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Leading pizza restaurant chain, Papa John’s International Inc.’s (PZZA - Snapshot Report) second-quarter 2013 earnings of 76 cents per share, outperformed the Zacks Consensus Estimate of 69 cents by 10.1% and the comparable year-ago quarter’s earnings of 59 cents by 28.8%. Higher top line pushed up the earnings for the quarter.

Total revenue jumped 9.6% year over year to $349.2 million which was in line with the Zacks Consensus Estimate. The year-over-year rise in revenues was primarily driven by higher comparable restaurant sales (comps) growth in both domestic and international markets, improved volumes and unit expansion.

Behind the Headline Numbers

Papa John’s earns revenues from its North America and International market.

Domestic company-owned restaurant revenues increased 8.1% to $155.2 million, led by a 6% rise in company-owned comps. The segment’s revenues also gained from the company’s 50 acquired restaurants in the second quarter of 2012.

North America Franchise royalties also jumped 5.9% year over year to $20.2 million, gaining from positive franchise comps growth of 2.6% and rise in net franchised units. However, Papa John’s’ acquisitions led to a reduction in the number of franchised stores, thus, lowering the royalty revenues.

Domestic commissaries sales also climbed 10.6% year over year to $140.0 million with the rise in sales volume.

International revenues increased 21.6% year over year to $21.1 million, powered by a system-wide international comps growth of 6.8% and international unit expansion.

Operating Income

In the quarter under review, Papa John’s’ operating income grew 13.5% year over year to $26.9 million, benefiting from higher operating income generation in North America franchising as well as in the international market.

Amid a growing sales environment, operating income for the domestic company-owned restaurants were down nearly 12.6% year over year to $8.2 million because of the rise in commodity prices. Operating income for the North America franchising unit was up 4.7% year over year to $17.4 million, led by unit growth and higher comps.

The International segment’s operating income was $866 million which was significantly higher than the year-ago quarter’s operating income of $320 million. The year-over-year rise in the segment’s operating income was attributable to higher royalties and comps growth.

Unit Growth

During the quarter, the company opened 81 restaurants while closing 26 units worldwide. As of Jun 30, 2013, Papa John’s had 4,252 restaurants across 34 countries.

Share Repurchase & Dividend

During the second quarter, Papa John’s bought back 0.4 million shares worth $26.7 million. The company also extended its current share repurchase authorization by an additional $25 million bringing it to a total of $80.1 million.

In the second quarter conference call, Papa John’s initiated regular quarterly dividend payment of 25 cents per share starting from Sep 20, 2013, to stockholders of record at the close of business on Sep 6. The annualized dividend per share thus stands at $1.00 per share.


Papa John’s increased the lower end of its earnings guidance for 2013 based on decent first half results and lower outstanding share count. The company now expects earnings within $2.92 to $3.00, up from the previous guidance of $2.90 to $3.00.

However, the company retained its revenue and comps guidance. The company expects total revenue to grow by 6% - 7% in 2013 with both the number of units and comps growing. Papa John’s continues to expect North America system-wide comps to increase in the range of 1.5% to 2.5%.

International comps are expected to increase in the range of 5.0% to 7.0% in 2013. Moreover, international restaurant sales are likely to grow by 20%–25% on the back of unit growth and comps improvement.

Our Viewpoint

Papa John’s has been posting solid earnings and revenue growth for the past few quarters on the back of higher traffic and unit growth. The company’s focus on menu innovation and international expansion are quite encouraging.

Moreover, we believe that the dividend initiation and increase in the share repurchase authorization affirms the company’s positive outlook and reflects its confidence in its fundamentals. The announcement is not only expected to reinforce shareholders’ confidence but also boost the market value of its shares.

However, this Zacks Rank #3 (Hold) company is facing food cost inflation which may hurt its margins in the ensuing quarters. Moreover, a feeble macroeconomic environment remains a headwind.

Some other restaurateurs which look attractive at the current level include Domino's Pizza Inc. (DPZ - Analyst Report), Yum! Brands Inc. (YUM - Analyst Report) and Buffalo Wild Wings Inc. (BWLD - Analyst Report). All these companies carry a Zacks Rank #2 (Buy).

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