Papa John's International, Inc. (NASDAQ:PZZA) is a leading pizza delivery and carryout restaurant chain, operating and franchising pizza delivery and carryout restaurants under the "Papa John's" trademark. The company has navigated a challenging macroeconomic environment while executing on strategic priorities to drive long-term growth and profitability.
In the fiscal year 2023, Papa John's reported annual revenue of $2,135,713,000 and net income of $82,098,000. The company generated annual operating cash flow of $193,055,000 and free cash flow of $116,435,000. These financial results demonstrate the strength and resilience of the Papa John's business model.
For the first quarter of 2024, Papa John's reported total revenues of $513,916,000, a decrease of 2.5% compared to the prior year period. Net income attributable to the company was $14,636,000, or $0.44 per diluted share, compared to $22,376,000, or $0.65 per diluted share, in the first quarter of 2023. The decrease in net income was primarily due to lower sales and higher costs, partially offset by improved margins and cost savings initiatives.
Business Overview
Papa John's operates in four reportable segments: Domestic Company-owned restaurants, North America franchising, North America commissaries, and International operations. The Domestic Company-owned restaurant segment derives its revenues principally from retail sales of pizza, Papadias, and side items. The North America franchising segment generates revenues from sales of franchise and development rights and collection of royalties from franchisees in the United States and Canada. The North America commissary segment produces and distributes food and paper products to Domestic Company-owned and franchised restaurants. The International segment consists of the operations of all Company-owned restaurants located in the UK, as well as distribution sales to franchised Papa John's restaurants in the UK and the company's franchise sales and support activities in international markets.Strategic Priorities and Initiatives
Papa John's has been focused on executing strategic priorities and building a foundation for long-term success, while navigating a challenging macroeconomic environment. The company's "Back to BETTER 2.0" initiative comprises long-term strategic initiatives focused on driving systemwide sales through enhancing North America national marketing investment and effectiveness, accelerating North America development, and evolving the Domestic Commissary business to provide cost savings for franchisees and incremental profit for the business model.Product Innovation and Marketing Strategy
: The company has advanced its menu and digital innovations to drive new customers and ticket sales. In the first quarter of 2024, Papa John's launched its new Crispy Cuppy 'Roni platform and an all-new brand platform "Better Get You Some" that is part of its deepened commitment to and investment in its new marketing strategy. These investments are focused on improving audience segmentation, building consumer loyalty, and driving cultural relevance.Domestic Commissary Growth Strategy
: The company has implemented a change in the Domestic Commissary profit model, increasing the fixed operating margin that Domestic QC Centers charge to 5% and providing increased rebate opportunities for franchisees. As of the end of the first quarter, more than 40% of franchisees are on track to earn a rebate for 2024. The operating income of the North America Commissary business has also increased, reflecting benefits for both franchisees and the Commissary.International Transformation Plan
: In December 2023, the company announced international transformation initiatives designed to evolve its business structure to deliver an enhanced value proposition to international customers and franchisees, ensure targeted investments and efficient resource management, and better position its largest markets, including the UK, for long-term profitable growth and brand strength.Key elements of the International Transformation Plan include: - UK Optimization: The company is moving forward with the planned closure of 43 underperforming Company-owned stores in the UK in the second quarter of 2024, which is expected to reduce future operating losses. The company is continuing to evaluate its restaurant portfolio in the UK and may pursue additional strategic closures or divestitures. - Regional Hubs: During the first quarter, the company established hubs in its key regions - APAC, EMEA, and Latin America. These hubs are led by General Managers with significant restaurant and international franchise experience, partnering with franchisees to create a holistic strategy to boost performance in their markets.
Financial Performance and Outlook
For the first quarter of 2024, Papa John's reported total revenues of $513,916,000, a decrease of 2.5% compared to the prior year period. The decrease was primarily due to a $9 million decrease in North America commissary revenues, a $9 million decrease in other revenues, and a $4 million decrease in domestic company-owned restaurant sales, partially offset by an approximate $10 million contribution from the 2023 UK franchisee acquisitions.Adjusted operating income for the first quarter of 2024 was $43,241,000, compared to $39,152,000 in the prior year period. The increase was primarily due to improved margins at the domestic company-owned restaurants and supply chain improvements, partially offset by the impact of the UK franchisee acquisitions and lower North America comparable sales.
For the full year 2024, the company expects North America comparable sales to be flat to down low single digits, and adjusted operating income to be between $145 million and $155 million. This guidance reflects the challenging macroeconomic environment and softening consumer demand, which the company expects to continue to impact results in the near term.
Liquidity and Capital Resources
As of March 31, 2024, Papa John's had $27,768,000 in cash and cash equivalents and $232,500,000 in available borrowing capacity under its $600 million revolving credit facility. The company's gross leverage ratio was 3.1x, well within its financial covenants.In the first quarter of 2024, the company generated $11,987,000 in net cash from operating activities and used $10,152,000 in net cash for investing activities, primarily for capital expenditures. The company paid $15,068,000 in dividends to common stockholders during the quarter.