Papa John's Announces 2004 Growth Plans and Earnings Guidance
2003 Guidance Reaffirmed and Share Repurchase Authorization Extended
LOUISVILLE, Ky., Dec. 12 /PRNewswire-FirstCall/ -- Papa John's International,
Inc. today announced its 2004 growth plans and earnings guidance. The company
projects earnings per share in the range of $2.20 to $2.28 for 2004.
Significant assumptions underlying this guidance are discussed below and a more
comprehensive list of assumptions is presented in an attached schedule.
(Logo: http://www.newscom.com/cgi-bin/prnh/20030430/PZZALOGO ) Significant Assumptions
Comparable sales -- Domestic systemwide comparable sales are expected to range
from flat to an increase of 2% for 2004. The company believes it is beginning
to see sales improvements as a result of the various restaurant initiatives
undertaken during the past 18 to 24 months. However, it is not yet clear that
the trends for the U.S. quick service restaurant pizza category have begun to
improve. For the most recent full quarter of industry data available (June,
July and August 2003), the category had a 2.8% decline in transactions, the
seventh consecutive quarter of flat or declining transaction results.
Net unit growth -- Domestic restaurant openings are expected to range from 120
to 140 during 2004, substantially all of which will be franchise units. The
company anticipates that 60 to 80 domestic units and 10 to 20 international
units may close in 2004.
The domestic development pipeline has improved during 2003, increasing from
approximately 239 units under contractual commitment at the beginning of the
year to approximately 330 units as of the end of November, with scheduled
opening dates through 2010. International openings are expected to range from
50 to 60 units, and the international development pipeline has also continued to
improve, increasing from approximately 567 units under contractual commitment as
of the beginning of the year to approximately 602 units as of the end of
November, with scheduled openings in 16 countries through 2012.
In addition to the increase in the number of units in the domestic and
international development pipelines during 2003, the quality of development
commitments has improved as a result of the termination or modification of
certain delinquent development agreements during the year.
Capital expenditures -- Capital expenditures are expected to range from $25 to
30 million during 2004. The relocation of the North Carolina commissary
facility is the primary driver of the increase over 2003 capital expenditure
levels. Additionally, the company is developing a restaurant image enhancement
program that may be implemented in a small number of company-owned units during
2004. The targeted cost of the image enhancement program is expected to
approximate $30,000 to $40,000 per inline unit and $45,000 to $60,000 per
freestanding unit.
Significant Factors Expected to Impact Margins Company-owned restaurants -- The total operating margin for company-owned
restaurants is expected to improve 1.2% to 1.3% in 2004 as compared to 2003. Cost of sales (food cost) is expected to be relatively flat in 2004. The
favorable impact of identified procurement savings is expected to be
substantially offset by the full year impact of certain portion increases
implemented during 2003 and generally higher base commodity costs, particularly
cheese (discussed below).
Labor costs are expected to be approximately 0.9% to 1.0% lower in 2004 than
2003, primarily as a result of the fixed cost leverage on expected sales
increases and anticipated efficiency improvements. Advertising costs are
expected to be relatively flat as a dollar amount in 2004 as compared to 2003,
but slightly lower as a percentage of increased sales. Occupancy costs and
other operating expenses are expected to be relatively flat as a percentage of
sales, as increased insurance and other costs offset the anticipated leverage on
increased sales.
Commissary and other operating units -- The total operating margin for
commissary and other operating units is expected to decline by approximately 50
to 60 basis points. The majority of this margin decline is in cost of sales as
a result of higher anticipated cheese costs in 2004, on which the commissary
charges a fixed dollar mark-up. Additionally, expected fixed cost leverage on
increased sales volumes is substantially offset by higher delivery, insurance
and utility costs impacting all commissary facilities and higher overall
operating costs for the new North Carolina facility for the limited portion of
2004 it is expected to be open.
International operations -- International revenues are expected to be
substantially flat in 2004 as compared to 2003 as the anticipated increase in
royalties and franchise fees will be offset by lower restaurant sales as a
result of a reduction in the number of company-owned units in the United
Kingdom. This change in revenue mix is expected to provide a 4% to 5%
improvement in international operating margins in 2004.
General and administrative expenses -- G&A expenses are expected to increase
approximately 50 basis points in 2004 as compared to 2003. The primary
components of this anticipated increase are: (1) increased management bonuses
for company-owned restaurants and various support functions at budgeted
performance levels; (2) planned investment spending in the franchise sales area
(principally for increased advertising and staffing levels) to drive continued
growth in the domestic development pipeline; (3) compensation expense related to
the planned award of stock options to management level personnel (the company
previously elected to expense the fair value of employee stock option awards as
allowed, but not required, under current accounting rules); (4) increased D&O
and general corporate insurance costs; and (5) overall merit and market-based
salary increases throughout administrative support functions.
Restaurant Initiatives The company has announced several restaurant initiatives during 2002 and 2003,
including certain systemwide quality initiatives, increases in General Manager
and Assistant General Manager base pay and incentive pay potential, increased
restaurant staffing levels, a realignment of the field management structure for
company-owned restaurants and a systemwide initiative to increase portions for
several core pizza products. These initiatives have produced significant
improvement in operational trends, including reduced GM and AGM turnover and
improved product quality and consistency.
The systemwide cost of these initiatives, when combined with the 2002 and 2003
declining comparable sales trends and anticipated operating cost increases for
2004 (e.g., insurance, utilities, rent, etc.), have negatively impacted
operating margins for both company-owned and franchised restaurants. Accordingly, the company has recently begun an initiative to identify
opportunities for improving restaurant operating margins.
The initial phase of this initiative will focus on procurement, administrative
and marketing related costs, while a subsequent phase is expected to review
direct restaurant operational processes and related costs. There can be no
assurance that this initiative will identify significant margin improvement
opportunities, and the company is not projecting when any such identified
opportunities may be implemented and any related margin improvements realized.
No margin improvements related to this initiative have been assumed in the 2004
earnings guidance.
Cheese Costs and FIN 46 In January 2000, Papa John's Franchise Advisory Council initiated a program that
allows the cost of cheese to Papa John's domestic restaurants to be established
on a quarterly basis. This program is executed by BIBP Commodities, Inc. (BIBP), a franchisee-owned entity established solely for this purpose.
Accordingly, the company's cheese costs do not mirror the actual block market
price for cheese on a short-term basis; however, over time, the company's cheese
costs will substantially equal the average block market price.
The average equivalent per pound block market price paid by the company in 2003
will approximate $1.185. Based upon the projected actual block market prices
for 2004 (as reflected in current milk futures prices) and the BIBP pricing
formula, the average equivalent per pound block market price to be paid by the
company in 2004 is expected to approximate $1.321. This anticipated increase in
cheese costs is expected to result in restaurant food cost increases in the
range of 70 to 80 basis points as a percentage of restaurant sales, and this
increase has been reflected in the 2004 earnings guidance.
As previously disclosed, the company will adopt the provisions of Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51"
(FIN 46), as of the end of 2003. The company has determined that it will be
required to consolidate the financial results of BIBP upon FIN 46 adoption,
based upon current interpretations of the guidance. A cumulative effect
adjustment is not expected to be required related to the consolidation of BIBP
as of the end of 2003 because BIBP is expected to have a surplus in
shareholders' equity at that date.
The consolidation of BIBP's financial results could have a significant impact on
the company's operating income in future periods due to the volatility of cheese
prices. The company will recognize the operating losses generated by BIBP if
the shareholders' equity of BIBP is in a net deficit position at the end of any
reporting period. Further, the company will recognize operating income
generated by BIBP up to the amount of any losses previously recognized. The
company has concluded that the operational benefits of maintaining its
relationship with BIBP in its current form outweigh any negatives associated
with the potential for increased operating income volatility.
The BIBP relationship produces a fixed quarterly cheese price to all restaurants
that fluctuates in a narrower range than actual block prices. The benefits of
this arrangement include the ability of domestic restaurants to establish
promotional offers on a timely basis with reliable food cost projections, and
reduced volatility in restaurant manager incentive compensation (generally based
upon unit profitability) as a result of less volatile cheese prices, a cost
factor over which the restaurant manager has no control.
The consolidation of BIBP has no impact on the underlying economic results in
comparison to those prior to the consolidation of BIBP. Any deficits arising
within BIBP are expected to be funded by a BIBP line of credit. Accordingly, the
company's borrowing capacity is not impacted in the near term. BIBP will be
managed to a "break-even" basis over time, meaning that domestic restaurants
will pay the actual average block market price for cheese and the company will
recognize the actual average block market price of cheese for company-owned
restaurants in its financial results, neither subsidizing nor benefiting from
the pricing of cheese to franchise restaurants on a cumulative basis over
numerous years.
Based upon the current level of BIBP shareholders' equity surplus, the projected
actual block market price of cheese in 2004 (as reflected in current milk
futures prices) and the BIBP pricing formula, the company does not expect the
consolidation of BIBP to impact operating income in 2004 (i.e., BIBP is expected
to maintain a surplus in shareholders' equity throughout 2004). This
expectation could change depending upon actual cheese block market price levels
throughout 2004, and the company will separately disclose the impact of BIBP
consolidation on the operating income of any future reporting period.
Reaffirmed Guidance for 2003 The company reaffirms that it expects 2003 earnings per share to be in the $1.84
to $1.90 range, excluding the impact of the adoption of FIN 46 or Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" (SFAS 150).
The company previously announced the third quarter adoption of SFAS 150, which
reduced 2003 earnings $413,000 after-tax, or $0.02 per share, through a
cumulative effect adjustment.
The company also previously announced that the required year-end adoption of FIN
46 was expected to result in a cumulative effect adjustment of approximately
$3.4 million after-tax, or $0.19 per share. However, subsequent guidance has
been issued by the Financial Accounting Standards Board (FASB) in the form of an
Exposure Draft that would eliminate the previously noted cumulative effect
adjustment for the company. This conclusion is subject to final interpretation
and implementation of the Exposure Draft by the FASB.
Extended Share Repurchase Authorization The company also announced that its Board of Directors has extended through
December 26, 2004, the existing $375 million authorization in the amount of the
company's common stock that may be repurchased by the company from time to time. The authorization includes both open market purchases as well as private
transactions and was to expire December 28, 2003 prior to this extension.
To date, the company has repurchased an aggregate of $349.8 million of its
common stock, representing 13.5 million shares at an average purchase price of
$25.89 per share. After such repurchases, the company has approximately 18.1
million of common stock outstanding on a fully diluted basis (approximately 17.9
million actual shares outstanding).
The 2004 earnings per share guidance of $2.20 to $2.28 assumes no additional
share repurchases, and further assumes that projected free cash flow is invested
rather than applied to reduce the line of credit borrowings below $80 million.
The company has entered into an interest rate swap on a notional amount of $100
million through March 2004, which reduces to $80 million through March 2005 and
further reduces to $60 million through expiration in March 2006.
Executive Officer Stock Sales As part of personal asset diversification strategies, John H. Schnatter, the
company's Founder and Chief Executive Officer, and Charles W. Schnatter, the
company's Chief Development Officer, announced their intentions to periodically
sell shares of company common stock they own or acquire through option
exercises.
Additionally, certain other executive officers have extended previously adopted
prearranged trading plans under Securities and Exchange Commission Rule 10b5-1
in order to sell shares, or exercise stock options and sell the underlying
shares, at pre-determined price thresholds. The extended plans permit the sale
of up to 182,522 shares on a combined basis through December 31, 2004. These
10b5-1 trading plans were adopted as part of the officers' personal asset
diversification programs.
At November 23, 2003, there were 2,796 Papa John's restaurants (571
company-owned and 2,225 franchised) operating in 49 states and 14 international
markets. Papa John's also franchises 135 Perfect Pizza restaurants in the
United Kingdom. For more information about the company, visit Papa John's at
http://www.papajohns.com/ .
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 differ
materially from those projected in these statements. Certain factors that can
cause actual results to differ materially include: the uncertainties associated
with litigation; increased advertising, promotions and discounting by
competitors that may adversely affect sales; new product and concept
developments by food industry competitors; the ability of the company and its
franchisees to open new restaurants and operate new and existing restaurants
profitably; increases in food, labor, utilities, insurance, employee benefits
and similar costs; and economic, political and public health conditions in the
countries in which the company or its franchisees operate. These factors might
be especially harmful to the financial viability of franchisees in
under-penetrated or emerging markets, leading to greater unit closings than
anticipated. 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.
For more information, contact:
David Flanery
Sr. Vice President of Finance
502-261-4753
Significant Operating Assumptions for 2004
Papa John's International, Inc.
Projected 2003 Results Guidance for 2004 Domestic Unit Openings 55 to 65 units 120 to 140 units International Unit Openings 30 to 35 units 50 to 60 units Domestic Unit Closings 65 to 75 units 60 to 80 units International Unit Closings 40 to 45 units 10 to 20 units Domestic Comparable Sales 3% to 4% decrease 0% to 2% increase Total International Restaurant
Sales Increases (Constant
U.S. $) 1% to 2% increase 10% to 15% increase Corporate Restaurant
Operating Margin 16.5% to 17.0% 17.75% to 18.25% Commissary and Other
Operating Margin 8.75% to 9.0% 8.25% to 8.75% G&A Expenses as a
Percentage of Revenues 7.5% to 7.7% 8.0% to 8.2% Other General Expenses (1) $1.6 to 2.0 million $3.5 to 4.5 million Net Interest Expense $6.0 to 6.5 million $4.0 to 5.0 million Capital Expenditures $15 to 20 million $25 to 30 million Weighted Average
Diluted Shares O/S (2) 18.0 to 18.2 million 18.0 to 18.5 million (1) - Other General Expenses include items such as restaurant relocation
expenses, losses on restaurant and other asset dispositions and provisions for
uncollectible notes receivable. The 2003 amount was reduced by the inclusion of
$2 million of proceeds related to the settlement of a litigation matter.
(2) - The Weighted Average Diluted Shares Outstanding for 2004 assume no share
repurchases during the remainder of 2003 or throughout 2004, and include an
estimate of increased shares outstanding as a result of stock option exercises. http://www.newscom.com/cgi-bin/prnh/20030430/PZZALOGO http://photoarchive.ap.org/ DATASOURCE: Papa John's International, Inc.
CONTACT: David Flanery, Sr. Vice President of Finance of Papa John's, +1-502-261-4753 Web site: http://www.papajohns.com/
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