Sturdy 3Q for Papa John's

Zacks Equity Research

Papa John’s International, Inc (PZZA) reported third quarter 2012 adjusted earnings of 55 cents per share, in line with the Zacks Consensus Estimate. However, the adjusted earnings per share surpassed the year-ago earnings of 44 cents by 25.0%.

Quarter Highlights

Total revenue jumped 6.5% year over year to $325.5 million and surpassed the Zacks Consensus Estimate of $323.0 million. The year-over-year improvement was attributable to higher comparable restaurant revenues in both domestic and international markets, and increase in number of units worldwide. Comparable system-wide restaurant revenue rose 2.5% and 6.9% in North America and in the international markets, respectively.

Domestic company-owned restaurant revenue improved 11.3% to $143.3 million, signifying an increase of 5.0% in comparable revenue and acquisition activity during the quarter.

Hike in net franchised units and comparable franchised restaurants’ revenue growth of 1.7% resulted in a 4.5% rise in North America franchise royalty revenue to $18.8 million. Domestic commissaries revenue upped 1.4% year over year to $132.7 million, primarily due to a hike in sales volume.

International revenues surged 16.2% year over year to $18.0 million, due to higher number of restaurants opened and comparable system-wide revenue growth.

In the quarter under review, Papa John’s company-owned restaurant expenses and domestic commissary and other expenses rose 11.1% to $118.2 million and 1.7% to $134.9 million, respectively. General and administrative (G&A) expenses hiked 11.3% year over year to $30.4 million. Operating income also rocketed 25.0% year over year to $21.2 million.

Unit Growth

Consistent with its unit growth momentum, Papa John’s attained the target of its 4,000th global unit opening. During the quarter, the company opened 75 restaurants and closed 19, representing a 6.6% increase worldwide. As of September 23, 2012, Papa John’s had 4,029 restaurants in 50 states across 34 countries.

In the next six years, the company expects to open approximately 1,500 restaurants, including 300 in North America and 1,200 in the international market.


At quarter end, Papa John’s had cash and cash equivalents of $25.4 million. The long-term debt and shareholders’ equity stood at $50.0 million and $217.8 million, respectively.

Share Repurchases

During the reported quarter, the company repurchased 515,000 shares for $25.4 million. Subsequent to end of the quarter through October 24, 2012, the company repurchased 107,000 shares for $5.6 million.

2012 Outlook

Based on the strong third quarter results, Papa John’s increased its earnings per share and domestic and international system-wide comps guidance. The company now expects full-year 2012 earnings per share in the range of $2.53-$2.63, up from the previous projection of $2.45-$2.55. One extra week of operation in fiscal 2012 is projected to benefit earnings by 8 cents to 10 cents per share and offset the expected decrease in earnings from Incentive Contribution in 2012.

The North America system-wide comparable revenue is projected to increase in the range of 3.0% to 4.0%, up from the earlier guidance of 2.0% to 3.0%. The international comparable revenue is expected to increase in the range of 6.0% to 7.0%, up from the previous guidance of 4.0% to 5.5%. However, the company reiterated its total revenue growth outlook increase in the range of 6% to 7%.

Our Viewpoint

We remain encouraged by the company’s long and successful track record, robust unit growth, viable business strategy and strong balance sheet. The company provides ample growth opportunities given its plan of opening 300 restaurants in North America and 1200 in the international markets within the next six years.

Based on these, we expect analysts to revise their estimates upward in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are currently pegged at $2.61 and $2.97, respectively.

One of Papa John’s peers – Domino's Pizza Inc. (DPZ) – reported third quarter 2012 adjusted earnings of 43 cents per share beating the Zacks Consensus Estimate by 2 cents.

Papa John’s currently carries a Zacks #2 Rank, implying a short-term Buy rating. We also reiterate our long-term Outperform recommendation on the stock.

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