Papa John’s Pizza
by
Michael Suchy &
Eric Utne
How We Found Papa John’s
• Taking a bottom-up approach, we ran a stock
screen using a minimum 15% ROE, 1 year and 5
year 15% earnings growth and a maximum market
cap of $5 billion.
• Papa John’s fits the client’s portfolio objectives
like a glove. It is a growth company with a market
capitalization of only $750 million.
Company Background
• In 1985 current CEO John Schnatter opened
opened the first Papa John’s restaurant in
Jeffersonville, IN.
• In 1986, the first Papa John’s franchise was
opened.
• The company went public in 1993.
• In 1997 Frank Carney, co-founder of Pizza Hut,
teams with Papa John’s to become a major
franchisee of the company.
Background Continued
• In 1999 Papa John’s had operations in 47 states,
the District of Columbia, and five international
markets such as Mexico and Puerto Rico.
• At 1999 fiscal year end, there were 2,280 Papa
John’s restaurants in operation; of these, 573 were
company owned.
• Through the acquisition of Perfect Pizza Holdings
Limited in the U.K., Papa John’s increased its
international presence by an additional 206 stores,
12 of which are company owned.
Background Continued
• Papa John’s Board of Directors has authorized the
repurchase of $150 million worth of common
stock through December 31, 2000. The share
repurchase will be funded through existing cash
and investments, operating cash flows, and a $100
million line of credit. The Board feels that Papa
John’s shares are currently trading at a deep
discount.
How Papa John’s Makes Money
• Roughly 50% of all Papa John’s revenue comes
from sales of menu items at company owned
restaurants.
• About 6% of revenues come from franchise
royalties, franchise fees, and development fees.
• 40% of Papa John’s revenues come through
commissary sales to both company and franchised
stores.
• The remaining revenues come from equipment
and other sales.
The Secret to Their Success
• Papa John’s has experienced phenomenal success by doing
what they do best: Making Pizza.
• The only items Papa John’s offers on its menu are pizza,
bread sticks and cheese sticks.
• The company prides itself on the use of only the finest
ingredients including fresh dough (not frozen), 100% real
cheese, and canned, vine-ripened tomato sauce (not
concentrate).
• The company only offers carry-out and delivery service,
allowing the focus of each store to be solely concentrated
on making their products.
American Customer Satisfaction
Index
All Fast Food Restaurants
Score
Papa John's
76
Wendy's
71
Group Average
69
Pizza Hut
68
Domino's Pizza
67
2000 R&I CHOICE IN CHAINS
Pizza
Category
Overall
Score
Food
Quality
Value
Service
Cleanliness
Papa
John's
36
56
38
37
33
Pizza Hut
35
54
29
31
29
Domino's
Pizza
32
42
33
33
27
Don’t Fear Pizza the Hut
• On August 12, 1998, Papa John’s was sued by its largest
competitor, Pizza Hut, Inc.
• Pizza Hut claimed that the slogan “Better Ingredients.
Better Pizza.” constitutes false and deceptive advertising, a
violation of the Lanham Trademark Act.
• On January 3, 2000 the United states District Court for the
Northern District of Texas found Papa John’s guilty as
charged and ordered Papa John’s to cease use of the slogan
in all its advertising.
• The costs incurred during litigation and complying with
the court order are estimated at $12 - $15 million, of which
$6.1 million was charged against 1999 pre-tax earnings.
However….
• Papa John’s has appealed the decision, and oral arguments
pertaining to the appeal have begun this month.
• If the appeal is successful, costs due to the trial should be
impacted favorably.
• We believe that Pizza Hut’s suit was a defensive tactic to
combat Papa John’s astonishing growth.
• We also believe that Papa John’s chance for a positive
outcome in the appellate court is likely because the slogan
is merely puffery, and doesn’t constitute a violation of any
laws.
Where Does the Papa Go From
Here?
• Papa John’s is a growth company, and it plans on
living up to its classification.
• The company plans to open 35 more company
restaurants this year and acquire from 60 from
existing franchisees.
• Additionally, the company expects franchisees to
open nearly 375 restaurants new restaurants this
year.
• Domestic market expansion is planned for the upper
Northeast Coast, West Coast and Rocky Mountain
regions.
• The company also plans on further penetration of
existing markets in the U.S.
• Internationally, Papa John’s is focused on Mexico,
Puerto Rico, Venezuela, Costa Rica, Guatemala, Saudi
Arabia, Canada, Iceland and the United Kingdom.
• Regarding expansion in the U.K., restaurants may be
opened under the name of either Papa John’s or Perfect
Pizza, but within three years all of the Perfect Pizzas
will converted to Papa John’s stores.
Balance Sheet
12/26/99
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
3,698.00
Accounts receivable
18,113.00
Accounts receivable-affiliates
3,302.00
Inventories
10,637.00
Prepaid expenses and other current assets
7,378.00
Deferred income taxes
2,977.00
TOTAL CURRENT ASSETS
46,105.00
Investments
22,086.00
Net property and equipment
227,813.00
Notes receivable-franchisees
8,153.00
Notes receivable-affiliates
3,590.00
Intangibles
47,669.00
Other assets
16,635.00
TOTAL ASSETS
372,051.00
12/27/98
33,814.00
15,147.00
2,273.00
9,808.00
4,891.00
2,090.00
68,023.00
47,355.00
172,872.00
4,249.00
4,741.00
9,397.00
13,087.00
319,724.00
12/28/97
18,692.00
12,678.00
2,454.00
9,091.00
6,261.00
-49,176.00
57,933.00
112,601.00
7,083.00
7,997.00
-18,453.00
253,243.00
12/29/96
24,063.00
10,169.00
2,932.00
6,839.00
4,245.00
-48,248.00
65,067.00
80,717.00
2,646.00
2,407.00
-12,976.00
212,061.00
Common Size Balance Sheet
12/26/99
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
1.0%
Accounts receivable
4.9%
Accounts receivable-affiliates
0.9%
Inventories
2.9%
Prepaid expenses and other current assets2.0%
Deferred income taxes
0.8%
TOTAL CURRENT ASSETS
12.4%
Investments
5.9%
Net property and equipment
61.2%
Notes receivable-franchisees
2.2%
Notes receivable-affiliates
1.0%
Intangibles
12.8%
Other assets
4.5%
TOTAL ASSETS
100.0%
12/27/98
10.6%
4.7%
0.7%
3.1%
1.5%
0.7%
21.3%
14.8%
54.1%
1.3%
1.5%
2.9%
4.1%
100.0%
12/28/97
12/29/96
7.4%
5.0%
1.0%
3.6%
2.5%
0.0%
19.4%
22.9%
44.5%
2.8%
3.2%
0.0%
7.3%
100.0%
11.3%
4.8%
1.4%
3.2%
2.0%
0.0%
22.8%
30.7%
38.1%
1.2%
1.1%
0.0%
6.1%
100.0%
Balance Sheet
12/26/99
12/27/98
12/28/97
12/29/96
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
24,947
18,389
15,148
13,105
Accrued expenses
38,516
26,916
15,132
9,237
Current portion of debt
5,308
190
--Deferred income taxes
--102
672
TOTAL CURRENT LIABILITIES
68,771
45,495
30,382
23,014
Unearned franchise and development fees
6,222
6,561
4,613
3,378
Long-term debt, net of current portion
925
8,230
--Deferred income taxes
2,109
5,066
3,987
3,285
Other long-term liabilities
1,891
202
1,528
1,741
TOTAL LIABILITIES
79,918
65,554
40,510
31,418
STOCKHOLDERS' EQUITY:
Preferred stock
----Common stock
305
298
291
288
Additional paid-in capital
189,920
166,209
149,850
143,978
Accumulated other comprehensive income (loss)
(390)
688
321
977
Retained earnings
134,492
87,456
62,752
35,882
Treasury stock
(32,194)
(481)
(481)
(482)
TOTAL STOCKHOLDERS' EQUITY
292,133
254,170
212,733
180,643
TOTAL LIABILITIES AND EQUITY
372,051
319,724
253,243
212,061
Common Size Balance Sheet
12/26/99
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
6.7%
Accrued expenses
10.4%
Current portion of debt
1.4%
Deferred income taxes
0.0%
TOTAL CURRENT LIABILITIES
18.5%
Unearned franchise and development fees
1.7%
Long-term debt, net of current portion
0.2%
Deferred income taxes
0.6%
Other long-term liabilities
0.5%
TOTAL LIABILITIES
21.5%
STOCKHOLDERS' EQUITY:
Preferred stock
Common stock
0.1%
Additional paid-in capital
51.0%
Accumulated other comprehensive income (loss)
-0.1%
Retained earnings
36.1%
Treasury stock
-8.7%
TOTAL STOCKHOLDERS' EQUITY
78.5%
TOTAL LIABILITIES AND EQUITY
100.0%
12/27/98
12/28/97
12/29/96
5.8%
8.4%
0.1%
0.0%
14.2%
2.1%
2.6%
1.6%
0.1%
20.5%
6.0%
6.0%
0.0%
0.0%
12.0%
1.8%
0.0%
1.6%
0.6%
16.0%
6.2%
4.4%
0.0%
0.3%
10.9%
1.6%
0.0%
1.5%
0.8%
14.8%
0.1%
52.0%
0.2%
27.4%
-0.2%
79.5%
100.0%
0.1%
59.2%
0.1%
24.8%
-0.2%
84.0%
100.0%
0.1%
67.9%
0.5%
16.9%
-0.2%
85.2%
100.0%
Income Statement
12/26/99
12/27/98
12/28/97
12/29/96
REVENUES:
Restaurant sales
Franchise royalties
Franchise and development fees
Commissary sales
Equipment and other sales
TOTAL REVENUES
$395,091
41,270
6,871
309,015
53,078
$805,325
$344,089
32,126
5,450
255,083
45,404
$682,152
$251,153
24,318
5,327
188,034
39,952
$508,784
$167,982
17,827
4,286
142,998
26,959
$360,052
COSTS AND EXPENSES:
Restaurant expenses:
Cost of sales
Salaries and benefits
Advertising and related costs
Occupancy costs
Other operating expenses
Total:
$100,412
106,851
36,014
19,560
53,591
$316,428
$92,612
92,372
29,846
17,138
44,685
$276,653
$66,417
67,830
23,298
12,785
33,882
$204,212
$47,092
44,774
16,074
8,527
22,801
$139,268
Commissary, equipment and other expenses:
Cost of sales
$276,079
Salaries and benefits
23,794
Other operating expenses
27,809
Total:
$327,682
$235,934
16,981
22,560
$275,475
$177,263
13,091
18,181
$208,535
$134,771
9,023
11,009
$154,803
Common Size Income Statement
12/26/99
12/27/98
12/28/97
12/29/96
49.1%
5.1%
0.9%
38.4%
6.6%
100.0%
50.4%
4.7%
0.8%
37.4%
6.7%
100.0%
49.4%
4.8%
1.0%
37.0%
7.9%
100.0%
46.7%
5.0%
1.2%
39.7%
7.5%
100.0%
12.5%
13.3%
4.5%
2.4%
6.7%
39.3%
13.6%
13.5%
4.4%
2.5%
6.6%
40.6%
13.1%
13.3%
4.6%
2.5%
6.7%
40.1%
13.1%
12.4%
4.5%
2.4%
6.3%
38.7%
Commissary, equipment and other expenses:
Cost of sales
34.3%
Salaries and benefits
3.0%
Other operating expenses
3.5%
Total:
13.3%
34.6%
2.5%
3.3%
13.5%
34.8%
2.6%
3.6%
13.3%
37.4%
2.5%
3.1%
12.4%
REVENUES:
Restaurant sales
Franchise royalties
Franchise and development fees
Commissary sales
Equipment and other sales
TOTAL REVENUES
COSTS AND EXPENSES:
Restaurant expenses:
Cost of sales
Salaries and benefits
Advertising and related costs
Occupancy costs
Other operating expenses
Total:
Income Statement
General and administrative expenses
Advertising litigation expense
Pre-opening and other general expenses
Depreciation and amortization
TOTAL COSTS AND EXPENSES
1999
1998
1997
1996
$54,386
$53,008
$37,051
$26,694
6,104 -3,565
3,481
24,827
20,490
19,792
13,658
$732,992 $629,107 $469,590 $334,423
OPERATING INCOME
$72,333
Investment income
3,384
Income before income taxes and a
cumulative
change in accounting principle
75,717
Other, net
Income before income taxes
Income tax expense
28,431
Income before cumulative effect of a
change in
accounting principle
47,286
Cumulative effect of accounting change, net
-- of tax
NET INCOME
$47,286
$53,045
4,100
57,145
22,181
34,964
(2,603)
$32,361
$39,194
4,505
42,625
(1,074)
42,625
15,772
$26,853
$25,629
3,484
29,546
433
29,546
10,932
$18,614
Common Size Income Statement
1999
6.8%
0.8%
0.4%
3.1%
91.0%
1998
7.8%
0.0%
0.5%
3.0%
92.2%
1997
7.3%
0.0%
0.0%
3.9%
92.3%
1996
7.4%
0.0%
0.0%
3.8%
92.9%
OPERATING INCOME
9.0%
Investment income
0.4%
Income before income taxes and a
cumulative
change in accounting principle
9.4%
Other, net
0.0%
Income before income taxes
0.0%
Income tax expense
3.5%
Income before cumulative effect of a
change in
accounting principle
5.9%
Cumulative effect of accounting change, net of tax
0.0%
NET INCOME
5.9%
7.8%
0.6%
7.7%
0.9%
7.1%
1.0%
8.4%
0.0%
0.0%
3.3%
8.4%
-0.2%
8.4%
3.1%
8.2%
0.1%
8.2%
3.0%
5.1%
-0.4%
4.7%
0.0%
0.0%
5.3%
0.0%
0.0%
5.2%
General and administrative expenses
Advertising litigation expense
Pre-opening and other general expenses
Depreciation and amortization
TOTAL COSTS AND EXPENSES
Income Statement EPS Info.
1999
1998
1997
1996
BASIC EARNINGS PER SHARE:
Income before cumulative effect of a
change in
accounting principle
$1.57
Cumulative effect of accounting change, net
-- of tax
Basic earnings per share
$1.57
$1.18
(0.09)
$1.09
$0.93
$0.66
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of a
change in
accounting principle
$1.52
Cumulative effect of accounting change, net
-- of tax
Diluted earnings per share
$1.52
$1.15
(0.09)
$1.06
$0.91
$0.65
29,537
30,455
28,916
29,592
28,010
28,670
$85,137
$570
$62,986
$514
$47,012
$85
Basic weighted average shares outstanding 30,195
Diluted weighted average shares oustanding 31,080
Supplemental data:
Revenues - affiliates
Other income - affiliates
$102,863
$314
Statement of Cash Flows
1999
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to
net cash
provided by operating activities:
Depreciation and amortization
Deferred income taxes
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Deferred pre-opening costs
-Prepaid expenses and other current assets
Other assets and liabilities
Accounts payable
Accrued expenses
Unearned franchise and development fees
Net cash provided by operating activities
$47,286
1998
1997
$32,361 $ 26,853
1996
$18,614
25,156
1,757
2,580
21,009
(1,443)
903
20,522
528
(601)
14,304
1,956
430
(1,802)
(275)
(2,125)
(551)
3,827
(2,382)
(1,324)
2,265
7,632
1,873
$62,045
(2,017)
(2,234)
(5,823)
(817)
(827)
2,043
5,885
1,195
$44,707
(2,903)
(1,651)
(4,247)
(499)
(3,253)
3,717
2,630
700
$29,798
(2,343)
(1,574)
4,784
10,406
(339)
$85,636
Statement of Cash Flows
1999
1998
1997
1996
INVESTING ACTIVITIES
Purchase of property and equipment
($81,161) ($70,861) ($43,135) ($28,792)
Purchase of investments
(22,908) (34,107) (41,445) (65,031)
Proceeds from sale or maturity of investments46,632
44,289
46,696
26,572
Loans to franchisees
(6,614)
(4,834) (12,348)
(7,823)
Loan repayments from franchisees
2,955
5,265
2,321 -Deferred systems development costs
(1,399)
(1,208)
(1,989)
(2,614)
Acquisitions
(32,703)
(1,902)
(6,168)
(30)
Other
(19)
403
316
161
Net cash used in investing activities
($95,217) ($62,955) ($55,752) ($77,557)
Statement of Cash Flows
1999
1998
1997
1996
FINANCING ACTIVITIES
Payments on long-term debt
($9,815)
($6,450)
($175)
Proceeds from issuance of long-term debt
2,510
7,720
-Proceeds from exercise of stock options
14,459
11,673
3,537
Tax benefit related to exercise of non-qualified 3,945
stock options
2,953
2,339
Acquisition of treasury stock
(31,713) --Other
79
(7)
(27)
Proceeds from issuance of common stock
Net cash provided by (used in) financing
activities
($20,535) $15,889
$5,674
$51,918
Net increase (decrease) in cash and cash equivalents
($30,116)
Cash and cash equivalents at beginning of year 33,814
Cash and cash equivalents at end of year
$3,698
$4,159
19,904
$24,063
$14,979
18,835
$33,814
($5,371)
24,063
$18,692
($1,367)
1,431
1,315
(12)
50,551
Ratio Analysis
Internal Liquidity Ratios:
Current Ratio
Quick Ratio
Cash Conversion Cycle
Operating Efficiency Ratios:
Total Asset Turnover
Fixed Asset Turnover
Operating Profitability Ratios:
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Return on Equity
Financial Risk Analysis:
Debt to Equity Ratio
DuPont Analysis:
Reurn on Equity
Net Profit Margin
Total Asset Turnover
Leverage Multiplier
1999
1998
1997
1996
0.67
0.37
(4.17)
1.50
1.13
(0.21)
1.62
1.11
1.78
2.10
1.61
0.71
2.16
3.54
2.13
3.95
2.01
4.52
1.70
4.46
53.2%
9.0%
5.9%
16.2%
51.8%
7.8%
4.7%
12.7%
0.02
0.03
16.2%
5.9%
2.16
1.27
12.7%
4.7%
2.13
1.26
52.1% 49.5%
7.7% 7.1%
5.3% 5.2%
12.6% 10.3%
0.00
0.00
12.6% 10.3%
5.3% 5.2%
2.01
1.70
1.19
1.17
Key Ratio Comparison
Current Ratio
Quick Ratio
Total Asset Turnover
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Return on Equity
Debt to Equity Ratio
1 Year Sales Growth
1 Year Earnings Growth
P/E
Market Cap
Papa John's
Tricon
S&P
0.67
0.37
2.16
53.2%
9.0%
5.9%
16.2%
0.02
18.06%
32.61%
18.74
$750M
0.37
0.23
1.81
23.9%
15.9%
8.0%
NM
NM
-7.75%
37.97%
8.19
$4.8B
1.61
1.14
1.05
49.7%
18.5%
11.8%
24.1%
0.92
22%
31.13%
37.01
NA
Recent Stock Info
•
•
•
•
•
•
Last Trade:
52 Week High:
52 Week Low:$21
P/E Ratio:
Beta:
Market Cap:
$29
$45
18.74
1.00
$734.4M
In Conclusion…..
• Papa John’s is a relatively small growth
company that fits the investment policy
statement like a glove.
• The company has a superior product and
more focused strategy than its competition.
• The company has been reporting positive
financial results since its inception, yet is
currently undervalued.
So we recommend….
• Buying 400 shares at the market.
• This strategy gives us the opportunity to get
are feet wet with the company without
committing the maximum dollar amount.