006 was $19.8 million compared to $16.5 million for the corresponding period in 2005. For the nine months ended September 24, 2006, pre-tax income from continuing operations was $68.8 million compared to $48.0 million for the corresponding period in 2005. Excluding the impact of the consolidation of BIBP, third quarter 2006 pre-tax income from continuing operations was $14.5 million, an increase of $1.0 million over 2005 comparable results, and pre-tax income for the nine months ended September 24, 2006 was $51.8 million, an increase of $5.1 million over 2005 comparable results. The increase of $1.0 million and $5.1 million, respectively, in pre-tax income from continuing operations for the three- and nine-month periods ended September 24, 2006 (excluding the consolidation of BIBP) is principally due to the following (analyzed on a segment basis — see the Summary Financial Data table that follows for the reconciliation of segment income to consolidated income below):
· Domestic Company-owned Restaurant Segment. Domestic company-owned restaurants’ operating income increased approximately $900,000 and $7.8 million for the three- and nine-month periods ended September 24, 2006, respectively, primarily due to fixed-cost leverage and related margin improvement associated with the noted increase in comparable sales (see below) for the periods.
· Domestic Commissary Segment. Domestic commissaries’ operating income increased approximately $2.9 million and $5.5 million for the three- and nine-month periods ended September 24, 2006, respectively, primarily due to the margin on increased sales volumes, including sales to the theme-park operator Six Flags, Inc. as part of our multi-year strategic marketing alliance and partnership agreement that was announced in late March 2006.
· Domestic Franchising Segment. Domestic franchising operating income increased approximately $360,000 and $1.1 million for the three- and nine-month periods ended September 24, 2006, respectively, primarily as a result of an increase in royalties due to an increase in comparable sales (see below) and the royalties from the 84 restaurants that were purchased by a franchisee from the company at the beginning of the fourth quarter of 2005. The increase in royalties during 2006 was partially offset by an increase in administrative costs related to the field organizational restructuring implemented in late 2005 to better drive the performance of our domestic franchise operations.
· International Segment. The international segment, which excludes the Perfect Pizza operations that were sold in March 2006, reported operating losses of $2.0 million and $6.8 million for the three- and nine-month periods
3
ended September 24, 2006, respectively, as compared to operating losses of $1.2 million and $2.7 million for the corresponding 2005 periods. The decrease in operating results is principally due to increased costs related to the continued development of our support infrastructure throughout the international segment, including the United Kingdom, to support the accelerated development of both company-owned and franchised Papa John’s branded restaurants in our international markets. In addition, the company incurred a $470,000 charge in the second quarter related to a management reorganization of one of our international operating units.
· All Others Segment. The operating income for the “All others” reporting segment was substantially flat for the three-month period ended September 24, 2006 as compared to the corresponding 2005 period. Operating income for this segment for the nine-month period ended September 24, 2006 increased $1.1 million primarily due to improved operating results from our insurance business and our partnership development activities.
· Unallocated Corporate Segment. The unallocated corporate expenses increased $2.3 million and $5.6 million for the three- and nine-month periods ended September 24, 2006, respectively, as compared to the corresponding prior year periods. Increased marketing efforts, primarily related to non-traditional restaurant initiatives, resulted in additional costs of $1.4 million and $2.0 million, respectively, for the three- and nine-month periods ended September 24, 2006.
In addition, we incurred additional equity compensation and executive performance unit incentive plan expense, as follows.
Stock options were awarded to the majority of management in late March 2005 and April 2006, each with a two-year cliff vesting provision. The company also granted approximately 28,000 shares of performance-based restricted stock to employees during the second quarter of 2006 with a performance period of three years. There were no such stock options or restricted stock awarded in 2004 that vested in 2005 or subsequent years. Stock compensation expense recognized for the three- and nine-month periods ended September 24, 2006 was $1.2 million and $3.1 million, respectively, as compared to $725,000 and $1.6 million for the corresponding 2005 periods.
Additionally, performance units were awarded in 2005 and 2006 to certain members of management with each award having a three-year performance period (none awarded prior to 2005). Further, the ultimate cost associated with the performance units is based on the company’s ending stock price and total shareholder return relative to a peer group over the three-year performance period ending in December 2007 for the 2005 program and December 2008 for the 2006 program, with the awards paid in cash at the end of the respective performance periods. The total expense related to the 2005 and 2006
4
performance unit programs was approximately $925,000 in the third quarter of 2006 as compared to $675,000 in the third quarter of 2005 and $2.3 million for the nine months ended September 24, 2006 as compared to $1.0 million for the corresponding 2005 period.
Net interest expense increased approximately $145,000 for the three-month period ended September 24, 2006, as compared to the corresponding 2005 period, principally due to an increased net average debt balance outstanding. For the nine months ended September 24, 2006, interest expense decreased $1.2 million principally due to a decrease in our average outstanding debt balance from the comparable prior year period.
The income tax rate was 33.8% and 36.1% for the three- and nine-month periods ended September 24, 2006, compared to 37.0% for the corresponding 2005 periods. The decrease in the effective tax rate in 2006 is primarily due to the previously mentioned finalization of certain income tax examination issues in the current quarter.
Cash Flow
Cash flow from operating activities from continuing operations was $66.3 million in the first nine months of 2006 as compared to $61.5 million for the comparable period in 2005. The consolidation of BIBP increased cash flow from operations by approximately $17.0 million and $1.3 million in 2006 and 2005, respectively. Excluding the impact of the consolidation of BIBP, cash flow from continuing operations decreased $11.0 million in the first nine months of 2006 as compared to the corresponding 2005 period, primarily due to unfavorable working capital changes with accounts receivable and other liabilities. The 2005 operating cash flows were favorably impacted by the collection of unusually high accounts receivable balances at the end of 2004. In addition, a decrease in cash flow from continuing operations occurred due to the classification in 2006 of $5.7 million of excess tax benefits related to the exercise of non-qualified stock options from operating activities to financing activities as required by Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment.
Form 10-Q Filing
See the Management Discussion & Analysis section of our third quarter Form 10-Q filed with the Securities and Exchange Commission for additional information concerning the operating results and cash flows for the three- and nine-month periods ended September 24, 2006.
Comparable Sales and Unit Count
As previously announced, domestic system-wide comparable sales for the third quarter increased 4.5% (composed of a 4.3% increase at company-owned restaurants and a 4.5% increase at franchised restaurants). Total system-wide international sales for Papa
5
John’s branded units increased 30.9% for the quarter, on a constant U.S. dollar basis, over the comparable period last year.
Domestic system-wide comparable sales for the nine months ended September 24, 2006 increased 4.4% (composed of a 5.0% increase at company-owned restaurants and a 4.3% increase at franchised restaurants). Total system-wide international sales for Papa John’s branded units increased 27.7% on a year-to-date basis, on a constant U.S. dollar basis, over the comparable period last year.
The company today announced that domestic system-wide comparable sales for the four weeks ended October 22, 2006 decreased approximately 1.8% (composed of a 0.6% decrease at company-owned restaurants and a 2.2% decrease at franchised restaurants). Total system-wide international sales for Papa John’s branded units increased 21.4% for the four weeks ended October 22, 2006, on a constant U.S. dollar basis, over the comparable period last year.
The company also today announced that December 2006 will be the last month of reporting monthly domestic comparable sales results. Beginning in 2007, domestic comparable sales results will be reported on a quarterly basis, matching the reporting methodology of our two primary national competitors. In addition to avoiding the potential competitive disadvantage of continuing to report monthly, we believe reporting on a quarterly basis will actually benefit investors by providing a more meaningful view of our long-term performance trends and strategies.
During the third quarter of 2006, 31 domestic (five company-owned and 26 franchised) and 17 international franchised restaurants were opened and 22 domestic and eight international franchised restaurants were closed.
At September 24, 2006, there were 2,978 Papa John’s restaurants (564 company-owned and 2,414 franchised) operating in 49 states and 25 countries. The company-owned unit count includes 117 restaurants operated in majority-owned domestic joint venture arrangements, the operations of which are fully consolidated into the company’s results.
Acquisition Activity
As previously disclosed, the company acquired 43 franchised restaurants in the Phoenix and Flagstaff, Arizona markets effective July 24, 2006 (beginning of period 8). The company also announced the acquisition of 11 franchised restaurants in the Raleigh, North Carolina market effective September 25, 2006 (beginning of period 10). It is not expected that these acquisitions will significantly impact operating income for the remainder of 2006 as management transition costs are expected to substantially offset incremental unit level operating income during this time frame.
6
International Update
A total of 17 restaurants were opened in all international markets during the quarter, of which 11 were located in our fastest growing markets of Korea and China. As of September 24, 2006, we had a total of 94 franchised restaurants open and contractual agreements for an additional 396 Papa John’s restaurants to be opened over the next eight years in these two countries. We also have a ten-year, 100-unit development agreement for Northern India, of which three units are currently open. In addition, we recently signed a development agreement for 75 restaurants to be opened in South and West India over the next six years. Our total international development pipeline as of September 24, 2006 included 836 restaurants expected to open over the next ten years.
As noted in our first quarter Form 10-Q filing, the company sold its Perfect Pizza operations in the United Kingdom, consisting of the franchised units and related distribution operations, on March 8, 2006. In accordance with U.S. generally accepted accounting principles, we have classified the Perfect Pizza operating results, including directly associated G&A expenses, as “discontinued operations” for both 2006 and 2005. The following summarizes the discontinued operations for 2006 and 2005 (in 000’s):
| | Three Months Ended | | Nine Months Ended | |
| | Sept. 24, | | Sept. 25, | | Sept. 24, | | Sept. 25, | |
| | 2006 | | 2005 | | 2006 | | 2005__ | |
Net sales | | $ | — | | $ | 3,235 | | $ | 2,421 | | $ | 10,431 | |
| | | | | | | | | |
Pre-tax income | | — | | 651 | | 617 | | 2,272 | |
| | | | | | | | | |
Net income | | — | | 410 | | 389 | | 1,431 | |
| | | | | | | | | | | | | |
Share Repurchase Activity
The company repurchased approximately 381,000 shares of its common stock at an average price of $32.14 per share, or a total of $12.2 million, during the third quarter of 2006, and 2.0 million shares of its common stock at an average of $31.58 per share, or a total of $64.0 million, during the first nine months of 2006. A total of 183,000 and 893,000 shares of common stock, respectively, were issued upon the exercise of stock options for the three- and nine-month periods ended September 24, 2006.
As a result, there were 32.6 million diluted weighted average shares outstanding for the third quarter of 2006 as compared to 35.0 million for the same period in 2005. Approximately 31.9 million actual shares of the company’s common stock were outstanding as of September 24, 2006. The company’s board of directors has authorized the repurchase of up to an aggregate $575.0 million of common stock through December 31, 2006, and through September 24, 2006, approximately 36.7 million shares have been
7
repurchased at a total cost of $559.8 million (average price of $15.24 per share). There were no repurchases subsequent to September 24, 2006.
The company’s share repurchase activity increased earnings per share from continuing operations by $0.02 and $0.06 for the three- and nine-month periods ended September 24, 2006, respectively.
2006 Earnings Guidance Updated
In connection with the second quarter earnings release, the company revised the original guidance for 2006, excluding the impact of the consolidation of BIBP, to a range of $1.42 to $1.46 (including the previously disclosed $0.07 benefit from the extra week of operations in the fourth quarter of 2006). Based upon actual third quarter operating results, including the impact of the finalization of certain income tax examination issues, which resulted in an additional $0.03 of earnings per share, the company is updating its 2006 EPS guidance to a range of $1.45 to $1.49. Our determination of the updated fourth quarter earnings guidance for 2006 included the following factors:
· Expected transition and infrastructure costs and unit level operating losses associated with the planned domestic and international development opportunities currently being pursued.
· The continued year-over-year increase in equity compensation costs in the fourth quarter for reasons as explained for the first three quarters of 2006.
The updated full-year guidance assumes domestic comparable sales will increase 3% to 5% for the year (3.8% increase year-to-date through October). Total sales growth for international Papa John’s branded units is expected to be in the range of 25% to 30% (27.1% increase year-to-date through October). Our worldwide unit openings are expected to be near the upper end of our initial guidance range of 210 to 240 units (151 openings through September). However, worldwide closings are expected to exceed our initial guidance range of 70 to 100 (99 closings through September). This includes 34 restaurants closed in Mexico as a result of our restructuring of that market. Therefore, worldwide net unit growth is now expected to be in the 100 to 115-unit range (52 net unit openings through September). The lower than anticipated net unit growth did not significantly impact our 2006 earnings.
There are no other significant changes in the key operating assumptions we provided in our press release dated August 1, 2006.
As noted above, the impact of the additional week of operations in the fourth quarter of 2006 provides $0.07 of earnings per share, as reflected in the above earnings guidance range. Accordingly, our baseline 2006 earnings per share, adjusted to exclude BIBP, the 53rd week of operations and the benefit from the finalization of certain income tax examination issues, is projected to be $1.35 to $1.39. We plan on issuing our initial 2007 earnings guidance in mid-December; however, we have consistently discussed an expectation of a 10% to 12% earnings per share growth target, and we would further
8
expect such growth target to be applied to baseline 2006 earnings adjusted as noted above.
Forward-Looking Statements
Except for historical information, this announcement contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect management’s expectations based upon currently available information and data; however, actual results are subject to future events and uncertainties, which could cause actual results to materially differ from those projected in these statements. Certain factors that can cause actual results to materially differ include: the uncertainties associated with litigation; changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales; new product and concept developments by food industry competitors; the ability of the company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably; increases in or sustained high levels of food, paper, utilities, fuel, employee compensation and benefits, insurance and similar costs; the ability to obtain ingredients from alternative suppliers, if needed; health- or disease-related disruptions or consumer concerns about commodities supplies; the selection and availability of suitable restaurant locations; negotiation of suitable lease or financing terms; constraints on permitting and construction of restaurants; local governmental agencies restricting the sale of certain food products; higher-than-anticipated construction costs; the hiring, training and retention of management and other personnel; changes in consumer taste, demographic trends, traffic patterns and the type, number and location of competing restaurants; franchisee relations; federal and state laws governing such matters as wages, working conditions, citizenship requirements and overtime; and labor shortages in various markets resulting in higher required wage rates. The above factors might be especially harmful to the financial viability of franchisees or company-owned operations in under-penetrated or emerging markets, leading to greater unit closings than anticipated. Increases in projected claims losses for the company’s self-insured coverage or within the captive franchise insurance program could have a significant impact on our operating results. Our international operations are subject to additional factors, including economic, political and health conditions in the countries in which the company or its franchisees operate; currency regulations and fluctuations; differing business and social cultures and consumer preferences; diverse government regulations and structures; ability to source high-quality ingredients and other commodities in a cost-effective manner; and differing interpretation of the obligations established in franchise agreements with international franchisees. Further information regarding factors that could affect the company’s financial and other results is included in the company’s Forms 10-Q and 10-K, filed with the Securities and Exchange Commission.
9
Conference Call
A conference call is scheduled for Wednesday, November 1, 2006, at 10:00 AM EST to review third quarter earnings results. The call can be accessed from the company’s web page at www.papajohns.com in a listen-only mode, or dial 800-487-2662 for participation in the question and answer session. International participants may dial 706-679-8452.
The conference call will be available for replay beginning Wednesday, November 1, 2006 at approximately noon through Friday, November 3, 2006, at midnight EST. The replay can be accessed from the company’s web page at www.papajohns.com or by dialing 800-642-1687 (passcode 5719380). International participants may dial 706-645-9291 (passcode 5719380).
10
