Record revenues of $487.2 million were achieved for the six months ended July 1, 2001, an increase of 6.2% over 2000 revenues of $458.6 million. Diluted earnings per share for the six months ended July 1, 2001 were $1.11 for 2001 compared to $0.96 (before special charge) for 2000, a 15.6% increase. Net income was $25.3 million for the six-month period in 2001 compared to $25.1 million (before special charge) in 2000. EBITDA was $61.7 million for the first six months in 2001 compared to $59.1 million (before special charge) for the same period in 2000, a 4.5% increase.
For the six months ended July 1, 2001, systemwide domestic comparable sales increased 1.4%, comprised of a 2.2% increase at franchised restaurants and a 0.6% decrease at company-owned restaurants. For the second quarter, systemwide domestic comparable sales decreased 1.7%, comprised of a 0.5% decrease at franchised restaurants and a 4.8% decrease at company-owned restaurants. Comparable sales for the second quarter were negatively impacted by three factors: the timing of the company's national Anniversary promotion, which ran during the first quarter of 2001 versus the second quarter of 2000; significantly lower corporate advertising spending during the second quarter of 2001 compared to the same period last year; and a decline in both traffic and sales in the pizza category during the quarter.
"Our concept continues to perform well in a very tough operating environment,'' said John Schnatter, Papa John's Founder and Chief Executive Officer. "With the pizza category showing negative sales and traffic during each of the last two quarters, it's a testament to the strength of our brand that we were able to run 1.4% systemwide positive comps. I'm also pleased with the improvements our team has made in managing the cost side of our business.''
A total of 56 restaurants (6 company-owned and 50 franchised) opened during the second quarter. As of July 1, 2001 there were 2,692 Papa John's restaurants (649 company-owned and 2,043 franchised) operating in 49 states and 10 international markets. Papa John's also owns or operates 199 Perfect Pizza restaurants (3 company-owned and 196 franchised) in the United Kingdom.
Second Quarter Operating Results
During the second quarter, domestic company-owned restaurant sales were $111.8 million compared to $111.6 million for the same period in 2000, primarily resulting from a 7.2% increase in the number of equivalent company-owned domestic restaurants open in the 2001 period compared to the 2000 period, substantially offset by a 4.8% comparable sales decrease for the quarter. Domestic franchise sales increased 10.2% to $326.9 million from $296.7 million for the same period in 2000, primarily resulting from a 10.7% increase in the number of equivalent franchised domestic restaurants open in the 2001 period compared to the 2000 period, partially offset by a 0.5% comparable sales decrease for the quarter.
The second quarter comparable sales base for domestic company-owned restaurants consisted of 566 units, or 90% of total equivalent units, and the domestic franchise base consisted of 1,641 units or 86% of total equivalent units. Average weekly sales for restaurants included in the corporate comparable base were $14,106, while other company-owned units averaged $9,697 for an overall average of $13,662. Average weekly sales for the restaurants included in the franchise comparable base were $13,422, while other franchise units averaged $11,657 for an overall average of $13,174.
Domestic franchise royalties increased 6.6% to $12.4 million in the second quarter of 2001 from $11.6 million for the same period in 2000, resulting from the increase in domestic franchise sales previously described. Domestic franchise and development fees were $840,000 compared to $1.3 million for the same period in 2000 due to 42 domestic franchise openings in 2001 compared to 67 in 2000.
The restaurant operating margin for domestic company-owned units was 19.2% during the quarter compared to 19.9% for the same period in 2000, consisting of the following differences:
Cost of sales was 1.0% lower in 2001 due primarily to favorable cheese prices, partially offset by increases in certain other commodity costs.
Salaries and benefits were 1.9% higher in 2001 due primarily to higher wage rates.
Advertising and related costs were 1.0% lower ($1.2 million reduction) in 2001.
Occupancy costs were 0.8% higher in 2001 due primarily to higher utility costs.
Other operating expenses were 13.4% of revenues in 2001, consistent with the prior year's percentage.
Domestic commissary and equipment and other sales increased 7.0% to $106.3 million in the second quarter of 2001 from $99.3 million for the same period in 2000, primarily resulting from the previously mentioned increase in domestic franchise equivalent units and sales, partially offset by the impact of lower cheese prices.
Domestic commissary, equipment and other margin was 10.8% during the second quarter for both 2001 and 2000. Cost of sales was 72.4% in 2001 compared to 74.9% in 2000, primarily resulting from the impact of lower cheese costs. Expected increases in cheese costs during the second half of 2001 will result in increased cost of sales and a corresponding decrease in margin during such period. Salaries and other operating costs as a percentage of sales increased from 14.3% in 2000 to 16.7% in 2001 primarily as a result of expanded services provided to both franchise and corporate restaurants.
International revenues, which include the Perfect Pizza operations, increased 10.5% during the quarter compared to the same period in 2000 prior to the impact of unfavorable currency exchange rates. After the impact of exchange rates, international revenues were $7.9 million compared to $7.7 million for the same period in 2000.
General and administrative expenses were 7.0% of revenues in the second quarter of 2001 compared to 7.3% of revenues in the same period in 2000. The decrease reflects the Company's ongoing efforts to control G&A costs during 2001 primarily through reduced headcount and travel.
Pre-opening and other general expenses were $962,000 in the second quarter of 2001 compared to $722,000 for the same period in 2000. Pre-opening costs of $96,000, relocation costs of $242,000 and disposition-related costs of $420,000 were included in the 2001 amount as compared to pre-opening costs of $320,000, relocation costs of $323,000 and disposition-related costs of $74,000 in the 2000 amount.
Depreciation and amortization was $8.8 million (3.7% of revenues) for the second quarter of 2001 as compared to $8.4 million (3.6% of revenues) for the same period in 2000, including goodwill amortization of $697,000 for 2001 and $772,000 for 2000.
Net interest expense was $1.8 million in the second quarter of 2001 compared to $1.1 million for the same period in 2000, due to an increase in the debt incurred by the company to fund stock repurchases. The effective income tax rate was 37.7% in the second quarter of 2001 compared to 38.4% for the same period in 2000, due primarily to effective state and local tax planning strategies.
Operating Results for the Six-Month Period in 2001 Compared to 2000
For the six months ended July 1, 2001, domestic company-owned restaurant sales increased 3.3% to $229.1 million compared to $221.8 million for the same period in 2000, primarily resulting from a 6.3% increase in the number of equivalent company-owned domestic restaurants open in the 2001 period compared to the 2000 period, partially offset by a 0.6% decrease in comparable sales. Domestic franchise sales for the six-month period increased 13.4% to $659.1 million from $581.1 million for the same period in 2000, primarily resulting from a 12.2% increase in the number of equivalent franchised domestic restaurants open in the 2001 period compared to the 2000 period, coupled with a 2.2% comparable sales increase for the year.
The comparable sales base for domestic company-owned restaurants for the six months ended July 1, 2001 consisted of 561 units, or 90% of total equivalent units, and the domestic franchise base consisted of 1,583 units or 83% of total equivalent units. Average weekly sales for restaurants included in the corporate comparable base were $14,589, while other company-owned units averaged $10,053 for an overall average of $14,130. Average weekly sales for the restaurants included in the franchise comparable base were $13,775, while other franchise units averaged $11,072 for an overall average of $13,321.
Domestic franchise royalties increased 12.1% to $25.5 million for the six months ended July 1, 2001 from $22.7 million for the same period in 2000, resulting from the increase in domestic franchise sales previously mentioned. Domestic franchise and development fees were $1.7 million compared to $2.6 million for the same period in 2000 due to 78 domestic franchise openings in 2001 compared to 129 in 2000.
The restaurant operating margin for domestic company-owned units for the six months ended July 1, 2001 was 19.0% compared to 19.5% for the same period in 2000, consisting of the following differences:
Cost of sales was 1.2% lower in 2001 due primarily to favorable cheese prices, partially offset by increases in certain other commodity costs.
Salaries and benefits were 2.1% higher in 2001 due primarily to higher wage rates.
Advertising and related costs were 1.3% lower ($2.3 million reduction) in 2001.
Occupancy costs were 0.7% higher in 2001 due primarily to higher utility costs.
Other operating expenses were 0.2% higher in 2001 primarily due to the costs associated with a first quarter 2001 corporate operations team meeting, which was previously held in the fourth quarter of 1999.
Domestic commissary and equipment and other sales increased 9.9% to $215.7 million for the six months ended July 1, 2001 from $196.3 million for the same period in 2000, primarily resulting from the increase in domestic franchise equivalent units and sales previously noted, partially offset by the impact of lower cheese prices.
Domestic commissary, equipment and other margin was 11.1% in the first six months of 2001 compared to 10.7% for the same period in 2000. Cost of sales was 72.5% in 2001 compared to 75.1% in 2000, primarily resulting from the impact of lower cheese costs. Expected increases in cheese costs during the second half of 2001 will result in increased cost of sales and a corresponding decrease in margin during such period. Salaries and other operating costs as a percentage of sales increased from 14.3% in 2000 to 16.4% in 2001 primarily as a result of expanded services provided to franchisees and corporate restaurants.
International revenues, which include the Perfect Pizza operations, increased 9.8% for the six-month period ending July 1, 2001 compared to the same period in 2000 prior to the impact of unfavorable currency exchange rates. After the impact of exchange rates, international revenues were $15.2 million in 2001 compared to $15.1 million for the same period in 2000.
General and administrative expenses for the six months ended July 1, 2001 were 7.2% of revenues compared to 7.5% of revenues in the same period in 2000, prior to the impact of management bonuses earned this year for exceeding earnings targets. After the impact of such bonuses, 2001 general and administrative expenses represented 7.4% of revenues.
Pre-opening and other general expenses were $1.1 million for the first six months of 2001 compared to $940,000 for the same period in 2000. Pre-opening costs of $156,000, relocation costs of $393,000 and net disposition-related gains of $573,000 were included in the 2001 amount as compared to pre-opening costs of $353,000, relocation costs of $652,000 and net disposition-related gains of $151,000 in the 2000 amount. The 2001 amount also includes costs related to franchise support initiatives undertaken during 2001.
Depreciation and amortization was $17.3 million (3.6% of revenues) for the first six months of 2001 as compared to $16.7 million (3.6% of revenues) in 2000, including goodwill amortization of $1.4 million for 2001 and $1.6 million for 2000.
Net interest expense was $3.8 million for the six months ended July 1, 2001 compared to $1.6 million in 2000, due to an increase in the debt incurred by the company to fund our stock repurchase program. The effective income tax rate was 37.7% in the first six months of 2001 compared to 38.4% for the same period in 2000, due primarily to effective state and local tax planning strategies.
Stock Repurchase Program
During 2001, the company has repurchased 657,000 shares of its common stock for $14.5 million. This brings the total repurchased to 8.3 million shares at a cost of $202.5 million since inception of the company's stock repurchase program in December 1999. After such repurchases, the company has approximately 22.7 million shares of common stock outstanding on a fully diluted basis.
The company is authorized to repurchase up to an additional $72.5 million of its common stock under the program through December 30, 2001. The company will continue to evaluate repurchases throughout the year.
2001 Guidance
As a result of better than anticipated franchise sales, lower cheese costs and a reduction in general and administrative costs, the company's earnings per share for the first six months of 2001 were $1.11, compared to our original earnings forecast for the first half of $0.97 to $1.08 per share. The company expects significantly higher cheese costs, continued high utility costs and a very competitive marketing and promotional environment during the second half of 2001. Accordingly, the company expects Q3 and Q4 earnings per share to be at or near the lower end of its previously forecasted ranges of $0.42 to $0.49 for Q3 and $0.51 to $0.58 for Q4.
The company expects the following for the second half of 2001:
100 to 120 restaurant openings.
The potential closure of 20 to 65 restaurants.
Flat to 2% systemwide comparable sales growth.
Corporate restaurant operating margin of 18.5% to 19.5%.
Commissary, equipment and other operating margin of 8.5% to 9.5%.
General and administrative expenses as a percentage of revenues of 7.3% to 7.6%.
Net interest expense of $3.3 million to $3.5 million, assuming no additional stock repurchases.
