10-K 1 a15-23458_110k.htm 10-K

Table of Contents

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

(Mark One)

 

x

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 27, 2015

 

or

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                                            to                                          

 

Commission File Number:  0-21660

 

PAPA JOHN’S INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

61-1203323

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

2002 Papa Johns Boulevard

 

 

Louisville, Kentucky

 

40299-2367

(Address of principal executive offices)

 

(Zip Code)

 

(502) 261-7272

(Registrant’s telephone number, including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of Each Class)

 

(Name of each exchange on which registered)

Common Stock, $0.01 par value

 

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 


 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x  No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

 

The aggregate market value of the common stock held by non-affiliates of the Registrant, computed by reference to the closing sale price on The NASDAQ Stock Market as of the last business day of the Registrant’s most recently completed second fiscal quarter, June 28, 2015, was $2,235,251,445.

 

As of February 16, 2016, there were 37,733,506 shares of the Registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of Part III of this annual report are incorporated by reference to the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held April 28, 2016.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

11

Item 1B.

Unresolved Staff Comments

19

Item 2.

Properties

19

Item 3.

Legal Proceedings

21

Item 4.

Mine Safety Disclosures

22

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

23

Item 6.

Selected Financial Data

26

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

49

Item 8.

Financial Statements and Supplementary Data

52

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

85

Item 9A.

Controls and Procedures

85

Item 9B.

Other Information

87

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

87

Item 11.

Executive Compensation

87

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

88

Item 13.

Certain Relationships and Related Transactions, and Director Independence

88

Item 14.

Principal Accounting Fees and Services

88

 

 

 

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules

89

 



Table of Contents

 

PART I

 

Item 1.  Business

 

General

 

Papa John’s International, Inc., a Delaware corporation (referred to as the “Company”, “Papa John’s” or in the first person notations of “we”, “us” and “our”) operates and franchises pizza delivery and carryout restaurants and, in certain international markets, dine-in and delivery restaurants under the trademark “Papa John’s”.  Papa John’s began operations in 1984.  At December 27, 2015, there were 4,893 Papa John’s restaurants in operation, consisting of 752 Company-owned and 4,141 franchised restaurants operating domestically in all 50 states and in 39 countries and territories. Our Company-owned restaurants include 213 restaurants operated under four joint venture arrangements and 45 units in Beijing and North China.

 

Papa John’s has defined five reportable segments: domestic Company-owned restaurants, domestic commissaries (Quality Control Centers), North America franchising, international operations, and “all other” business units. North America is defined as the United States and Canada. Domestic is defined as the contiguous United States. International franchisees are defined as all franchise operations outside of the United States and Canada. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 20” of “Notes to Consolidated Financial Statements” for financial information about our segments.

 

All of our periodic and current reports filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), are available, free of charge, through our website located at www.papajohns.com, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. Those documents are available through our website as soon as reasonably practicable after we electronically file them with the SEC. We also make available free of charge on our website our Corporate Governance Guidelines, Board Committee Charters, and our Code of Ethics, which applies to Papa John’s directors, officers and employees. Printed copies of such documents are also available free of charge upon written request to Investor Relations, Papa John’s International, Inc., P.O. Box 99900, Louisville, KY 40269-0900. You may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. This information is also available at www.sec.gov. The references to these website addresses do not constitute incorporation by reference of the information contained on the websites, which should not be considered part of this document.

 

Strategy

 

Our goal is to build the strongest brand loyalty in the pizza industry. Recognized as a trusted brand and quality leader in the domestic pizza category, we endeavor to build our brand on a global basis.  The key elements of our strategy include:

 

High-Quality Menu Offerings. Our menu strategy focuses on the quality of our ingredients.  Domestic Papa John’s restaurants offer high-quality pizza along with side items, including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. Papa John’s traditional crust pizza is prepared using fresh dough (never frozen). Papa John’s pizzas are made from a proprietary blend of wheat flour, 100% real cheese made from mozzarella, fresh-packed pizza sauce made from vine-ripened tomatoes (not from concentrate) and a proprietary mix of savory spices, and a choice of high-quality meat and vegetable toppings. Our traditional crust pizza is delivered with a container of our

 

1



Table of Contents

 

special garlic sauce and a pepperoncini pepper. In addition to our fresh dough traditional crust pizza, we offer a thin crust pizza, which is a par-baked product produced by a third-party vendor. Each thin crust pizza is served with a packet of special seasonings and a pepperoncini pepper.

 

Domestically, all ingredients and toppings can be purchased by our Company-owned and franchised restaurants from our Quality Control Center (“QC Center”) system, which delivers to individual restaurants twice weekly. To ensure consistent food quality, each domestic franchisee is required to purchase dough and tomato sauce from our QC Centers and to purchase all other supplies from our QC Centers or other approved suppliers. Internationally, the menu may be more diverse than in our domestic operations to meet local tastes and customs. Most QC Centers outside the U.S. are operated by franchisees pursuant to license agreements or by other third parties. The Company operates three international QC Centers in Mexico, the United Kingdom and China. We provide significant assistance to licensed international QC Centers in sourcing approved quality suppliers. All of the QC Centers are required to meet food safety and quality standards and to be in compliance with all applicable laws.

 

We continue to test new product offerings both domestically and internationally, including limited time offering pizzas. The new products can become a part of the permanent menu if they meet certain established guidelines.

 

Efficient Operating System. We believe our operating and distribution systems, restaurant layout and designated delivery areas result in lower restaurant operating costs and improved food quality, and promote superior customer service. Our QC Center system takes advantage of volume purchasing of food and supplies and provides consistency and efficiencies of scale in fresh dough production. This eliminates the need for each restaurant to order food from multiple vendors and commit substantial labor and other resources to dough preparation.

 

Commitment to Team Member Training and Development. We are committed to the development and motivation of our team members through training programs, incentive and recognition programs and opportunities for advancement. Team member training programs are conducted for corporate restaurant team members, and operational training is offered to our franchisees. We offer performance-based financial incentives to corporate team members and restaurant managers.

 

Marketing. Our domestic marketing strategy consists of both national and local components. Our national strategy includes national advertising via television, print, direct mail, digital, mobile marketing and social media channels. Our online and digital marketing activities have increased significantly over the past several years in response to increasing consumer use of online and mobile web technology. Local advertising programs include television, radio, and print materials. We strive to efficiently allocate resources among television, print, digital, and other media. We also integrate social media into our various marketing campaigns.

 

In international markets, our marketing focuses on reaching customers who live or work within a small radius of a Papa John’s restaurant. Our international markets use a combination of advertising strategies, including television, radio, digital, and print depending on the size of the local market.

 

Technology. We use technology to both enhance the customer experience and improve efficiencies in our Company-owned and franchised restaurants. Our proprietary digital ordering platform allows customers to order online. Our mobile ordering iPhone® and Android® applications support payment options such as Google Wallet®  and PayShare, a first-of-its-kind digital solution in the pizza industry that lets customers immediately split their pizza bill.  Our Papa Rewards® program is an eCommerce customer loyalty program designed to increase customer loyalty and frequency. In 2015, we upgraded our domestic proprietary point-of-sale technology, which we refer to as “FOCUS”.  We believe this technology facilitates fast and accurate order-taking and pricing and is an easy tool for restaurant operators to learn

 

2



Table of Contents

 

and use. The FOCUS system is also integrated with our digital ordering solutions in all domestic traditional Papa John’s restaurants, enabling Papa John’s to offer nationwide digital ordering to our customers.

 

Strong Franchise System. We are committed to developing and maintaining a strong franchise system by attracting experienced operators, supporting them to expand and grow their business and monitoring their compliance with our high standards. We seek to attract franchisees with experience in restaurant or retail operations and with the financial resources and management capability to open single or multiple locations. We devote significant resources to provide Papa John’s franchisees with assistance in restaurant operations, operations training, marketing, site selection and restaurant design.

 

Our strategy for global unit growth focuses on our strong unit economics model. We strive to eliminate barriers to expansion in existing international markets, and identify new expansion opportunities. Our growth strategy varies based on the maturity and penetration of the market and other factors in specific domestic and international markets, with overall unit growth expected to come increasingly from international markets.

 

Restaurant Sales and Investment Costs

 

We are committed to maintaining strong restaurant unit economics. In 2015, the 667 domestic Company-owned restaurants included in the full year’s comparable restaurant base generated average annual unit sales of $1.12 million. Our North American franchise restaurants, which included 2,351 restaurants in 2015, generated average annual unit sales of $858,000. North American franchise restaurant sales are lower than Company-owned restaurants as a higher percentage of our Company-owned restaurants are located in more heavily penetrated markets.

 

With few exceptions, domestic restaurants do not offer a dine-in area, which reduces our restaurant capital investment. The average cash investment for the 11 domestic traditional Company-owned restaurants opened during 2015, exclusive of land, was approximately $319,000 per unit, compared to the $283,000 investment for the 11 domestic traditional units opened in 2014, excluding tenant allowances that we received. Over the past few years we have experienced an increase in the cost of our new restaurants primarily as a result of building larger units to accommodate increased sales, an increase in the cost of certain equipment as a result of technology enhancements, and increased costs to comply with local regulations.

 

We define a “traditional” domestic Papa John’s restaurant as a delivery and carryout unit that services a defined trade area. We consider the location of a traditional restaurant to be important and therefore devote significant resources to the investigation and evaluation of potential sites. The site selection process includes a review of trade area demographics, target population density and competitive factors.  A member of our development team inspects each potential domestic Company-owned restaurant location and substantially all franchised restaurant locations before a site is approved. Papa John’s restaurants are typically located in strip shopping centers or freestanding buildings that provide visibility, curb appeal and accessibility. Our restaurant design can be configured to fit a wide variety of building shapes and sizes, which increases the number of suitable locations for our Company-owned and franchised restaurants. A typical traditional domestic Papa John’s restaurant averages 1,100 to 1,500 square feet with visible exterior signage.

 

“Non-traditional” Papa John’s restaurants generally do not provide delivery service but rather provide walk-up or carry out service to a captive customer group within a designated facility, such as a food court at an airport, university or military base or an event-driven service at facilities such as sports stadiums or entertainment venues. Non-traditional units are designed to fit the unique requirements of the venue and may not offer the full range of menu items available in our traditional restaurants.

 

3



Table of Contents

 

All of our international restaurants are franchised, except for 45 Company-owned restaurants in Beijing and North China. Generally, our international Papa John’s restaurants are slightly smaller than our domestic restaurants and average between 900 and 1,400 square feet; however, in order to meet certain local customer preferences, some international restaurants have been opened in larger spaces to accommodate both dine-in and restaurant-based delivery service, typically with 35 to 140 seats.

 

Development

 

A total of 357 Papa John’s restaurants were opened during 2015, consisting of 16 Company-owned and 341 franchised restaurants (106 in North America and 235 international), while 127 Papa John’s restaurants closed during 2015, consisting of six Company-owned (two in North America and four in Beijing) and 121 franchised restaurants (72 in North America and 49 international), representing net global unit growth of 230 restaurants.

 

Although most of our domestic Company-owned markets are well-penetrated, our Company-owned growth strategy is to continue to open domestic restaurants in existing markets as appropriate, thereby increasing consumer awareness and enabling us to take advantage of operational and marketing efficiencies. Our experience in developing markets indicates that market penetration through the opening of multiple restaurants in a particular market results in increased average restaurant sales in that market over time. We have co-developed domestic markets with some franchisees or divided markets among franchisees and will continue to utilize market co-development in the future, where appropriate.

 

Of the total 3,388 North American restaurants open as of December 27, 2015, 707 or 20.9% were Company-owned (including 213 units owned in joint venture arrangements with franchisees in which the Company has a majority ownership position). Operating Company-owned restaurants allows us to improve operations, training, marketing and quality standards, for the benefit of the entire system.  From time to time, we evaluate the purchase or sale of units in significant markets, which could change the percentage of Company-owned units.

 

Of the 1,505 international restaurants open as of December 27, 2015, 45 or 3.0% were Company-owned (all of which are located in Beijing and North China).  We plan to sell the 45 Company-owned China restaurants in the next 12 months. Accordingly, as of December 27, 2015, the Company’s China operations, including these restaurants and a commissary, are classified as held for sale in the accompanying consolidated financial statements.

 

During 2016, we expect net unit growth of approximately 180 to 210 units, with approximately 75% of openings in international franchised markets. International franchised unit expansion includes an emphasis on existing markets in Latin and South America, the United Kingdom, Europe and the Middle East.

 

QC Center System and Supply Chain Management

 

Our domestic QC Center system, comprised of ten full-service regional production and distribution centers, supplies pizza dough, food products, paper products, smallwares and cleaning supplies twice weekly to each traditional restaurant throughout the contiguous United States. This system enables us to monitor and control product quality and consistency, while lowering food and other costs. We evaluate the QC Center system capacity in relation to existing restaurants’ volumes and planned restaurant growth, and facilities are developed or upgraded as operational or economic conditions warrant. In 2016, we have plans to construct an additional domestic full-service production and distribution center in the Southeast Region of the United States.

 

4



Table of Contents

 

We own full-service international QC Centers in the United Kingdom, Mexico City, Mexico and Beijing, China. Other international QC Centers are licensed to franchisees or non-franchisee third parties and are generally located in the markets where our franchisees have restaurants.

 

We set quality standards for all products used in Papa John’s restaurants and designate approved outside suppliers of food and paper products that meet our quality standards.  To ensure product quality and consistency, all domestic Papa John’s restaurants are required to purchase tomato sauce and dough from QC Centers. Franchisees may purchase other goods directly from our QC Centers or other approved suppliers. National purchasing agreements with most of our suppliers generally result in volume discounts to us, allowing us to sell products to our restaurants at prices we believe are below those generally available to restaurants in the marketplace. Within our domestic QC Center system, products are distributed to restaurants by leased refrigerated trucks operated by us.

 

Marketing Programs

 

Our local restaurant-level marketing programs target consumers within the delivery area of each restaurant through the use of local television, radio, print materials, targeted direct mail, store-to-door flyers, digital display advertising, email marketing, text messages and local social media. Local marketing efforts also include a variety of community-oriented activities within schools, sports venues and other organizations supported with some of the same advertising vehicles mentioned above.

 

Domestic Company-owned and franchised Papa John’s restaurants within a defined market may be required to join an area advertising cooperative (“Co-op”). Each member restaurant contributes a percentage of sales to the Co-op for market-wide programs, such as television, radio, digital and print advertising, and sports sponsorships. The rate of contribution and uses of the monies collected are determined by a majority vote of the Co-op’s members. The contribution rate for Co-ops generally may not be below 2% of sales without approval from Papa John’s.

 

The restaurant-level and Co-op marketing efforts are supported by media, print, digital and electronic advertising materials that are produced by Papa John’s Marketing Fund, Inc. (“PJMF”). PJMF is an unconsolidated nonstock corporation designed to operate at break-even for the purpose of designing and administering advertising and promotional programs for all participating domestic restaurants. PJMF produces and buys air time for Papa John’s national television commercials, buys digital media such as banner advertising, paid search-engine advertising, mobile marketing, social media advertising and marketing, and SMS text and email.  It also engages in other brand-building activities, such as consumer research and public relations activities. Domestic Company-owned and franchised Papa John’s restaurants are required to contribute a certain minimum percentage of sales to PJMF.  The contribution rate to PJMF can be set at up to 3% of sales, if approved by the governing board of PJMF, and beyond that level if approved by a supermajority of domestic restaurants. The contribution rate has been 4% since 2011.

 

Our proprietary digital ordering platform allows customers to order online. Our eCommerce platforms include “plan ahead ordering,” Spanish-language ordering capability, Google Wallet® alternative payment and enhanced mobile web ordering for our customers, including Papa John’s iPhone® and Android® applications. In April 2015, we introduced PayShare, a first-of-its-kind digital solution in the pizza industry that lets customers immediately split their pizza bill.  PayShare, powered by Venmo, provides our customers a safe and secure option to simply and easily split the check on any mobile or online order.  Our Papa Rewards® program is an eCommerce customer loyalty program designed to increase loyalty and frequency of consumer use of our eCommerce ordering platform. We receive a percentage-based fee from U.S. franchisees for online sales, in addition to royalties, to defray development and operating costs associated with our eCommerce ordering platform.

 

5



Table of Contents

 

Our domestic restaurants offer customers the opportunity to purchase a reloadable gift card referred to as the “Papa Card.” The Papa Card is sold as either a plastic gift card purchased in our restaurants, or an online digital card. We sell Papa Cards to consumers on our website and through third-party retailers.  We also sell cards in bulk to business entities and organizations. We continue to explore other Papa Card distribution opportunities. The Papa Card may be redeemed for delivery, carryout, and eCommerce orders and is accepted at all Papa John’s traditional domestic restaurants.

 

We provide both Company-owned and franchised restaurants with pre-approved marketing materials and catalogs for the purchase of uniforms and promotional items. We also provide direct marketing services to Company-owned and franchised restaurants using customer information gathered by our proprietary point-of-sale technology (see “Company Operations — Domestic Point-of-Sale Technology”). In addition, we provide database tools, templates and training for operators to facilitate local email marketing and text messaging through our approved tools.

 

In international markets, our marketing focuses on customers who live or work within a small radius of a Papa John’s restaurant. Certain markets can effectively use television and radio as part of their marketing strategies. The majority of the marketing efforts include using print materials such as flyers, newspaper inserts, in-store marketing materials, and to a growing extent, digital marketing such as display, search engine marketing, social media, mobile marketing, email, and SMS text. Local marketing efforts, such as sponsoring or participating in community events, sporting events and school programs, are also used to build customer awareness.

 

Company Operations

 

Domestic Restaurant Personnel.  A typical Papa John’s Company-owned domestic restaurant employs a restaurant manager and approximately 20 to 25 hourly team members, many of whom work part-time. The manager is responsible for the day-to-day operation of the restaurant and maintaining Company-established operating standards. We seek to hire experienced restaurant managers and staff and provide comprehensive training programs in areas such as operations and managerial skills. We also employ directors of operations who are responsible for overseeing an average of seven Company-owned restaurants. Senior management and corporate staff also support the field teams in many areas, including, but not limited to, quality assurance, food safety, training, marketing and technology. We seek to motivate and retain personnel by providing opportunities for advancement and performance-based financial incentives.

 

Training and Education. The Global Operations Support and Training department is responsible for creating tools and materials for the operational training and development of both corporate and franchise team members. We believe training is very important to delivering consistent operational execution. Operations personnel complete our management training program and ongoing development programs, including multi-unit training, in which instruction is given on all aspects of our systems and operations.

 

Domestic Point-of-Sale Technology. Our proprietary point-of-sale technology, “FOCUS”, is in place in all North America traditional Papa John’s restaurants. We believe this technology facilitates fast and accurate order-taking and pricing, and allows the restaurant manager to better monitor and control food and labor costs, including food inventory management and order placement from the domestic QC Centers. The system allows us to obtain restaurant operating information, providing us with timely access to sales and customer information. The FOCUS system is also integrated with our digital ordering solutions in all domestic traditional Papa John’s restaurants, enabling Papa John’s to offer nationwide digital ordering to our customers.

 

Domestic Hours of Operation.  Our domestic restaurants are open seven days a week, typically from 11:00 a.m. to 12:30 a.m. Monday through Thursday, 11:00 a.m. to 1:30 a.m. on Friday and Saturday and

 

6



Table of Contents

 

12:00 noon to 11:30 p.m. on Sunday. Carry out hours are generally more limited for late night, for security purposes.

 

Franchise Program

 

General. We continue to attract franchisees with significant restaurant and retail experience. We consider our franchisees to be a vital part of our system’s continued growth and believe our relationship with our franchisees is good. As of December 27, 2015, there were 4,141 franchised Papa John’s restaurants operating in all 50 states and 39 countries and territories.  During 2015, our franchisees opened an additional 341 (106 North America and 235 international) restaurants.  As of December 27, 2015, we have development agreements with our franchisees for approximately 200 additional North America restaurants, the majority of which are committed to open over the next two to three years, and agreements for approximately 940 additional international franchised restaurants, the majority of which are scheduled to open over the next six years. There can be no assurance that all of these restaurants will be opened or that the development schedule set forth in the development agreements will be achieved.

 

Approval. Franchisees are approved on the basis of the applicant’s business background, restaurant operating experience and financial resources. We seek franchisees to enter into development agreements for single or multiple restaurants. We require each franchisee to complete our training program or to hire a full-time operator who completes the training and has either an equity interest or the right to acquire an equity interest in the franchise operation. For most non-traditional operations and for operations outside the United States, we will allow an approved operator bonus plan to substitute for the equity interest.

 

North America Development and Franchise Agreements. We enter into development agreements with our franchisees in North America for the opening of a specified number of restaurants within a defined period of time and specified geographic area. Our standard domestic development agreement includes a fee of $25,000 before consideration of any incentives. The franchise agreement is generally executed once a franchisee secures a location. Our current standard franchise agreement requires the franchisee to pay a royalty fee of 5% of sales, and the majority of our existing franchised restaurants have a 5% royalty rate in effect.

 

Over the past several years, we have offered various development incentive programs for domestic franchisees to accelerate unit openings. Such incentives included the following for 2015 traditional openings: (1) waiver of the standard one-time $25,000 franchise fee if the unit opens on time in accordance with the agreed-upon development schedule, or a reduced fee of $5,000 if the unit opens late; (2) the waiver of some or all of the 5% royalty fee for a period of time; (3) a credit for a portion of the purchase of certain leased equipment; and (4) a credit to be applied toward a future food purchase, under certain circumstances. We believe the development incentive programs have accelerated unit openings and expect they will continue to do so in 2016.

 

Substantially all existing franchise agreements have an initial 10-year term with a 10-year renewal option. We have the right to terminate a franchise agreement for a variety of reasons, including a franchisee’s failure to make payments when due or failure to adhere to our policies and standards. Many state franchise laws limit our ability as a franchisor to terminate or refuse to renew a franchise.

 

We provide assistance to Papa John’s franchisees in selecting sites, developing restaurants and evaluating the physical specifications for typical restaurants. We provide layout and design services and recommendations for subcontractors, signage installers and telephone systems to Papa John’s franchisees. Our franchisees can purchase complete new store equipment packages through an approved third-party supplier. We sell replacement smallwares and related items to our franchisees. Each franchisee is responsible for selecting the location for its restaurants but must obtain our approval of restaurant design

 

7



Table of Contents

 

and location based on traffic accessibility and visibility of the site and targeted demographic factors, including population density, income, age and traffic.

 

Domestic Franchise Support Initiatives. From time to time, we offer discretionary support initiatives to our domestic franchisees, including:

 

·                  Performance-based incentives;

·                  Targeted royalty relief and local marketing support to assist certain identified franchisees or markets;

·                  Restaurant opening incentives; and

·                  Reduced-cost direct mail campaigns from Preferred Marketing Solutions (“Preferred,” our wholly owned print and promotions subsidiary).

 

In 2016, we plan to offer some or all of these domestic franchise support initiatives.

 

International Development and Franchise Agreements.  We opened our first franchised restaurant outside the United States in 1998. We define “international” as all markets outside the United States and Canada. In international markets, we have either a development agreement or a master franchise agreement with a franchisee for the opening of a specified number of restaurants within a defined period of time and specified geographic area. Under a master franchise agreement, the franchisee has the right to sub-franchise a portion of the development to one or more sub-franchisees approved by us. Under our current standard international development or master franchise agreement, the franchisee is required to pay total fees of $25,000 per restaurant: $5,000 at the time of signing the agreement and $20,000 when the restaurant opens or on the agreed-upon development date, whichever comes first. Additionally, under our current standard master franchise agreement, the master franchisee is required to pay $15,000 for each sub-franchised restaurant — $5,000 at the time of signing the agreement and $10,000 when the restaurant opens or on the agreed-upon development date, whichever comes first.

 

Our current standard international master franchise and development agreements provide for payment to us of a royalty fee of 5% of sales. For international markets with sub-franchise agreements, the effective sub-franchise royalty received by the Company is generally 3% of sales and the master franchisee generally receives a royalty of 2% of sales. The remaining terms applicable to the operation of individual restaurants are substantially equivalent to the terms of our domestic franchise agreement. From time to time, development agreements will be negotiated at other-than-standard terms for fees and royalties, and we may offer various development and royalty incentives to help drive net unit growth and results.

 

Non-traditional Restaurant Development. We had 228 non-traditional domestic restaurants at December 27, 2015. Non-traditional restaurants generally cover venues or areas not originally targeted for traditional unit development, and our franchised non-traditional restaurants have terms differing from the standard agreements.

 

Franchisee Loans. Selected domestic and international franchisees have borrowed funds from us, principally for the purchase of restaurants from us or other franchisees or for construction and development of new restaurants. Loans made to franchisees can bear interest at fixed or floating rates and in most cases are secured by the fixtures, equipment and signage of the restaurant and/or are guaranteed by the franchise owners. At December 27, 2015, net loans outstanding totaled $18.9 million. See “Note 11” of “Notes to Consolidated Financial Statements” for additional information.

 

Domestic Franchise Insurance Program. Our franchisees may elect to purchase various insurance policies, such as health, general liability, non-owned automobile and workers’ compensation insurance, through our wholly-owned insurance agency. The Company bears no liability under this program.

 

8



Table of Contents

 

Various third-party commercial insurance companies provide fully-insured coverage for these lines of business to franchisees participating in the franchise insurance program.

 

Domestic Franchise Training and Support. Our domestic field support structure consists of franchise business directors, each of whom is responsible for serving an average of 130 franchised units. Our franchise business directors maintain open communication with the franchise community, relaying operating and marketing information and new initiatives between franchisees and us. Franchise business directors report to division vice presidents, who report to the Vice President North America Franchise Operations.

 

Every franchisee is required to have a principal operator approved by us who satisfactorily completes our required training program. Principal operators for traditional restaurants are required to devote their full business time and efforts to the operation of the franchisee’s traditional restaurants. Each franchised restaurant manager is also required to complete our Company-certified management operations training program. Ongoing compliance with training is monitored by the Global Operations Support and Training team. Multi-unit franchisees are encouraged to appoint training store general managers or hire a full-time training coordinator certified to deliver Company-approved operational training programs.

 

International Franchise Operations Support. We employ or contract with international business directors who are responsible for supporting one or more franchisees. The international business directors usually report to regional vice presidents. Senior management and corporate staff also support the international field teams in many areas, including but not limited to food safety, quality assurance, marketing, technology, operations training and financial analysis.

 

Franchise Operations. All franchisees are required to operate their Papa John’s restaurants in compliance with our policies, standards and specifications, including matters such as menu items, ingredients, and restaurant design. Franchisees have full discretion in human resource practices, and generally have full discretion to determine the prices to be charged to customers, but we have the authority to set maximum price points for nationally advertised promotions.

 

Franchise Advisory Council. We have a Franchise Advisory Council (“FAC”) that consists of Company and franchisee representatives of domestic restaurants. We also have a franchise advisory council in the United Kingdom (“UK FAC”). The FAC and UK FAC and subcommittees hold regular meetings to discuss new product and marketing ideas, operations, growth and other business issues. From time to time, certain domestic franchisees have also formed a separate franchise association for the purpose of communicating and addressing issues, needs and opportunities among its members.

 

We currently communicate with, and receive input from, our franchisees in several forms, including through the FAC, UK FAC, annual operations conferences, system communications, national conference calls, various regional meetings conducted with franchisees throughout the year and ongoing communications from franchise business directors and international business directors in the field. Monthly webcasts are also conducted by the Company to discuss current operational, marketing or other issues affecting the domestic franchisees’ business. We are committed to communicating with our franchisees and receiving input from them.

 

Industry and Competition

 

The United States Quick Service Restaurant pizza (“QSR Pizza”) industry is mature and highly competitive with respect to price, service, location, food quality and product innovation. There are well-established competitors with substantially greater financial and other resources than Papa John’s. The category is largely fragmented and competitors include international, national and regional chains, as well as a large number of local independent pizza operators, any of which can utilize a growing number of

 

9



Table of Contents

 

food delivery services.  Some of our competitors have been in existence for substantially longer periods than Papa John’s and can have higher levels of restaurant penetration and stronger, more developed brand awareness in markets where we compete. According to industry sources, domestic QSR Pizza category sales, which includes dine-in, carry out and delivery, totaled approximately $33.8 billion in 2015, or an increase of 3% from the prior year.

 

With respect to the sale of franchises, we compete with many franchisors of restaurants and other business concepts. There is also active competition for management personnel and attractive commercial real estate sites suitable for Papa John’s restaurants.

 

Government Regulation

 

We, along with our franchisees, are subject to various federal, state, local and international laws affecting the operation of our respective businesses, including laws and regulations related to the preparation and sale of food, including food safety and menu labeling. Each Papa John’s restaurant is subject to licensing and regulation by a number of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining, or the failure to obtain, required licenses or approvals could delay or prevent the opening of a new restaurant in a particular area. Our QC Centers are licensed and subject to regulation by state and local health and fire codes, and the operation of our trucks is subject to federal and state transportation regulations. We are also subject to federal and state environmental regulations. In addition, our domestic system-wide restaurant operations are subject to various federal and state laws governing such matters as minimum wage requirements, benefits, working conditions, citizenship requirements, and overtime.

 

We are subject to Federal Trade Commission (“FTC”) regulation and various state laws regulating the offer and sale of franchises. The laws of several states also regulate substantive aspects of the franchisor-franchisee relationship. The FTC requires us to furnish to prospective franchisees a franchise disclosure document containing prescribed information. State laws that regulate the franchisor-franchisee relationship presently exist in a significant number of states and bills have been introduced in Congress from time to time that would provide for federal regulation of the U.S. franchisor-franchisee relationship in certain respects if such bills were enacted. The state laws often limit, among other things, the duration and scope of non-competition provisions and the ability of a franchisor to terminate or refuse to renew a franchise. Some foreign countries also have disclosure requirements and other laws regulating franchising and the franchisor-franchisee relationship. National, state and local government regulations or initiatives, including health care legislation, “living wage,” legislation imposing “joint employer liability” or other current or proposed regulations and increases in minimum wage rates affect Papa John’s as well as others within the restaurant industry. As we expand internationally, we are subject to applicable laws in each jurisdiction where franchised units are established.

 

We are increasingly subject to laws and regulations that require us to disclose calorie content and other specific content of our food, including, fat, trans fat, and salt content. The Patient Protection and Affordable Care Act of 2010 (ACA) requires us and many restaurant companies to disclose calorie information on their restaurant menus. The Food and Drug Administration has issued final rules to implement this provision beginning in December 2016 that would require restaurants to post the number of calories for most items on menus or menu boards and to make other nutritional information available. A number of states, counties and cities in which we do business have also enacted menu labeling laws. Government regulation of nutrition disclosure and advertising could result in increased costs of compliance and also impact consumer habits in a way that adversely impacts sales at our restaurants. For further information regarding governmental regulation, see Item 1A, Risk Factors.

 

10



Table of Contents

 

Trademarks, Copyrights and Domain Names

 

Our intellectual property rights are a significant part of our business. We have registered and continue to maintain federal registrations through the United States Patent and Trademark Office (the “USPTO”) for the marks PAPA JOHN’S, PIZZA PAPA JOHN’S & Design (our logo), BETTER INGREDIENTS. BETTER PIZZA., PIZZA PAPA JOHN’S BETTER INGREDIENTS. BETTER PIZZA. & Design, and PAPA REWARDS.  We also own federal registrations through the USPTO for several ancillary marks, principally advertising slogans. Moreover, we have registrations for and/or have applied for PIZZA PAPA JOHN’S & Design in more than 100 foreign countries and the European Community, in addition to international registrations for PAPA JOHN’S and PIZZA PAPA JOHN’S BETTER INGREDIENTS. BETTER PIZZA. & Design in various foreign countries.  From time to time, we are made aware of the use by other persons in certain geographical areas of names and marks that are the same as or substantially similar to our marks. It is our policy to pursue registration of our marks whenever possible and to vigorously oppose any infringement of our marks.

 

We hold copyrights in authored works used in our business, including advertisements, packaging, training, and promotional materials. In addition, we have registered and maintain Internet domain names, including “papajohns.com.”

 

Employees

 

As of December 27, 2015, we employed approximately 22,350 persons, of whom approximately 19,500 were restaurant team members, approximately 900 were restaurant management personnel, approximately 750 were corporate personnel and approximately 1,200 were QC Center and Preferred personnel. Most restaurant team members work part-time and are paid on an hourly basis. None of our team members are covered by a collective bargaining agreement. We consider our team member relations to be good.

 

Item 1A. Risk Factors

 

We are subject to various risks that could have a negative effect on our business, financial condition and results of operations. These risks could cause actual operating results to differ from those expressed in certain “forward looking statements” contained in this Form 10-K as well as in other Company communications. Before you invest in our securities you should carefully consider these risk factors together with all other information included in this Form 10-K and our other publicly filed documents.

 

Our profitability may suffer as a result of competition in our industry.

 

The QSR Pizza industry is mature and highly competitive. Competition is based on price, service, location, food quality, brand recognition and loyalty, product innovation, effectiveness of marketing and promotional activity, use of technology, and the ability to identify and satisfy consumer preferences. From time to time, we may need to reduce the prices for some of our products to respond to competitive and customer pressures, which may adversely affect our profitability. Additionally, when commodity and other costs increase, we may be limited in our ability to increase prices. With the significant levels of competition we may be required to increase investment spending in several areas including marketing and technology, which can decrease profitability.

 

In addition to competition with our larger and more established competitors who have substantially greater financial and other resources then we do, we also face competition from new competitors and concepts such as fast casual pizza concepts. We also face additional competitive pressures from food delivery concepts using new delivery technologies, some of which may have more effective marketing.  The emergence or growth of new competitors may make it difficult for us to maintain or increase our market share and could negatively impact our sales and our system-wide restaurant operations.

 

11



Table of Contents

 

One of our competitive strengths is our Better Ingredients, Better Pizza brand promise. This means that we may use ingredients which cost more than the ingredients some of our competitors may use. Because of our investment in higher quality ingredients, we could have lower profit margins than some of our competitors if we are not able to maintain premium pricing for our products.

 

Changes in consumer preferences or discretionary consumer spending could adversely impact our results.

 

Changes in consumer preferences and trends (for example, changes in dietary preferences that could cause consumers to avoid pizza or some of its ingredients in favor of foods that are perceived as more healthful, lower-calorie or otherwise based on their ingredients or nutritional content) or preferences for a dining experience such as fast casual pizza concepts, could adversely affect our restaurant business. Also, our success depends to a significant extent on numerous factors affecting consumer confidence and discretionary consumer income and spending, such as general economic conditions and the level of employment. Any factors that could cause consumers to spend less on food or shift to lower-priced products could reduce sales or inhibit our ability to maintain or increase pricing, either of which could materially adversely affect our results of operations.

 

Food safety and quality concerns may negatively impact our business and profitability.

 

Incidents or reports of food- or water-borne illness or other food safety issues, investigations or other actions by food safety regulators, food contamination or tampering, employee hygiene and cleanliness failures, improper franchisee or employee conduct, or presence of communicable disease at our Company-owned and franchised restaurants, QC Centers, or suppliers could lead to product liability or other claims. If we were to experience any such incidents or reports, our brand and reputation could be negatively impacted. This could result in a significant decrease in customer traffic and could negatively impact our revenues and profits. Similar incidents or reports occurring at quick service restaurants unrelated to us could likewise create negative publicity, which could negatively impact consumer behavior towards us.

 

We rely on our domestic and international suppliers, as do our franchisees, to provide quality ingredients and to comply with applicable laws and industry standards. A failure of one of our domestic or international suppliers to meet our quality standards, or meet domestic or international food industry standards, could result in a disruption in our supply chain and negatively impact our brand and our business and profitability.

 

Our results depend upon our ability to differentiate our brand and our reputation for quality. Damage to our brand or reputation could negatively impact our business and financial results. Our brand has been highly rated in U.S. surveys, and we strive to build the value of our brand as we develop international markets. The value of our brand and demand for our products could be damaged by any incidents that harm consumer perceptions of the Company and our brand. As a result of the impact of social media, the value of our brand and the demand for our products could be quickly and seriously damaged due to the widespread publicity that can be associated with one or more of these incidents.

 

We may not be able to effectively market our products or maintain key marketing partnerships.

 

The success of our system-wide business depends on the effectiveness of our marketing and promotional plans. We may not be able to effectively execute our national or local marketing plans, particularly if lower sales result in reduced levels of funds from PJMF. Our marketing strategy utilizes relationships with well-known sporting events, athletes, celebrity personalities and our brand spokesman to market our products. Our business could suffer if we are not able to maintain key marketing relationships and sponsorships, or if we are unable to do so at a reasonable cost, and could require additional investments in

 

12



Table of Contents

 

alternative marketing strategies. Actions taken by persons endorsing our products that harm their reputations could also cause harm to our brand.

 

Changes in privacy law could adversely affect our ability to market our products effectively.

 

We rely on a variety of direct marketing techniques, including email, text messages and postal mailings. Any future restrictions in federal, state or foreign laws regarding marketing and solicitation or international data protection laws that govern these activities could adversely affect the continuing effectiveness of email, text messages and postal mailing techniques and could force changes in our marketing strategies. If this occurs, we may need to develop alternative marketing strategies, which could impact the amount and timing of our revenues.

 

We may not be able to execute our strategy or achieve our planned growth targets, which could negatively impact our business and our financial results.

 

Our growth strategy depends on our and our franchisees’ ability to open new restaurants and to operate them on a profitable basis. We expect substantially all of our international unit growth and much of our domestic unit growth to be franchised units. Accordingly, our profitability increasingly depends upon royalty revenues from franchisees. If our franchisees are not able to operate their businesses successfully under our franchised business model, our results could suffer. Additionally, we may fail to attract new qualified franchisees or existing franchisees may close underperforming locations. Planned growth targets and the ability to operate new and existing restaurants profitably are affected by economic, regulatory and competitive conditions and consumer buying habits. Increased commodity or operating costs, including, but not limited to, employee compensation and benefits or insurance costs, could slow the rate of new store openings or increase the number of store closings. Our business is susceptible to adverse changes in local, national and global economic conditions, which could make it difficult for us to meet our growth targets. Additionally, we or our franchisees may face challenges securing financing, finding suitable store locations at acceptable terms or securing required domestic or foreign government permits and approvals.

 

Our franchisees remain dependent on the availability of financing to remodel or renovate existing locations, upgrade systems and enhance technology, or construct and open new restaurants. From time to time, the Company may provide financing to certain franchisees and prospective franchisees in order to mitigate store closings, allow new units to open, or complete required upgrades. If we are unable or unwilling to provide such financing, which is a function of, among other things, a franchisee’s credit worthiness, the number of new restaurant openings may be slower than expected and our results of operations may be adversely impacted. To the extent we provide financing to franchisees in domestic and international markets, our results could be negatively impacted by negative performance of these franchisee loans.

 

If we do not meet our growth targets or the expectations of the market for net restaurant openings or our other strategic objectives, our stock price could decline.

 

We may be adversely impacted by increases in the cost of food ingredients and other costs.

 

We are exposed to fluctuations in commodities. An increase in the cost, or sustained high levels of the cost of cheese or other commodities could adversely affect the profitability of our system-wide restaurant operations, particularly if we are unable to increase the selling price of our products to offset increased costs. Cheese, representing our largest food cost, and other commodities can be subject to significant cost fluctuations due to weather, availability, global demand and other factors that are beyond our control. Additionally, increases in labor, mileage, insurance, and other costs, could adversely affect the profitability of our restaurant and QC Center businesses. Most of the factors affecting costs in our system-wide restaurant

 

13



Table of Contents

 

operations are beyond our control, and we may not be able to adequately mitigate these costs or pass along these costs to our customers or franchisees, given the significant competitive pricing pressure.

 

Our dependence on a sole supplier or a limited number of suppliers for some ingredients could result in disruptions to our business.

 

Domestic restaurants purchase substantially all food and related products from our QC Centers. We are dependent on Leprino Foods Dairy Products Company (“Leprino”) as our sole supplier for cheese, one of our key ingredients. Leprino, one of the major pizza category suppliers of cheese in the United States, currently supplies all of our cheese domestically and substantially all of our cheese internationally. While we have no other sole sources of supply for key ingredients, we do source other key ingredients from a limited number of suppliers. Alternative sources of supply of cheese or other key ingredients may not be available on a timely basis or may not be available on terms as favorable to us as under our current arrangements.

 

Our corporate and franchised restaurants could also be harmed by a prolonged disruption in the supply of products from or to our QC Centers due to weather, climate change, natural disasters, crop disease, labor dispute or interruption of service by carriers. In particular, adverse weather or crop disease affecting the California tomato crop could disrupt the supply of pizza sauce to our and our franchisees’ restaurants. Insolvency of key suppliers could also cause similar business interruptions and negatively impact our business.

 

Natural disasters or other catastrophic events may disrupt our operations or supply chain.

 

The occurrence of a natural disaster, epidemic, cyber attack or other catastrophic event may result in the closure of Company-owned or franchised restaurants, our corporate office, any of our QC Centers or the facilities of our suppliers, any of which could materially adversely affect our results of operations.

 

Changes in purchasing practices by our domestic franchisees could harm our commissary business.

 

Although our domestic franchisees currently purchase substantially all food products from our QC Centers, they are only required to purchase from our QC Centers tomato sauce, dough and other items we may designate as proprietary or integral to our system. Any changes in purchasing practices by domestic franchisees, which have become more sensitive to charges and other fees, such as seeking alternative approved suppliers of ingredients or other food products, could adversely affect the financial results of our QC Centers and the Company.

 

Our current insurance may not be adequate and we may experience claims in excess of our reserves.

 

Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability, property and team member health insurance coverage are funded by the Company up to certain retention levels, generally ranging from $100,000 to $500,000. These insurance programs or our program for cyber insurance may not be adequate to protect us, and it may be difficult or impossible to obtain additional coverage or maintain current coverage at a reasonable cost. We also have experienced increasing claims volatility and higher related costs for workers’ compensation, owned and non-owned automobiles and health claims. We estimate loss reserves based on historical trends, actuarial assumptions and other data available to us, but we may not be able to accurately estimate reserves. If we experience claims in excess of our projections, our business could be negatively impacted, and our franchisees could be similarly impacted by higher claims experience.

 

14



Table of Contents

 

Our international operations are subject to increased risks and other factors that may make it more difficult to achieve or maintain profitability or meet planned growth rates.

 

Our international operations could be negatively impacted by changes in international economic, political, security or health conditions in the countries in which the Company or our franchisees operate, especially in emerging markets. In addition, there are risks associated with differing business and social cultures and consumer preferences. We may also face limited availability for restaurant locations, higher location costs and difficulties in franchisee selection and financing. We may be subject to difficulties in sourcing and importing high-quality ingredients (and ensuring food safety) in a cost-effective manner, hiring and retaining qualified team members, marketing effectively and adequately investing in information technology, especially in emerging markets.

 

Our international operations are also subject to additional risk factors, including import and export controls, compliance with anti-corruption and other foreign laws, changes in tax laws, difficulties enforcing intellectual property and contract rights in foreign jurisdictions, and the imposition of increased or new tariffs or trade barriers. We intend to continue to expand internationally, which would make the risks related to our international operations more significant over time.

 

Our international results, which are substantially franchised, depend heavily on the operating capabilities and financial strength of our franchisees. Any changes in the ability of our franchisees to run their stores profitably in accordance with our operating procedures, or to effectively sub franchise stores, could result in brand damage, a higher number of restaurant closures and a reduction in the number of new restaurant openings. Our Company-owned store presence is currently limited to our stores in China, which are classified as held for sale. We may find it difficult to find a suitable buyer for our Company-owned stores in China in a timely fashion, or a new franchisee could develop the market more slowly than we anticipate, which could delay our growth in this market.

 

Foreign currency or interest rate risks could adversely affect our financial results.

 

Sales made by our franchisees in international markets are denominated in their local currencies, and fluctuations in the U.S. dollar occur relative to the local currencies. Accordingly, changes in currency exchange rates will cause our revenues and operating results to fluctuate. We have not historically hedged our exposure to foreign currency fluctuations. Our international revenues and earnings may be adversely impacted as the U.S. dollar rises against foreign currencies, because the local currency will translate into fewer U.S. dollars, which occurred in 2015. Additionally, the value of certain assets or loans denominated in local currencies may deteriorate. Other items denominated in U.S dollars including product imports or loans may also become more expensive, putting pressure on franchisees’ cash flows.

 

Under our revolving credit facility, we are exposed to variable interest rates. A significant increase in interest rates or total borrowings could adversely affect our profitability. Additionally, rising interest rates could impact our franchisees and their ability to open new restaurants or operate existing restaurants profitably.

 

Increasingly complex laws and regulations could adversely affect our business.

 

We operate in an increasingly complex regulatory environment, and the cost of regulatory compliance is increasing. Our failure, or the failure of any of our franchisees, to comply with applicable U.S. and international labor, health care, food, health and safety, consumer protection, anti-bribery and corruption, competition, environmental and other laws, may result in civil and criminal liability, damages, fines and penalties. Enforcement of existing laws and regulations, changes in legal requirements, and/or evolving interpretations of existing regulatory requirements may result in increased compliance costs and create other obligations, financial or otherwise, that could adversely affect our business, financial condition or operating results. Increased regulatory scrutiny of, and increased litigation and enforcement actions involving food matters and product marketing claims, may increase compliance and legal costs and create other obligations that could adversely affect our business, financial condition or operating results. Governments may also impose requirements and restrictions that impact our business. For example, some

 

15



Table of Contents

 

local government agencies have implemented ordinances that restrict the sale of certain food or drink products.

 

Compliance with new or additional government laws or regulations, including menu labeling requirements, could increase costs and be harmful to system-wide restaurant sales. Non-compliance with laws or government regulations could result in enforcement actions or investigations and could have an adverse impact on our financial performance and our reputation.

 

In addition, a change in our tax rates, or new tax legislation impacting our business or the restaurant industry could negatively impact our results.

 

Changes in employment and labor laws, including health care legislation and minimum wage increases, could increase costs for our system-wide operations.

 

We are subject to federal, state and foreign laws governing such matters as minimum wage requirements, overtime compensation, benefits, working conditions, citizenship requirements and discrimination and family and medical leave. Labor costs and labor-related benefits are primary components in the cost of operation of our domestic system-wide restaurants and QC Centers.  Labor shortages, increased employee turnover and health care mandates could increase our system-wide labor costs.

 

A significant number of hourly personnel are paid at rates closely related to the federal and state minimum wage requirements. Accordingly, the enactment of additional state or local minimum wage increases above federal wage rates or proposed Department of Labor regulations related to exempt employees could increase labor costs for our domestic system-wide operations. Additionally, social media may be used to foster negative perceptions of employment in our industry and promote strikes or boycotts.

 

The Affordable Care Act, enacted in 2010, requires employers such as us to provide health insurance for all qualifying employees in the United States or pay penalties for not providing coverage. We, like other industry competitors, are complying with the law and are providing more extensive health benefits to employees than we had previously provided, and are subsidizing a larger portion of their insurance premiums. These additional costs could negatively impact our operational results. In addition, our franchisees subject to the ACA could face additional cost pressures from compliance with the legislation, which could reduce their future expansion of units.

 

Failure to retain the services of our Founder, John Schnatter, as Chief Executive Officer, Chairman and brand spokesman, or to successfully execute succession planning, could harm our Company and brand.

 

John H. Schnatter, our Founder, Chairman and Chief Executive Officer, does not serve under an employment agreement, and we do not maintain key man life insurance on Mr. Schnatter. We also depend on the continued availability of Mr. Schnatter’s image and his services as spokesman in our advertising and promotion materials. While we have entered into a license agreement with Mr. Schnatter related to the use of certain intellectual property related to his name, likeness and image, our business and brand may be harmed if Mr. Schnatter’s services were not available to the Company for any reason or the reputation of Mr. Schnatter were negatively impacted. In addition, failure to effectively execute succession planning with respect to Mr. Schnatter and other senior leaders could harm our Company and brand.

 

The concentration of stock ownership with Mr. Schnatter may influence the outcome of certain matters requiring stockholder approval.

 

The concentration of stock ownership by our Founder, Chairman and Chief Executive Officer allows him to substantially influence the outcome of certain matters requiring stockholder approval. As of December 27, 2015, he beneficially

 

16



Table of Contents

 

owned approximately 27% of our outstanding common stock. As a result, he may be able to substantially influence the strategic direction of the Company and the outcome of matters requiring approval by our stockholders.

 

We rely on information technology to operate our businesses and maintain our competitiveness, and any failure to invest in or adapt to technological developments or industry trends could harm our business.

 

We rely heavily on information systems, including digital ordering solutions, through which approximately half of our domestic sales originate. We also rely heavily on point-of-sale processing in our Company-owned and franchised restaurants for data collection and payment systems for the collection of cash, credit and debit card transactions, and other processes and procedures. Our ability to efficiently and effectively manage our business depends on the reliability and capacity of these technology systems. In addition, we anticipate that consumers will continue to have more options to place orders digitally, both domestically and internationally. Our failure to adequately invest in new technology, adapt to technological developments and industry trends, particularly our digital ordering capabilities, could result in a loss of customers and related market share. Additionally, we are in an environment where the technology life cycle is short which requires continued reinvestments in technology and increases the risk that our technology may not be customer centric or could become obsolete, inefficient or otherwise incompatible with other systems.

 

We rely heavily on our international franchisees to maintain their own point-of-sale and on line ordering systems, which are often purchased from third party vendors.

 

Disruptions of our critical business or information technology systems could harm our ability to compete and conduct our business.

 

Our critical business and information technology systems could be damaged or interrupted by power loss, various technological failures, user errors, sabotage or acts of God. In particular, we may experience occasional interruptions of our digital ordering solutions, which make online ordering unavailable or slow to respond, negatively impacting sales and the experience of our customers. If our digital ordering solutions do not perform with adequate speed, our customers may be less inclined to return to our digital ordering solutions.

 

Part of our technology infrastructure, such as our FOCUS point-of-sale system, is specifically designed for us and our operational systems, which could cause unexpected costs, delays or inefficiencies when infrastructure upgrades are needed or prolonged and widespread technological difficulties occur. Significant portions of our technology infrastructure are provided by third parties, and the performance of these systems is largely beyond our control. Failure of our third-party systems, and backup systems, to adequately perform, particularly as our online sales grow, could harm our business and the satisfaction of our customers. In addition, we may not have or be able to obtain adequate protection or insurance to mitigate the risks of these events or compensate for losses related to these events, which could damage our business and reputation and be expensive and difficult to remedy or repair.

 

Failure to maintain the integrity of internal or customer data could result in damages to our reputation, loss of sales, and/or subject us to litigation, penalties or significant costs.

 

We are subject to a number of privacy and data protection laws and regulations. Our business requires the collection and retention of large volumes of internal and customer data, including credit card data and other personally identifiable information of our employees and customers housed in the various information systems we use. Constantly changing cyber security threats pose risks to the security of our systems and networks, and the confidentiality of our data.  As techniques used in cyber attacks evolve, we may not be able to timely detect threats or anticipate and implement security measures. The integrity and

 

17



Table of Contents

 

protection of that customer, employee, franchisee and Company data are critical to us. The failure to prevent fraud or security breaches or to adequately invest in data security could harm our business and revenues due to the reputational damage to our brand. Such a breach could also result in litigation, regulatory actions, penalties, and other significant costs to us and have a material adverse effect on our financial results. These costs could be well in excess of our cyber insurance coverage.

 

We have been and will continue to be subject to various types of investigations and litigation, including collective and class action litigation, which could subject us to significant damages or other remedies.

 

We are subject to the risk of investigations and litigation from various parties, including vendors, customers, franchisees, state and federal agencies, stockholders and employees. From time to time, we are involved in a number of lawsuits, claims, investigations, and proceedings consisting of intellectual property, employment, consumer, personal injury, commercial and other matters arising in the ordinary course of business. We have been subject to claims in cases containing collective and class action allegations. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss and defense costs relating to such lawsuits may not be accurately estimated. Litigation trends involving the relationship between franchisors and franchisees, personal injury claims, employment law and intellectual property may increase our cost of doing business. We evaluate all of the claims and proceedings involving us to assess the expected outcome, and where possible, we estimate the amount of potential losses to us. In many cases, particularly collective and class action cases, we may not be able to estimate the amount of potential losses and/or our estimates may prove to be insufficient. These assessments are made by management based on the information available at the time made and require the use of a significant amount of judgment, and actual outcomes or losses may materially differ. Regardless of whether any claims against us are valid, or whether we are ultimately held liable, such litigation may be expensive to defend and may divert resources away from our operations and negatively impact earnings. Further, we may not be able to obtain adequate insurance to protect us from these types of litigation matters or extraordinary business losses.

 

We may not be able to adequately protect our intellectual property rights, which could negatively affect our results of operations.

 

We depend on the Papa John’s brand name and rely on a combination of trademarks, service marks, copyrights, and similar intellectual property rights to protect and promote our brand. We believe the success of our business depends on our continued ability to exclusively use our existing marks to increase brand awareness and further develop our brand, both domestically and abroad. We may not be able to adequately protect our intellectual property rights, and we may be required to pursue litigation to prevent consumer confusion and preserve our brand’s high-quality reputation. Litigation could result in high costs and diversion of resources, which could negatively affect our results of operations, regardless of the outcome.

 

We may be subject to impairment charges.

 

Impairment charges are possible due to the nature and timing of decisions we make about underperforming assets or markets, or if previously opened or acquired restaurants perform below our expectations. This could result in a decrease in our reported asset value and reduction in our net income.

 

18



Table of Contents

 

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 2.  Properties

 

As of December 27, 2015, there were 4,893 Papa John’s restaurants system-wide. The following tables provide the locations of our restaurants. We define “North America” as the United States and Canada and “domestic” as the contiguous United States.

 

North America Restaurants:

 

 

 

Company

 

Franchised

 

Total

 

Alabama

 

 

83

 

83

 

Alaska

 

 

10

 

10

 

Arizona

 

39

 

39

 

78

 

Arkansas

 

 

27

 

27

 

California

 

 

210

 

210

 

Colorado

 

32

 

19

 

51

 

Connecticut

 

 

17

 

17

 

Delaware

 

 

16

 

16

 

District of Columbia

 

 

10

 

10

 

Florida

 

47

 

235

 

282

 

Georgia

 

95

 

65

 

160

 

Hawaii

 

 

15

 

15

 

Idaho

 

 

11

 

11

 

Illinois

 

8

 

106

 

114

 

Indiana

 

41

 

89

 

130

 

Iowa

 

 

24

 

24

 

Kansas

 

15

 

20

 

35

 

Kentucky

 

44

 

70

 

114

 

Louisiana

 

 

62

 

62

 

Maine

 

 

6

 

6

 

Maryland

 

60

 

42

 

102

 

Massachusetts

 

 

24

 

24

 

Michigan

 

 

54

 

54

 

Minnesota

 

33

 

17

 

50

 

Mississippi

 

 

29

 

29

 

Missouri

 

42

 

32

 

74

 

Montana

 

 

9

 

9

 

Nebraska

 

 

17

 

17

 

Nevada

 

 

20

 

20

 

New Hampshire

 

 

4

 

4

 

New Jersey

 

 

64

 

64

 

New Mexico

 

 

19

 

19

 

New York

 

 

97

 

97

 

North Carolina

 

99

 

83

 

182

 

North Dakota

 

 

7

 

7

 

Ohio

 

 

163

 

163

 

Oklahoma

 

 

31

 

31

 

Oregon

 

 

15

 

15

 

Pennsylvania

 

 

96

 

96

 

Rhode Island

 

 

5

 

5

 

South Carolina

 

8

 

65

 

73

 

South Dakota

 

 

13

 

13

 

 

19



Table of Contents

 

North America Restaurants (continued):

 

 

 

Company

 

Franchised

 

Total

 

Tennessee

 

31

 

82

 

113

 

Texas

 

87

 

199

 

286

 

Utah

 

 

32

 

32

 

Vermont

 

 

1

 

1

 

Virginia

 

26

 

117

 

143

 

Washington

 

 

54

 

54

 

West Virginia

 

 

21

 

21

 

Wisconsin

 

 

28

 

28

 

Wyoming

 

 

9

 

9

 

Total U.S. Papa John’s Restaurants

 

707

 

2,583

 

3,290

 

Canada

 

 

98

 

98

 

Total North America Papa John’s Restaurants

 

707

 

2,681

 

3,388

 

 

International Restaurants:

 

Azerbaijan

 

 

4

 

4

 

Bahrain

 

 

21

 

21

 

Belarus

 

 

4

 

4

 

Bolivia

 

 

2

 

2

 

Cayman Islands

 

 

2

 

2

 

Chile

 

 

42

 

42

 

China

 

45

 

199

 

244

 

Colombia

 

 

26

 

26

 

Costa Rica

 

 

21

 

21

 

Cyprus

 

 

8

 

8

 

Dominican Republic

 

 

14

 

14

 

Ecuador

 

 

16

 

16

 

Egypt

 

 

33

 

33

 

El Salvador

 

 

18

 

18

 

Guam

 

 

3

 

3

 

Guatemala

 

 

9

 

9

 

India

 

 

72

 

72

 

Ireland

 

 

65

 

65

 

Jordan

 

 

9

 

9

 

Kuwait

 

 

31

 

31

 

Malaysia

 

 

21

 

21

 

Mexico

 

 

89

 

89

 

Nicaragua

 

 

4

 

4

 

Oman

 

 

9

 

9

 

Panama

 

 

10

 

10

 

Peru

 

 

32

 

32

 

Philippines

 

 

18

 

18

 

Puerto Rico

 

 

23

 

23

 

Qatar

 

 

20

 

20

 

Russia

 

 

71

 

71

 

Saudi Arabia

 

 

33

 

33

 

Singapore

 

 

1

 

1

 

 

20



Table of Contents

 

International Restaurants (continued):

 

 

 

Company

 

Franchised

 

Total

 

South Korea

 

 

102

 

102

 

Trinidad

 

 

6

 

6

 

Turkey

 

 

22

 

22

 

United Arab Emirates

 

 

41

 

41

 

United Kingdom

 

 

319

 

319

 

Venezuela

 

 

40

 

40

 

Total International Papa John’s Restaurants

 

45

 

1,460

 

1,505

 

 

Note: Company-owned Papa John’s restaurants include restaurants owned by majority-owned subsidiaries. There were 213 such restaurants at December 27, 2015 (32 in Colorado, 35 in Maryland, 33 in Minnesota, 87 in Texas, and 26 in Virginia).

 

Most Papa John’s Company-owned restaurants are located in leased space. The initial term of most domestic restaurant leases is generally five years with most leases providing for one or more options to renew for at least one additional term. Generally, the leases are triple net leases, which require us to pay all or a portion of the cost of insurance, taxes and utilities. Additionally, we lease our Company-owned restaurant sites in Beijing and North China. At December 27, 2015, we leased and subleased to franchisees in the United Kingdom 231 of the 319 franchised Papa John’s restaurant sites. The initial lease terms on the franchised sites in the United Kingdom are generally 10 to 15 years. The initial lease terms of the franchisee subleases are generally five to ten years.

 

Seven of our ten domestic QC Centers are located in leased space, including the following locations: Raleigh, NC; Denver, CO; Phoenix, AZ; Des Moines, IA; Portland, OR; Pittsburgh, PA; and Cranbury, NJ.  We are party to a lease for an eleventh QC Center in Acworth, GA that is expected to open in 2017. Our remaining three locations are in buildings we own, located in: Orlando, FL; Dallas, TX; and Louisville, KY. Additionally, our corporate headquarters and our printing operations are located in Louisville, KY in buildings owned by us. Internationally, we own a full-service QC Center and lease office space in the United Kingdom.  We also lease our QC Centers and office space in Beijing, China and Mexico City, Mexico.

 

Item 3.  Legal Proceedings

 

The Company is involved in a number of lawsuits, claims, investigations and proceedings, including those specifically identified below, consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with Accounting Standards Codification (“ASC”) 450, “Contingencies,” the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s consolidated financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

 

Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. is a conditionally certified collective and class action filed in August 2009 in the United States District Court, Eastern District of Missouri (“the Court”), alleging that delivery drivers were not properly reimbursed for mileage and expenses in accordance with the Fair Labor Standards Act (“FLSA”). Approximately 3,900 drivers out of a potential class size of 28,800 opted into the action. In December 2013, the Court granted a motion for class certification in five additional states, which added approximately 15,000 plaintiffs to the case. The parties reached a settlement in principle, which was preliminarily approved by the Court in September 2015. With the preliminary settlement agreement, the Company recorded a pre-tax expense of $12.3 million in

 

21



Table of Contents

 

June 2015 under the provisions of ASC 450, Contingencies. This amount is separately reported as Legal settlement expense in the consolidated statements of income.  The Court issued its final order approving the settlement on January 12, 2016, with no changes to the previously recorded expense. The Company then remitted funds to the administrator for the payment of claims and plaintiffs’ attorney fees. The Company continues to deny any wrongdoing in this matter.

 

Item 4.  Mine Safety Disclosures

 

None.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Set forth below are the current executive officers of Papa John’s:

 

Name

 

Age (a)

 

Position

 

First Elected
Executive Officer

 

 

 

 

 

 

 

John H. Schnatter

 

54

 

Founder, Chairman and Chief Executive Officer

 

1985

 

 

 

 

 

 

 

Steve M. Ritchie

 

41

 

President and Chief Operating Officer

 

2012

 

 

 

 

 

 

 

Timothy C. O’Hern

 

52

 

Senior Vice President and Chief Development Officer

 

2005

 

 

 

 

 

 

 

Lance F. Tucker

 

46

 

Senior Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer

 

2011

 


(a) Ages are as of January 1, 2016.

 

John H. Schnatter created the Papa John’s concept and started operations in 1984. He currently serves as Founder, Chairman and Chief Executive Officer. He previously served as Interim Chief Executive Officer from December 2008 to April 2009, Executive Chairman of the Company from 2005 until May 2007, as Chairman of the Board and Chief Executive Officer from 1990 until 2005, and as President from 1985 to 1990, from 2001 until 2005 and from 2014 to 2015.

 

Steve M. Ritchie was appointed President and Chief Operating Officer in July 2015 after serving as Senior Vice President and Chief Operating Officer since May 2014. Mr. Ritchie has served as a Senior Vice President since May 2013 and in various capacities of increasing responsibility over Global Operations & Global Operations Support and Training since July 2010. Since 2006, he also has served as a franchise owner and operator of multiple units in the Company’s Midwest Division.

 

Timothy C. O’Hern was appointed Senior Vice President and Chief Development Officer in July 2012. He previously served as Senior Vice President, Development since June 2009, a position he previously held from 2005 until 2007. From 2002 until 2005 and from 2007 until 2009, he managed the operations of a Papa John’s franchisee in which he has an ownership interest. Prior to his departure from Papa John’s in 2002, Mr. O’Hern held various positions, including Vice President of Global Development from February 2001 to 2002, Vice President of U.S. Development from March 1997 to February 2001, Director of

 

22



Table of Contents

 

Franchise Development from December 1996 to March 1997 and Construction Manager from November 1995 to December 1996. He has been a franchisee since 1993.

 

Lance F. Tucker was appointed Chief Administrative Officer in July 2012 and Chief Financial Officer and Treasurer in February 2011. Mr. Tucker previously held the positions of Chief of Staff and Senior Vice President, Strategic Planning from June 2010 to February 2011, after serving as Chief of Staff and Vice President, Strategic Planning since June 2009. Mr. Tucker was previously employed by the Company from 1994 to 1999 working in its finance department. From 2003 to 2009, Mr. Tucker served as Chief Financial Officer of Evergreen Real Estate, a company owned by John Schnatter. Mr. Tucker is a licensed Certified Public Accountant.

 

There are no family relationships between any of the directors or executive officers of the Company.

 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock trades on The NASDAQ Global Select Market tier of The NASDAQ Stock Market under the symbol PZZA. As of February 16, 2016, there were 785 record holders of common stock. However, there are significantly more beneficial owners of our common stock than there are record holders. The following table sets forth, for the quarters indicated, the high and low sales prices of our common stock, as reported by The NASDAQ Stock Market, and dividends declared per common share:

 

2015

 

High

 

Low

 

Dividends
Declared
per Share

 

First Quarter

 

$

65.96

 

$

55.15

 

$

0.140

 

Second Quarter

 

76.38

 

60.06

 

0.140

 

Third Quarter

 

79.40

 

63.96

 

0.175

 

Fourth Quarter

 

74.52

 

53.65

 

0.175

 

 

2014

 

High

 

Low

 

Dividends
Declared
per Share

 

First Quarter

 

$

55.00

 

$

44.95

 

$

0.125

 

Second Quarter

 

52.72

 

40.00

 

0.125

 

Third Quarter

 

45.50

 

37.32

 

0.140

 

Fourth Quarter

 

57.00

 

39.49

 

0.140

 

 

Our Board of Directors declared a quarterly dividend of $0.175 per share on January 27, 2016 that was payable on February 19, 2016 to shareholders of record at the close of business on February 8, 2016.

 

We anticipate continuing the payment of quarterly cash dividends. The actual amount of such dividends is subject to declaration by our Board of Directors and will depend upon future earnings, results of operations, capital requirements, our financial condition and other relevant factors. There can be no assurance that the Company will continue to pay quarterly cash dividends.

 

23



Table of Contents

 

Our Board of Directors has authorized the repurchase of up to $1.525 billion of common stock under a share repurchase program that began December 9, 1999, and expires February 28, 2017. This includes $125 million authorized in October 2015 and an additional $75 million authorized in February 2016. Through December 27, 2015, a total of 107.4 million shares with an aggregate cost of $1.3 billion and an average price of $12.24 per share have been repurchased under this program. Subsequent to year-end, we acquired an additional 860,000 shares at an aggregate cost of $42.6 million. Approximately $167.1 million remained available under the Company’s share repurchase program as of February 16, 2016.

 

The following table summarizes our repurchase activity by fiscal period during the fourth quarter ended December 27, 2015 (in thousands, except per share amounts):

 

 

 

 

 

 

 

Total Number

 

Maximum Dollar

 

 

 

Total

 

Average

 

of Shares Purchased

 

Value of Shares

 

 

 

Number

 

Price

 

as Part of Publicly

 

that May Yet Be

 

 

 

of Shares

 

Paid per

 

Announced Plans

 

Purchased Under the

 

Fiscal Period

 

Purchased

 

Share

 

or Programs

 

Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

09/28/2015 - 10/25/2015

 

174

 

$

68.76

 

106,992

 

$

237,335

 

10/26/2015 - 11/22/2015

 

171

 

$

63.53

 

107,163

 

$

226,466

 

11/23/2015 - 12/27/2015

 

292

 

$

57.46

 

107,455

 

$

209,681

 

 

Our share repurchase authorization increased from $1.45 billion to $1.525 billion in February 2016. For presentation purposes, the maximum dollar value of shares that may be purchased was adjusted retroactively to September 28, 2015.

 

The Company utilizes a written trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, from time to time to facilitate the repurchase of shares of our common stock under this share repurchase program. There can be no assurance that we will repurchase shares of our common stock either through a Rule 10b5-1 trading plan or otherwise.

 

24



Table of Contents

 

Stock Performance Graph

 

The following performance graph compares the cumulative shareholder return of the Company’s common stock for the five-year period between December 26, 2010 and December 27, 2015 to (i) the NASDAQ Stock Market (U.S.) Index and (ii) a group of the Company’s peers consisting of U.S. companies listed on NASDAQ with standard industry classification (SIC) codes 5800-5899 (eating and drinking places).  Management believes the companies included in this peer group appropriately reflect the scope of the Company’s operations and match the competitive market in which the Company operates. The graph assumes the value of the investments in the Company’s common stock and in each index was $100 on December 26, 2010, and that all dividends were reinvested.

 

 

25



Table of Contents

 

Item 6.  Selected Financial Data

 

The selected financial data presented for each of the fiscal years in the five-year period ended December 27, 2015, were derived from our audited consolidated financial statements. The selected financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Consolidated Financial Statements” and Notes thereto included in Item 7 and Item 8, respectively, of this Form 10-K.

 

 

 

Year Ended (1)

 

 

 

Dec. 27,

 

Dec. 28,

 

Dec. 29,

 

Dec. 30,

 

Dec. 25,

 

(In thousands, except per share data)

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

 

52 weeks

 

52 weeks

 

52 weeks

 

53 weeks

 

52 weeks

 

Income Statement Data

 

 

 

 

 

 

 

 

 

 

 

North America revenues:

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurant sales

 

$

756,307

 

$

701,854

 

$

635,317

 

$

592,203

 

$

525,841

 

Franchise royalties (2)

 

95,046

 

89,443

 

81,692

 

79,567

 

73,694

 

Franchise and development fees

 

1,010

 

726

 

1,181

 

806

 

722

 

Domestic commissary sales

 

615,610

 

629,492

 

578,870

 

545,924

 

508,155

 

Other sales

 

64,711

 

74,179

 

53,322

 

51,223

 

50,912

 

International revenues:

 

 

 

 

 

 

 

 

 

 

 

Royalties and franchise and development fees (3)

 

27,289

 

25,730

 

21,979

 

19,881

 

16,327

 

Restaurant and commissary sales (4)

 

77,402

 

76,725

 

66,661

 

53,049

 

42,231

 

Total revenues

 

1,637,375

 

1,598,149

 

1,439,022

 

1,342,653

 

1,217,882

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

136,307

 

117,630

 

106,503

 

99,807

 

87,017

 

Legal settlement expense

 

(12,278

)

 

 

 

 

Investment income

 

794

 

702

 

589

 

750

 

755

 

Interest expense

 

(5,676

)

(4,077

)

(983

)

(2,162

)

(2,981

)

Income before income taxes

 

119,147

 

114,255

 

106,109

 

98,395

 

84,791

 

Income tax expense

 

37,183

 

36,558

 

33,130

 

32,393

 

26,324

 

Net income before attribution to noncontrolling interests

 

81,964

 

77,697

 

72,979

 

66,002

 

58,467

 

Income attributable to noncontrolling interests (5)

 

(6,282

)

(4,382

)

(3,442

)

(4,342

)

(3,732

)

Net income attributable to the Company

 

$

75,682

 

$

73,315

 

$

69,537

 

$

61,660

 

$

54,735

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

75,422

 

$

72,869

 

$

68,497

 

$

61,660

 

$

54,735

 

Basic earnings per common share

 

$

1.91

 

$

1.78

 

$

1.58

 

$

1.31

 

$

1.09

 

Diluted earnings per common share

 

$

1.89

 

$

1.75

 

$

1.55

 

$

1.29

 

$

1.08

 

Basic weighted average common shares outstanding

 

39,458

 

40,960

 

43,387

 

46,916

 

50,086

 

Diluted weighted average common shares outstanding

 

40,000

 

41,718

 

44,243

 

47,810

 

50,620

 

Dividends declared per common share

 

$

0.63

 

$

0.53

 

$

0.25

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

494,912

 

$

504,555

 

$

464,291

 

$

438,408

 

$

390,382

 

Total debt

 

256,000

 

230,451

 

157,900

 

88,258

 

51,489

 

Mandatorily redeemable noncontrolling interests (6)

 

 

 

10,786

 

11,837

 

11,065

 

Redeemable noncontrolling interests

 

8,363

 

8,555

 

7,024

 

6,380

 

3,965

 

Total stockholders’ equity

 

42,206

 

98,715

 

138,184

 

181,514

 

205,647

 

 


(1)              We operate on a 52-53 week fiscal year ending on the last Sunday of December of each year. The 2012 fiscal year consisted of 53 weeks and all other years above consisted of 52 weeks. The additional week resulted in additional revenues of approximately $21.5 million and additional income before income taxes of approximately $4.1 million, or $0.05 per diluted share for 2012.

(2)              North America franchise royalties were derived from franchised restaurant sales of $2.13 billion in 2015, $2.04 billion in 2014, $1.91 billion in 2013, $1.85 billion in 2012 ($1.82 billion on a 52 week basis) and $1.71 billion in 2011.

(3)              International royalties were derived from franchised restaurant sales of $592.7 million in 2015, $553.0 million in 2014, $460.0 million in 2013, $388.4 million in 2012 ($379.4 million on a 52 week basis) and $320.0 million in 2011.

 

26



Table of Contents

 

(4)              Restaurant sales for international Company-owned restaurants were $19.3 million in 2015, $23.7 million in 2014, $22.7 million in 2013, $16.2 million in 2012 and $12.4 million in 2011.

(5)               Represents the noncontrolling interests’ allocation of income for our joint venture arrangements.

(6)              Represents the redemption value of a mandatorily redeemable noncontrolling interest. Upon removal of the redemption feature during 2014, the noncontrolling interest was reclassified from other long-term liabilities to stockholders’ equity in the consolidated balance sheet.

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Introduction

 

Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”) began operations in 1984. At December 27, 2015, there were 4,893 Papa John’s restaurants in operation, consisting of 752 Company-owned and 4,141 franchised restaurants. Our revenues are principally derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants. Additionally, approximately 43% to 46% of our domestic revenues in each of the last three years were derived from sales to franchisees of various items including food and paper products, printing and promotional items, risk management services and information systems equipment, including the FOCUS point-of-sale system, and software and related services. We believe that in addition to supporting both Company and franchised profitability and growth, these activities contribute to product quality and consistency throughout the Papa John’s system.

 

New unit openings in 2015 were 357 as compared to 388 in 2014 and 386 in 2013 and unit closings in 2015 were 127 as compared to 153 in 2014 and 121 in 2013. We expect net unit growth of approximately 180 to 210 units during 2016, of which 70-80% will be international locations. Our expansion strategy is to cluster restaurants in targeted markets, thereby increasing consumer awareness and enabling us to take advantage of operational, distribution and advertising efficiencies.

 

We continue to generate strong sales in our North America Company-owned restaurants in a very competitive environment. Average annual Company-owned sales for our most recent domestic comparable restaurant base were $1.12 million for 2015, compared to $1.06 million for 2014 and $988,000 for 2013. Average sales volumes in new markets are generally lower than in those markets in which we have established a significant market position. The comparable sales for domestic Company-owned restaurants increased 5.9% in 2015, 8.2% in 2014 and 6.6% in 2013. “Comparable sales” represents sales generated by restaurants open for the entire twelve-month period reported.

 

We are pleased with the ongoing growth in both our North America and international franchise restaurant sales. The comparable sales for North America franchised units increased 3.6% in 2015, 6.2% in 2014 and 3.1% in 2013.  The comparable sales for International franchised units increased 7.3% in 2015, 7.8% in 2014 and 7.5% in 2013.

 

We strive to obtain high-quality restaurant sites with good access and visibility, and to enhance the appearance and quality of our restaurants. We believe these factors improve our image and brand awareness. The average cash investment for the 11 domestic traditional Company-owned restaurants opened during 2015 was approximately $319,000, compared to the $283,000 investment for the 11 domestic traditional units opened in 2014, exclusive of land and any tenant improvement allowances we received. Over the past few years we have experienced an increase in the cost of our new restaurants primarily as a result of building larger units to accommodate increased sales, an increase in the cost of certain equipment as a result of technology enhancements, and increased costs to comply with local regulations.

 

27



Table of Contents

 

Planned Sale of China Company-owned Operations

 

In September 2015, the Company decided to refranchise the China Company-owned market and is planning a sale of its existing China operations, consisting of 45 Company-owned restaurants and a commissary.  We expect to sell the business during 2016; upon completion of the sale, the Company will not have any Company-owned international restaurants. We have classified the assets as held for sale within the consolidated balance sheet. Upon the classification of these assets to held for sale, no loss was recognized as their fair value exceeded their carrying value.

 

The Company-owned China operations incurred losses before income taxes of $1.2 million in 2015 and $3.4 million in 2014, which are recorded in our International segment. The loss in 2014 includes an impairment and disposition charge of $1.0 million for eleven Company-owned restaurants in China. We do not expect the sale of our China operations to have a significant impact on our financial results.

 

See “Note 7” of “Notes to Consolidated Financial Statements” for additional information.

 

Critical Accounting Policies and Estimates

 

The results of operations are based on our consolidated financial statements, which were prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of consolidated financial statements requires management to select accounting policies for critical accounting areas as well as estimates and assumptions that affect the amounts reported in the consolidated financial statements. The Company’s significant accounting policies are more fully described in “Note 2” of “Notes to Consolidated Financial Statements.” Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact the operating results. We have identified the following accounting policies and related judgments as critical to understanding the results of our operations:

 

Allowance for Doubtful Accounts and Notes Receivable

 

We establish reserves for uncollectible accounts and notes receivable based on overall receivable aging levels and a specific evaluation of accounts and notes for franchisees and other customers with known financial difficulties. Balances are charged off against the allowance after recovery efforts have ceased.

 

Noncontrolling Interests

 

The Company has the following four joint ventures in which there are noncontrolling interests as of December 27, 2015:

 

Joint Venture

 

Redemption Feature

 

Location within the
Consolidated Balance Sheet

 

Recorded value

 

 

 

 

 

 

 

Star Papa, LP

 

Redeemable

 

Temporary equity

 

Carrying value

PJ Denver, LLC

 

Redeemable

 

Temporary equity

 

Redemption value

Colonel’s Limited, LLC

 

No redemption feature

 

Permanent equity

 

Carrying value

PJ Minnesota, LLC

 

No redemption feature

 

Permanent equity

 

Carrying value

 

Consolidated net income is required to be reported separately at amounts attributable to both the parent and the noncontrolling interest. Disclosures are required to clearly identify and distinguish between the interests of the parent company and the interests of the noncontrolling owners, including a disclosure on the face of the consolidated statements of income attributable to the noncontrolling interest holder.

 

28



Table of Contents

 

See “Note 6” of “Notes to Consolidated Financial Statements” for additional information.

 

Stock Based Compensation

 

Compensation expense for equity grants is estimated on the grant date, net of projected forfeitures and is recognized over the vesting period (generally in equal installments over three years). Restricted stock is valued based on the market price of the Company’s shares on the date of grant. Stock options are valued using a Black-Scholes option pricing model.

 

Our specific assumptions for estimating the fair value of options include the following:

 

 

 

2015

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Assumptions (weighted average):

 

 

 

 

 

 

 

Risk-free interest rate

 

1.6

%

1.8

%

1.1

%

Expected dividend yield

 

0.9

%

1.0

%

0.1

%

Expected volatility

 

28.5

%

35.7

%

37.5

%

Expected term (in years)

 

5.5

 

6.0

 

6.0

 

 

The risk-free interest rate for the periods within the contractual life of an option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield was estimated as the annual dividend divided by the market price of the Company’s shares on the date of grant. Expected volatility was estimated by using the Company’s historical share price volatility for a period similar to the expected life of the option. See “Note 18” of “Notes to Consolidated Financial Statements” for additional information.

 

Intangible Assets — Goodwill

 

We evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Such tests are completed separately with respect to the goodwill of each of our reporting units, which includes our domestic Company-owned restaurants, China and the United Kingdom (“PJUK”).  We may perform a qualitative assessment or move directly to the quantitative assessment for any reporting unit in any period if we believe that it is more efficient or if impairment indicators exist.

 

We elected to perform a qualitative assessment for our domestic Company-owned restaurants and PJUK reporting units in 2015. As a result of our qualitative analyses, we determined that it was more-likely-than-not that the fair values of our reporting units were greater than their carrying amounts. We performed a quantitative analysis for the goodwill of our China reporting unit using a market approach. The market approach considered earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples that a potential buyer would pay based on third-party transactions in similar markets. The results of our quantitative assessment indicated the fair value significantly exceeded the carrying amount.

 

Subsequent to completing our goodwill impairment tests, no indications of impairment were identified. See “Note 8” of “Notes to Consolidated Financial Statements” for additional information.

 

29



Table of Contents

 

Insurance Reserves

 

Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability, property, and health insurance coverage provided to our employees are funded by the Company up to certain retention levels. Retention limits generally range from $100,000 to $500,000 per occurrence.

 

Losses are accrued based upon undiscounted estimates of the aggregate retained liability for claims incurred using certain third-party actuarial projections and our claims loss experience. The estimated insurance claims losses could be significantly affected should the frequency or ultimate cost of claims differ significantly from historical trends used to estimate the insurance reserves recorded by the Company. See “Note 12” of “Notes to Consolidated Financial Statements” for additional information.

 

Deferred Income Tax Accounts and Tax Reserves

 

Papa John’s is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining Papa John’s provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred.

 

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax loss carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize. As of December 27, 2015, we had a net deferred income tax liability of approximately $2.2 million.

 

Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues and adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures. We recognized increases in income tax expense of $731,000 in 2015 and $117,000 in 2014 and a decrease in income tax expense of $909,000 in 2013 associated with the finalization of certain income tax matters. See “Note 15” of “Notes to Consolidated Financial Statements” for additional information.

 

Fiscal Year

 

Our fiscal year ends on the last Sunday in December of each year. All fiscal years presented in the accompanying consolidated financial statements consist of 52 weeks.

 

Two-for-One Stock Split

 

The Company completed a two-for-one stock split of the Company’s outstanding shares of stock in December 2013 effected in the form of a stock dividend. Shareholders of record on December 12, 2013 received one additional share for each outstanding share of stock held on the record date. The stock dividend was distributed effective December 27, 2013. All share and per-share amounts have been adjusted to reflect the stock split.

 

30



Table of Contents

 

FOCUS System

 

As of December 27, 2015, we have implemented FOCUS, our new, proprietary point-of-sale system in our domestic Company-owned and franchised restaurants. FOCUS had the following impact on our consolidated statements of income for the years ended December 27, 2015 and December 28, 2014 (in thousands):

 

 

 

Year Ended

 

 

 

Dec. 27,

 

Dec. 28,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Franchise royalties (a)

 

$

(2,427

)

$

(405

)

Other sales (b)

 

9,885

 

20,143

 

Other operating expenses (c)

 

(9,983

)

(20,629

)

Depreciation and amortization (d) 

 

(5,014

)

(2,834

)

Net decrease in income before income taxes

 

$

(7,539

)

$

(3,725

)

 

 

 

 

 

 

Diluted earnings per common share

 

$

(0.13

)

$

(0.06

)

 


(a)         Royalty incentive program tied to franchise rollout of FOCUS.

(b)         Represents revenues for equipment installed at domestic franchised restaurants.

(c)          Includes cost of sales associated with equipment installed at franchised restaurants and other costs to support the rollout of the program.

(d)         Includes depreciation expense for both the capitalized software and for equipment installed at Company-owned restaurants, which are being depreciated over five and seven years, respectively.

 

31



Table of Contents

 

Items Impacting Comparability; Non-GAAP Measures

 

The following table reconciles our GAAP financial results to the adjusted (non-GAAP) financial results, excluding the 2015 legal settlement expense for Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc., a conditionally certified collective and class action that was settled in 2016. We present these non-GAAP measures because we believe the legal settlement impacts the comparability of our results of operations. For additional information about the legal settlement, see “Note17” of “Notes to Consolidated Financial Statements.”

 

 

 

Year Ended

 

 

 

Dec. 27,

 

Dec. 28,

 

Dec. 29

 

(In thousands, except per share amounts)

 

2015

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Income before income taxes, as reported

 

$

119,147

 

$

114,255

 

$

106,109

 

Legal settlement expense

 

12,278

 

 

 

Income before income taxes, as adjusted

 

$

131,425

 

$

114,255

 

$

106,109

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

75,682

 

$

73,315

 

$

69,537

 

Legal settlement expense

 

7,986

 

 

 

Net income, as adjusted

 

$

83,668

 

$

73,315

 

$

69,537

 

 

 

 

 

 

 

 

 

Diluted earnings per share, as reported

 

$

1.89

 

$

1.75

 

$

1.55

 

Legal settlement expense

 

0.20

 

 

 

Diluted earnings per share, as adjusted

 

$

2.09

 

$

1.75

 

$

1.55

 

 

The non-GAAP results shown above and within this document, which exclude the legal settlement, 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 certain financial information without the legal settlement is important for purposes of comparison to prior year results. In addition, management uses this metric to evaluate the Company’s underlying operating performance and to analyze trends. See “Results of Operations” for further analysis regarding the impact of the legal settlement.

 

In addition, we present free cash flow in this report, which is a non-GAAP measure. We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less the purchases of property and equipment. We view free cash flow as an important measure because it is one 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 our performance than the Company’s GAAP measures. See “Liquidity and Capital Resources” for a reconciliation of free cash flow to the most directly comparable GAAP measure.

 

The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures.

 

32



Table of Contents

 

Percentage Relationships and Restaurant Data and Unit Progression

 

The following tables set forth the percentage relationship to total revenues, unless otherwise indicated, of certain income statement data, and certain restaurant data for the years indicated:

 

 

 

Year Ended (1)

 

 

 

Dec. 27,

 

Dec. 28,

 

Dec. 29,

 

 

 

2015

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Income Statement Data:

 

 

 

 

 

 

 

North America revenues:

 

 

 

 

 

 

 

Domestic Company-owned restaurant sales

 

46.2

%

43.9

%

44.2

%

Franchise royalties

 

5.8

 

5.6

 

5.7

 

Franchise and development fees

 

0.1

 

0.1

 

0.1

 

Domestic commissary sales

 

37.6

 

39.4

 

40.2

 

Other sales

 

3.9

 

4.6

 

3.7

 

International revenues:

 

 

 

 

 

 

 

Royalties and franchise and development fees

 

1.7

 

1.6

 

1.5

 

Restaurant and commissary sales

 

4.7

 

4.8

 

4.6

 

Total revenues

 

100.0

 

100.0

 

100.0

 

Costs and expenses:

 

 

 

 

 

 

 

Domestic Company-owned restaurant cost of sales (2)

 

23.7

 

25.0

 

24.6

 

Domestic Company-owned restaurant operating expenses (2)

 

56.2

 

56.5

 

56.9

 

Domestic commissary cost of sales (3)

 

76.6

 

78.3

 

77.5

 

Domestic commissary operating expenses (3)

 

15.7

 

14.6

 

14.8

 

Other operating expenses (4)

 

94.1

 

95.8

 

90.0

 

International restaurant and commissary expenses (5)

 

82.0

 

83.0

 

84.9

 

General and administrative expenses

 

9.6

 

8.8

 

9.3

 

Other general expenses

 

0.4

 

0.5

 

0.5

 

Depreciation and amortization

 

2.5

 

2.5

 

2.4

 

Total costs and expenses

 

91.7

 

92.6

 

92.6

 

Operating income

 

8.3

 

7.4

 

7.4

 

Legal settlement expense

 

(0.7

)

0.0

 

0.0

 

Net interest expense

 

(0.3

)

(0.2

)

(0.1

)

Income before income taxes

 

7.3

 

7.2

 

7.3

 

Income tax expense

 

2.3

 

2.3

 

2.3

 

Net income before attribution to noncontrolling interests

 

5.0

 

4.9

 

5.0

 

Income attributable to noncontrolling interests

 

(0.4

)

(0.3

)

(0.2

)

Net income attributable to the Company

 

4.6

%

4.6

%

4.8

%

 

33



Table of Contents

 

 

 

Year Ended (1)

 

 

 

Dec. 27,

 

Dec. 28,

 

Dec. 29,

 

 

 

2015

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Restaurant Data:

 

 

 

 

 

 

 

Percentage increase in comparable domestic Company-owned restaurant sales (6)

 

5.9

%

8.2

%

6.6

%

Number of domestic Company-owned restaurants included in the most recent full year’s comparable restaurant base

 

667

 

646

 

633

 

Average sales for domestic Company-owned restaurants included in the most recent comparable restaurant base

 

$

1,116,000

 

$

1,064,000

 

$

988,000

 

 

 

 

 

 

 

 

 

Papa John’s Restaurant Progression:

 

 

 

 

 

 

 

North America Company-owned:

 

 

 

 

 

 

 

Beginning of period

 

686

 

665

 

648

 

Opened

 

16

 

12

 

19

 

Closed

 

(2

)

(4

)

(2

)

Acquired from franchisees

 

7

 

13

 

 

End of period

 

707

 

686

 

665

 

International Company-owned:

 

 

 

 

 

 

 

Beginning of period

 

49

 

58

 

48

 

Opened

 

 

2

 

11

 

Closed

 

(4

)

(7

)

(1

)

Sold to franchisees

 

 

(4

)

 

End of period

 

45

 

49

 

58

 

North America franchised:

 

 

 

 

 

 

 

Beginning of period

 

2,654

 

2,621

 

2,556

 

Opened

 

106

 

132

 

152

 

Closed

 

(72

)

(86

)

(87

)

Sold to Company

 

(7

)

(13

)

 

End of period

 

2,681

 

2,654

 

2,621

 

International franchised:

 

 

 

 

 

 

 

Beginning of period

 

1,274

 

1,084

 

911

 

Opened

 

235

 

242

 

204

 

Closed

 

(49

)

(56

)

(31

)

Acquired from Company

 

 

4

 

 

End of period

 

1,460

 

1,274

 

1,084

 

Total Papa John’s restaurants - end of period

 

4,893

 

4,663

 

4,428

 

 


(1)                     We operate on a fiscal year ending on the last Sunday of December of each year.

(2)                     As a percentage of domestic Company-owned restaurant sales.

(3)                     As a percentage of domestic commissary sales.

(4)                     As a percentage of other sales.

(5)                     As a percentage of international restaurant and commissary sales.

(6)                     Represents the change in year-over-year sales for Company-owned restaurants open throughout the periods being compared.

 

34



Table of Contents

 

Results of Operations

 

2015 Compared to 2014

 

Discussion of Revenues.  Consolidated revenues increased $39.2 million, or 2.5%, to $1.64 billion in 2015, compared to $1.60 billion in 2014.  Revenues are summarized in the following table on a reporting segment basis.

 

 

 

Year Ended

 

Increase

 

Increase

 

 

 

Dec. 27,

 

Dec. 28,

 

(Decrease)

 

(Decrease)

 

(In thousands)

 

2015

 

2014

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

North America Revenues:

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurant sales

 

$

756,307

 

$

701,854

 

$

54,453

 

7.8

%

Franchise royalties

 

95,046

 

89,443

 

5,603

 

6.3

%

Franchise and development fees

 

1,010

 

726

 

284

 

39.1

%

Domestic commissary sales

 

615,610

 

629,492

 

(13,882

)

-2.2

%

Other sales

 

64,711

 

74,179

 

(9,468

)

-12.8

%

 

 

 

 

 

 

 

 

 

 

International Revenues:

 

 

 

 

 

 

 

 

 

Royalties and franchise and development fees

 

27,289

 

25,730

 

1,559

 

6.1

%

Restaurant and commissary sales

 

77,402

 

76,725

 

677

 

0.9

%

Total Revenues

 

$

1,637,375

 

$

1,598,149

 

$

39,226

 

2.5

%

 

The increase in revenues in 2015 compared to 2014 was primarily due to the following:

 

·                  Domestic Company-owned restaurant sales increased $54.5 million, or 7.8% primarily due to an increase of 5.9% in comparable sales and a 2.7% increase in equivalent units. “Equivalent units” represents the number of restaurants open at the beginning of a given period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis.

·                  North America franchise royalty revenue increased approximately $5.6 million, or 6.3%, primarily due to a 3.6% increase in comparable sales, an increase of 1.0% in equivalent units and lower royalty incentives.

·                  Domestic commissary sales decreased $13.9 million, or 2.2%, as lower revenues associated with lower cheese prices were somewhat offset by increases in restaurant sales volume. Pricing for cheese is based on a fixed dollar markup; when cheese prices decrease, revenues decrease with no overall impact on the related dollar margin.

·                  Other sales decreased approximately $9.5 million, or 12.8%, primarily due to lower FOCUS equipment sales in 2015, as anticipated. The higher levels of FOCUS equipment sales in 2014 had no significant impact on operating results. See the FOCUS System section above for additional information.

·                  International royalties and franchise and development fees increased approximately $1.6 million, or 6.1%, primarily due to higher royalties from an increase in the number of franchised restaurants and a 7.3% increase in franchised comparable sales, calculated on a constant dollar basis. The negative impact of foreign currency exchange rates reduced our revenues by approximately $2.7 million in 2015.

·                  International restaurant and commissary sales increased approximately $700,000, or 0.9%, primarily due to an increase in commissary and other revenues, particularly in the United Kingdom, with increases in units and higher comparable sales. This increase was somewhat offset by lower sales at China Company-owned restaurants due to the disposition of eleven restaurants in 2014 and negative comparable sales. Additionally, sales were negatively impacted $4.8 million by foreign currency exchange rates.

 

35



Table of Contents

 

Discussion of Operating Results

 

Our income before income taxes totaled $119.1 million in 2015, as compared to $114.3 million in 2014, an increase of approximately $4.9 million. Excluding the previously discussed legal settlement, income before income taxes was $131.4 million in 2015, or an increase of 15.0%. Income before income taxes is summarized in the following table on a reporting segment basis. Alongside the GAAP income before income taxes data, we have included “adjusted” income before income taxes for 2015 to exclude the legal settlement expense. We believe this non-GAAP measure is important for purposes of comparing to prior year results.

 

 

 

Year Ended

 

 

 

 

 

As Reported

 

Legal

 

Adjusted

 

 

 

 

 

 

 

Dec. 27,

 

Settlement

 

Dec. 27,

 

Dec. 28,

 

Increase

 

(In thousands)

 

2015

 

Expense

 

2015

 

2014

 

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurants

 

$

56,452

 

$

 

$

56,452

 

$

40,969

 

$

15,483

 

Domestic commissaries

 

44,721

 

 

44,721

 

39,317

 

5,404

 

North America franchising

 

83,315

 

 

83,315

 

77,009

 

6,306

 

International

 

10,891

 

 

10,891

 

7,250

 

3,641

 

All others

 

845

 

 

845

 

(9

)

854

 

Unallocated corporate expenses

 

(75,896

)

12,278

 

(63,618

)

(49,440

)

(14,178

)

Elimination of intersegment profits

 

(1,181

)

 

(1,181

)

(841

)

(340

)

Total income before income taxes (a)

 

$

119,147

 

$

12,278

 

$

131,425

 

$

114,255

 

$

17,170

 

 


(a)         Includes FOCUS system rollout costs of approximately $7.5 million in 2015 and $3.7 million in 2014. See the “FOCUS System” section above for additional information.

 

Changes in income before income taxes for 2015 in comparison to 2014 are summarized on a segment basis as follows:

 

·                  Domestic Company-owned Restaurants Segment. Domestic Company-owned restaurants income before income taxes increased $15.5 million primarily due to higher profits from the 5.9% increase in comparable sales and lower commodity costs. These increases were partially offset by higher depreciation expense of $1.1 million associated with FOCUS equipment. The market price for cheese averaged $1.61 per pound in 2015, compared to $2.12 per pound in the prior year.

·                  Domestic Commissaries Segment. Domestic commissaries’ income before income taxes increased $5.4 million primarily due to incremental profits from higher restaurant volumes and a higher margin, partially offset by incremental insurance expense from higher automobile claims costs of approximately $1.5 million.

·                  North America Franchising Segment. North America franchising income before income taxes increased $6.3 million primarily due to higher royalties from increases of 3.6% and 1.0% in comparable sales and equivalent units, respectively, and lower royalty incentives.

·                  International Segment. The international segment reported income before income taxes of approximately $10.9 million in 2015 compared to $7.3 million in 2014. The increase of $3.6 million was primarily due to an increase in units and comparable sales of 6.9%, which resulted in both higher royalties and an increase of approximately $2.4 million in United Kingdom results. Additionally, our Company-owned China results improved approximately $2.2 million (losses of approximately $1.2 million in 2015 and $3.4 million in 2014). The improvement in China Company-owned results was primarily due to lower non-operating costs of $1.5 million for impairment, disposition and depreciation. The international segment improvement was somewhat offset by the negative impact of foreign currency exchange rates of approximately $2.8 million.

·                  All Others Segment. The “All others” reporting segment, which primarily includes our online and mobile ordering business and our wholly-owned print and promotions subsidiary, Preferred

 

36



Table of Contents

 

Marketing Solutions, increased approximately $900,000 primarily due to lower infrastructure costs to support our digital ordering business.

·                  Unallocated Corporate Expenses. Unallocated corporate expenses increased approximately $14.2 million, excluding the legal settlement expense, primarily due to higher salaries and benefits, including an increase in health insurance claims costs, as well as increased interest costs associated with higher levels of debt and a higher effective interest rate. In addition, management incentive compensation costs increased in 2015 due to higher annual operating results.

 

Diluted earnings per common share were $1.89 in 2015 compared to $1.75 in 2014, or an increase of $0.14, or 8.0%. Diluted earnings per common share were $2.09 in 2015, excluding the $0.20 legal settlement, or an increase of $0.34, or 19.4%. Diluted earnings per common share increased $0.08 due to the 4.1% reduction in weighted average shares outstanding. Additionally, FOCUS system costs reduced diluted earnings per share by $0.13 in 2015 and $0.06 in 2014.

 

Review of Consolidated Operating Results

 

Revenues. Domestic Company-owned restaurant sales were $756.3 million for 2015 compared to $701.9 million for 2014. As previously noted, the 7.8% increase was primarily due to a 5.9% increase in comparable sales and a 2.7% increase in equivalent units.

 

North America franchise royalties were $95.0 million for 2015, representing an increase of 6.3% over 2014 revenues of $89.4 million. This increase was primarily due to higher North America franchise sales and lower incentives. North America franchise sales increased 4.2% to $2.13 billion, from $2.04 billion in 2014, as domestic franchise comparable sales increased 3.6% and equivalent units increased 1.0%. North America franchise sales are not included in our consolidated statements of income; however, our North America franchise royalty revenue is derived from these sales.

 

Average weekly sales for comparable units include restaurants that were open throughout the periods presented below. The comparable sales base for domestic Company-owned and North America franchised restaurants, respectively, includes restaurants acquired by the Company or divested to franchisees during the previous twelve months. Average weekly sales for non-comparable units include restaurants that were not open throughout the periods presented below and include non-traditional sites. Average weekly sales for non-traditional units not subject to continuous operation are calculated based upon actual days open.

 

37



Table of Contents

 

The comparable sales base and average weekly sales for 2015 and 2014 for domestic Company-owned and North America franchised restaurants consisted of the following:

 

 

 

Year Ended

 

Year Ended

 

 

 

December 27, 2015

 

December 28, 2014

 

 

 

Domestic 
Company-
owned

 

North 
America 
Franchised

 

Domestic 
Company-
owned

 

North 
America 
Franchised

 

 

 

 

 

 

 

 

 

 

 

Total domestic units (end of period)

 

707

 

2,681

 

686

 

2,654

 

Equivalent units

 

684

 

2,546

 

666

 

2,521

 

Comparable sales base units

 

667

 

2,351

 

646

 

2,307

 

Comparable sales base percentage

 

97.5

%

92.3

%

97.0

%

91.5

%

Average weekly sales - comparable units

 

$

21,461

 

$

16,510

 

$

20,451

 

$

16,031

 

Average weekly sales - total non-comparable units*

 

$

13,773

 

$

10,716

 

$

14,389

 

$

10,588

 

Average weekly sales - all units

 

$

21,274

 

$

16,066

 

$

20,271

 

$

15,570

 

 


*Includes 129 traditional units in 2015 and 150 in 2014 and 228 non-traditional units in 2015 and 213 in 2014.

 

North America franchise and development fees were approximately $1.0 million in 2015, an increase of approximately $300,000 from 2014 revenues, primarily due to higher franchise renewal fees.

 

Domestic commissary sales decreased 2.2% to $615.6 million in 2015, from $629.5 million in the prior year. The decrease was primarily due to a decrease in cheese prices, which was somewhat offset by an increase in sales volumes. Pricing for cheese is based on a fixed dollar markup; when cheese prices decrease, revenues will decrease with no overall impact on the related dollar margin.

 

Other sales decreased $9.5 million to $64.7 million in 2015 primarily due to lower FOCUS equipment sales to franchisees. See the FOCUS System section above for additional information.

 

International royalties and franchise and development fees increased approximately $1.6 million primarily due to a 14.6% increase in franchised units and a comparable sales increase of 7.3%, calculated on a constant dollar basis. The negative impact of foreign currency exchange rates reduced our revenues by approximately $2.7 million. International franchise sales were $592.7 million in 2015, compared to $553.0 million in 2014. International franchise sales are not included in our consolidated statements of income; however, our international royalty revenue is derived from these sales.

 

International restaurant and commissary sales increased approximately $700,000, or 0.9%, primarily due to an increase in commissary revenues from increases in units and higher comparable sales. The increase was partially offset by lower sales at China Company-owned restaurants due to the disposition of eleven restaurants in 2014 and negative comparable sales. Additionally, sales were negatively impacted $4.8 million by foreign currency exchange rates.

 

Costs and Expenses.  The restaurant operating margin at domestic Company-owned units was 20.1% in 2015, compared to 18.5% in 2014 with the following differences by income statement category:

 

·                  Cost of sales was 1.3% lower as a percentage of revenues in 2015 primarily due to lower commodity costs, primarily cheese.

·                  Salaries and benefits were 0.7% higher as a percentage of sales in 2015, primarily due to higher performance-based bonuses paid to general managers and minimum wage increases.

·                  Advertising and related costs as a percentage of revenues were 0.2% lower as a percentage of sales in 2015 primarily due to the benefit of higher sales.

 

38



Table of Contents

 

·                  Occupancy costs and other restaurant operating costs, on a combined basis, were 0.8% lower as a percentage of revenues in 2015 primarily due to the benefit of higher sales and lower mileage reimbursement due to lower gas prices.

 

Domestic commissary operating margin was 7.6% and 7.1% in 2015 and 2014, respectively, with the following differences by income statement category:

 

·                  Cost of sales was 1.7% lower as a percentage of revenues in 2015 primarily due to lower cheese costs, which have a fixed-dollar markup. As cheese prices are lower, food cost as a percentage of sales is lower.

·                  Salaries and benefits and other commissary operating expenses were 1.1% higher as a percentage of sales due to incremental automobile insurance claims costs of $1.5 million and due to higher labor costs, including in house distribution. Additionally, commissary revenues are lower due to lower cheese prices, which increase overall salaries and benefits and other commissary operating expenses as a percentage of sales.

 

Other operating expenses as a percentage of other sales were 94.1% in 2015, compared to 95.8% in 2014. The lower operating expenses were primarily due to the decreasing number of franchise FOCUS systems sales. FOCUS sales had very high operating expenses and a minimal margin.

 

International restaurant and commissary expenses were 82.0% in 2015 compared to 83.0% in 2014, as a percentage of total restaurant and commissary sales. The decrease of 1.0% is primarily due to the benefit of higher commissary sales volumes.

 

General and administrative (“G&A”) expenses were $157.4 million, or 9.6% of revenues for 2015, as compared to $140.6 million, or 8.8% of revenues for 2014. The increase of $16.9 million was primarily due to the following:

 

·                  Corporate G&A costs increased primarily due to increases in salaries and benefits, including an increase in health insurance claim costs, and management incentive compensation costs due to higher annual operating results.

·                  Domestic Company-owned restaurant supervisor bonuses increased due to higher sales and higher operating profits.

·                  International G&A costs increased primarily due to incremental advertising spending and other international support costs.

 

Other general expenses decreased $2.0 million to $6.2 million in 2015, from $8.2 million in 2014. The decrease was primarily due to lower provisions for uncollectible accounts and notes receivable and lower disposition and valuation related losses. The 2014 year included $1.0 million of these charges for eleven Company-owned restaurants in China.

 

Depreciation and amortization was $40.3 million, or 2.5% of revenues for 2015, as compared to $40.0 million, or 2.5% of revenues for 2014.

 

Net interest expense. Net interest expense increased approximately $1.5 million primarily due to a higher average outstanding debt balance and a higher effective interest rate.

 

Income Tax Expense.  Our effective income tax rate was 31.2% in 2015 compared to 32.0% in 2014. The 2015 rate includes higher benefits from various tax deductions and credits including the U.S. federal manufacturing deduction. See “Note 15” of “Notes to Consolidated Financial Statements” for additional information.

 

39



Table of Contents

 

2014 Compared to 2013

 

Discussion of Revenues.  Consolidated revenues increased $159.1 million, or 11.1%, to $1.60 billion in 2014, compared to $1.44 billion in 2013.  Revenues are summarized in the following table on a reporting segment basis.

 

 

 

Year Ended

 

Increase

 

Increase

 

 

 

Dec. 28,

 

Dec. 29,

 

(decrease)

 

(decrease)

 

(In thousands)

 

2014

 

2013

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

North America Revenues:

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurant sales

 

$

701,854

 

$

635,317

 

$

66,537

 

10.5

%

Franchise royalties

 

89,443

 

81,692

 

7,751

 

9.5

%

Franchise and development fees

 

726

 

1,181

 

(455

)

-38.5

%

Domestic commissary sales

 

629,492

 

578,870

 

50,622

 

8.7

%

Other sales

 

74,179

 

53,322

 

20,857

 

39.1

%

 

 

 

 

 

 

 

 

 

 

International Revenues:

 

 

 

 

 

 

 

 

 

Royalties and franchise and development fees

 

25,730

 

21,979

 

3,751

 

17.1

%

Restaurant and commissary sales

 

76,725

 

66,661

 

10,064

 

15.1

%

Total Revenues

 

$

1,598,149

 

$

1,439,022

 

$

159,127

 

11.1

%

 

The increase in revenues in 2014 compared to 2013 was primarily due to the following:

 

·                  Domestic Company-owned restaurant sales increased $66.5 million, or 10.5% primarily due to an 8.2% increase in comparable sales and a 2.6% increase in equivalent units.

·                  North America franchise royalty revenue increased $7.8 million, or 9.5% primarily due to a 6.2% increase in comparable sales and a reduced level of performance-based royalty incentives.

·                  Domestic commissary sales increased $50.6 million, or 8.7%, primarily due to increases in the prices of certain commodities (primarily cheese and meats), higher sales volumes, and higher overall margins.

·                  Other sales increased $20.9 million, or 39.1%, primarily due to FOCUS equipment sales to franchisees. See the FOCUS System section above for additional information.

·                  International royalties and franchise and development fees increased $3.8 million or 17.1% primarily due to an increase in the number of restaurants and a 7.8% increase in comparable sales, calculated on a constant dollar basis.

·                  International restaurant and commissary sales increased $10.1 million, or 15.1%, primarily due to an increase in commissary revenues, particularly in the United Kingdom, with increases in units and higher comparable sales. This was somewhat offset by the 2013 year including an additional month of revenues at our China Company-owned operations as we changed the reporting cycle in the fourth quarter of 2013 to no longer consolidate the results one month in arrears. The impact of this change resulted in incremental revenues of $2.1 million in 2013.

 

40



Table of Contents

 

Discussion of Operating Results

 

Our income before income taxes totaled $114.3 million in 2014, as compared to $106.1 million in 2013, an increase of approximately $8.1 million. Income before income taxes is summarized in the following table on a reporting segment basis:

 

 

 

Year Ended

 

 

 

 

 

Dec. 28,

 

Dec. 29,

 

Increase

 

(In thousands)

 

2014

 

2013

 

(Decrease)

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurants

 

$

40,969

 

$

34,590

 

$

6,379

 

Domestic commissaries

 

39,317

 

37,804

 

1,513

 

North America franchising

 

77,009

 

70,201

 

6,808

 

International

 

7,250

 

2,803

 

4,447

 

All others

 

(9

)

3,490

 

(3,499

)

Unallocated corporate expenses

 

(49,440

)

(41,025

)

(8,415

)

Elimination of intersegment profits

 

(841

)

(1,754

)

913

 

Total income before income taxes (a)

 

$

114,255

 

$

106,109

 

$

8,146

 

 


(a)         Includes FOCUS system rollout costs of approximately $3.7 million in 2014. See the FOCUS System section above for additional information.

 

Changes in income before income taxes for 2014 in comparison to 2013 are summarized on a segment basis as follows:

 

·                  Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’ income before income taxes increased $6.4 million due to the 8.2% increase in comparable sales, partially offset by higher commodities and higher automobile insurance claims costs of approximately $3.5 million. Additionally, 2014 includes depreciation expense of approximately $1.2 million associated with FOCUS equipment costs.

·                  Domestic Commissaries Segment. Domestic commissaries’ income before income taxes increased $1.5 million primarily due to higher margins and higher sales volumes, which were somewhat offset by higher workers’ compensation and automobile insurance claims costs of approximately $2.6 million and higher costs assoc