"I’d like to congratulate our operators on yet another solid quarter," said Papa John’s Founder, Chairman and Chief Executive Officer, John Schnatter. "Papa John’s brand promise of delivering Better Ingredients, Better Pizza is resonating with customers around the world reflected by our strong international comp sales and unit growth. Having just initiated a regular cash dividend, today’s announcement of a two-for-one stock split demonstrates our Company’s sustained commitment to building value for our shareholders and our confidence in the fundamentals and growth potential of our business."
Third quarter 2013 revenues were $346.3 million, a 6.4% increase from third quarter 2012 revenues of $325.5 million. Third quarter 2013 net income was $14.3 million, compared to third quarter 2012 net income of $13.0 million. Third quarter 2013 diluted earnings per share were $0.65 compared to third quarter 2012 diluted earnings per share of $0.55.
Revenues were $1.05 billion for the nine months ended September 29, 2013, a 7.8% increase from revenues of $975.4 million for the same period in 2012. Net income was $50.7 million for the nine months ended September 29, 2013, compared to $44.3 million for the same period in 2012 ($50.2 million and $46.4 million, for the nine-month periods in 2013 and 2012, respectively, excluding the impact of the previously disclosed 2012 Incentive Contribution). Diluted earnings per share were $2.27 for the nine months ended September 29, 2013, compared to $1.84 for the same period in 2012 ($2.24 and $1.93, for the nine-month periods in 2013 and 2012, respectively, excluding the impact of the 2012 Incentive Contribution).
Revenue and Operating Highlights
All revenues and operating highlights below are compared to the same period of the prior year and exclude the Incentive Contribution, unless otherwise noted.
Consolidated revenues increased $20.8 million, or 6.4%, for the third quarter of 2013 and increased $75.8 million, or 7.8%, for the nine months ended September 29, 2013. The increases in revenues were primarily due to the following:
Domestic company-owned restaurant sales increased $9.4 million, or 6.5%, and $35.1 million, or 8.1%, for the three and nine months, respectively, primarily due to increases in comparable sales of 5.1% and 5.0%. The increase for the nine-month period was also due to 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 $600,000, or 3.4%, and $2.0 million, or 3.4%, for the three and nine months, respectively, primarily due to increases in net franchise units over the prior year and increases in comparable sales of 0.6% and 1.3%, partially offset by royalty incentives offered to franchisees for meeting certain sales targets. The increase for the nine-month period was partially offset by reduced royalties attributable to the company’s net acquisition of the 50 restaurants noted above.
Domestic commissary sales increased $5.4 million, or 4.1%, and $25.1 million, or 6.3%, for the three and nine months, respectively, primarily due to increases in sales volumes as well as increases in the prices of commodities.
International revenues increased $4.4 million, or 24.2%, and $11.2 million, or 21.4%, for the three and nine months, respectively, primarily due to increases in the number of restaurants and increases in comparable sales of 8.1% and 7.7%, calculated on a constant dollar basis.
The table below summarizes income before income taxes on a reporting segment basis, excluding the Incentive Contribution:
Third quarter 2013 income before income taxes increased approximately $400,000, or 1.9%, primarily due to the following:
North America franchising increased primarily due to the increase in net restaurants and comparable sales, partially offset by royalty incentives offered to franchisees for meeting certain sales targets.
International increased primarily due to the increase in net restaurants and comparable sales results and an improvement in our United Kingdom results, partially offset by higher operating losses in our company-owned China market.
Unallocated corporate expenses decreased primarily due to lower settlement costs than originally estimated for the previously disclosed Agne text messaging class action lawsuit.
These increases were partially offset by the following decrease:
Domestic commissaries decreased as higher distribution costs more than offset the incremental profits associated with higher sales. We manage commissary results on a full year basis and anticipate the 2013 full year pre-tax income margin will approximate the 2012 margin.
Domestic company-owned restaurants income before income taxes approximated the prior year as the incremental profits associated with higher comparable sales of 5.1% were offset by a lower gross margin.
The increase in income before income taxes for the nine months ended September 29, 2013 of $2.3 million, or 3.1%, was primarily due to the same reasons as the increases noted above for the three month period. In addition, All others increased primarily due to an improvement in our online operating results due to higher online sales volumes. These increases were partially offset by a decrease in income before income taxes at our domestic company-owned restaurants primarily due to higher commodity costs, somewhat offset by incremental profits associated with higher comparable sales of 5.0%.
The effective income tax rates were 30.0% and 31.9% for the three and nine months ended September 29, 2013, respectively, representing decreases of 3.7% and 1.9% from the prior year rates. The lower tax rates were due to various credits earned and the settlement or resolution of specific tax issues in 2013.
The company’s free cash flow for the first nine months of 2013 and 2012 was as follows (in thousands):
We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less the purchase of property and equipment. We view free cash flow as an important measure because it is a 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.
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 Securities and Exchange Commission for additional information concerning our operating results and cash flow for the three- and nine-month periods ended September 29, 2013.
Global Restaurant Unit Data
At September 29, 2013, there were 4,296 Papa John’s restaurants operating in all 50 states and in 35 countries, as follows:
Our development pipeline as of September 29, 2013 included approximately 1,300 restaurants (250 units in North America and 1,050 units internationally), the majority of which are scheduled to open over the next six years.
Marketing Incentive Contribution
The following table reconciles our GAAP financial results to our results excluding the Incentive Contribution for the three and nine months ended September 29, 2013 versus the same periods in 2012:
The results shown in the table and elsewhere in this press release, which exclude the Incentive Contribution, are not measures defined by accounting principles generally accepted in the United States ("GAAP"). These non-GAAP measures 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 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, were based on financial measures that excluded the Incentive Contribution.
Share Repurchase Activity
The following table reflects our repurchases for the three and nine months ended September 29, 2013 and subsequent repurchases through October 28, 2013 (in thousands):
There were 22.1 million and 22.4 million diluted weighted average shares outstanding for the three and nine months ended September 29, 2013, representing decreases of 6.9% and 7.2% over the prior year comparable periods. Diluted earnings per share increased $0.05 and $0.17 for the three and nine months ended September 29, 2013 due to the reduction in shares outstanding resulting from the share repurchase program. Approximately 21.5 million actual shares of the company’s common stock were outstanding as of September 29, 2013.
Regular Quarterly Dividend and Two-for-One Stock Split
As previously announced, the Board of Directors declared a regular quarterly cash dividend of $0.25 per share; the dividend will be paid on November 22, 2013 to shareholders of record as of the close of business on November 11, 2013.
The Board of Directors also declared a two-for-one split of the company’s outstanding shares of common stock, which will be effected in the form of a stock dividend. The stock dividend entitles each shareholder of record at the close of business on December 12, 2013 to receive one additional share for every outstanding share of common stock held on such record date. The stock dividend will be distributed on December 27, 2013.
2013 Guidance Update
The company provided the following 2013 guidance updates:
A conference call is scheduled for November 6, 2013 at 10:00 a.m. Eastern Time to review our third quarter 2013 earnings results. The call can be accessed from the company’s web page at www.papajohns.com in a listen-only mode, or dial 877-312-8816 (U.S. and Canada) or 253-237-1189 (international). The conference call will be available for replay, including by downloadable podcast, from the company’s web site at www.papajohns.com. The Conference ID is 63215634.