SEC Company Response from PAPA JOHNS INTERNATIONAL INC (PZZA) (CIK 0000901491) (PZZA) — Apr 13, 2020
PAPA JOHNS INTERNATIONAL INC (PZZA) (CIK 0000901491)
Date: April 13, 2020 · CIK: 0000901491 · Accession: 0001157523-20-000500
AI Filing Summary & Sentiment
File numbers found in text: 000-21660
Referenced dates: March 16, 2020
Letter
VIA EDGAR Division of Corporation Finance Office of Trade and Services Papa John's International, Inc. Form 10-K for the Fiscal Year Ended December 29, 2019 Filed February 26, 2020 File No. 000-21660
Dear Messrs. Rhodes and Decker:
We are writing in response to your letter dated March 16, 2020, commenting on the above-referenced filing of Papa John’s International, Inc. (“Papa John’s” or the “Company”). For your convenience, we have repeated each of the staff’s comments below together with the subheadings used in your letter. Each comment is followed by our response to that comment.
Form 10-K for the Fiscal Year Ended December 29, 2019
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Items Impacting Comparability; Non-GAAP Measures, page 40
Comment:
1.
Please tell us the consideration you gave to Question 100.01 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations in adjusting your non-GAAP measures to remove marketing fund investments made by you.
Response:
We did consider the guidance in Question 100.01 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations in our presentation of our adjusted (non-GAAP) financial results excluding marketing fund investments identified as “Special charges.” The marketing fund investments included in “Special charges” of $27.5 million and $10.0 million for the years ended December 29, 2019 and December 30, 2018, respectively, represent discretionary, non-contractual marketing fund investments to support national media initiatives. Domestic Company-owned and franchised Papa John’s restaurants are required to contribute a certain minimum percentage of their sales (currently 5.0% of sales) to the Papa John’s Marketing Fund, our national marketing fund, which are not included as part of the “Special charges.” The national marketing fund is responsible for developing and conducting marketing and advertising for the domestic Papa John’s system. Beginning in the fourth quarter of 2018, the Company began making significant discretionary, non-contractual marketing fund investments to supplement the contractual Company-owned and franchised restaurant-level system contributions. These discretionary, non-contractual marketing fund investments were part of the Company’s previously announced program of increased support and financial assistance to the North America franchise system in response to the severe decline in North America sales. The decline in North America sales followed extensive negative publicity and consumer sentiment as a result of statements by the Company’s founder and former spokesman in late 2017 and July 2018. The discretionary, non-contractual marketing fund investments were made as a response to these extraordinary adverse events to defend and repair the brand’s reputation and were not made in the ordinary course of business.
Question 100.01 notes that a non-GAAP financial measure may be misleading if it excludes “normal, recurring, cash operating expenses necessary to operate a registrant’s business.” The Company does not consider the incremental marketing fund investments to be normal, recurring, cash operating expenses necessary to operate the Company’s business. Furthermore, as stated in the Company’s Form 10-K for the fiscal year ended December 29, 2019, such investments are of a limited duration and are only “expected to continue through the third quarter of 2020”, which further supports the conclusion that the charges are not of a recurring nature. As a result, we do not consider these investments to be representative of our underlying operating performance and thus believe the exclusion in our non-GAAP financial results provides investors with important additional information regarding our underlying operating results and is important for purposes of comparisons to prior year results. In addition, management uses the non-GAAP financial results to evaluate the Company’s underlying operating performance and to analyze trends. Accordingly, we respectfully advise the staff that we considered the guidance in Question 100.01 and believe that the exclusion of the discretionary marketing fund investments from our non-GAAP financial results and the related presentation and disclosure does not cause those results to be misleading.
To help further clarify the nature of these charges, beginning in our Form 10-Q for the quarter ended March 29, 2020, we will revise the footnoted description of these marketing fund investments in our “Special charges” table as follows: “Represents incremental discretionary marketing fund investments in excess of contractual Company-owned restaurant-level contributions, which were made as part of our previously announced temporary support package to our franchisees.”
Comment:
2.
Please tell us the consideration you gave to Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations in adjusting your non-GAAP measures to add revenues you did not receive due to royalty relief.
Response:
We did consider the guidance in Question 100.04 in connection with our inclusion in “Special charges” of royalty reductions that are above and beyond the level of franchise support the Company would incur in the ordinary course of its business. We also evaluated Rule 100(b) of Regulation G, which states that a registrant may not make public a non-GAAP financial measure that, taken together with the information accompanying the measure, is misleading. We believe the adjustment reflects the add-back of contractually due and waived franchise royalties in our financial statements rather than the tailoring of the recognition or measurement principles under GAAP.
Papa John’s franchisees are contractually required to pay a 5% royalty on sales. As part of its voluntary program to provide temporary financial assistance for traditional North America franchisees in response to declining North America sales discussed above, the Company extended financial assistance to its traditional North America franchisees in the form of a reduction in the contractually due royalties beginning in the third quarter of 2018, for a limited time period. The decline in sales was due to the negative publicity and consumer sentiment surrounding the Company’s brand as noted in Comment 1 above. Sales remained negative into 2019, which led the Company to formalize a temporary relief package, publicly announced in July 2019, to provide its franchisees with certainty regarding the availability and schedule of the relief which will continue through the third quarter of 2020. The total royalty relief included in “Special charges” was $19.1 million and $15.4 million for the years ended December 29, 2019 and December 30, 2018, respectively. The scheduled royalty reductions presented in “Special charges” represent the difference between the usual 5.0% contractual royalty rate applicable to North America franchise sales and the reduced royalty rate under our franchisee assistance program ranging from 0.5% to 2.0% of franchise restaurant sales varying by quarter. Additionally, North America franchisees that met certain defined service measures also received a 0.25% reduction in the royalty rate in the third and fourth quarters of 2019.
We believe that presenting these royalty reductions as “Special charges” is consistent with the objectives of our non-GAAP presentation, which is to show the financial performance of our ongoing operations excluding the temporary impact of the Company’s initiative of providing short-term support and financial assistance to the North America franchise system in response to the severe decline in North America sales. The Company did not receive the revenue foregone from its royalty relief program, as it is waiving a contractual right to recognize the revenue earned. We excluded the temporary waiver of this contractual right together with the marketing investments discussed in our response to Comment 1 for internal comparison purposes when evaluating the Company’s underlying operating performance and when analyzing trends. When presented next to the most directly comparable GAAP measure, we believe we are presenting a supplemental measure that shows the impact of our discretionary, non-contractual franchise support and relief program to our operating results. Accordingly, the Company respectfully advises the staff that we have considered the prescribed guidance and we believe that the presentation of royalty relief from our non-GAAP financial results, taken together with the information accompanying the measure, does not cause those results to be misleading.
To help further clarify the nature of the royalty reductions, beginning in our Form 10-Q for the quarter ended March 29, 2020, we will revise the footnoted description of the royalty relief in our “Special charges” table as follows: “Represents financial assistance provided to the North America system in the form of temporary royalty reductions that are above and beyond the level of franchise support the Company would incur in the ordinary course of its business. This temporary financial assistance provides our North America franchisees with certainty regarding the availability and schedule of the temporary relief through the third quarter of 2020. Under the formal relief program, the franchisees pay royalties below the 5.0% contractual rate on franchise restaurant sales with varying rates by quarter as specified under the terms of the program.”
Comment:
3.
For your reconciliations of adjusted net income attributable to common shareholders and adjusted diluted earnings per share, please tell us the consideration you gave to Question 102.11 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations, including presenting the income tax impact attributable to your non-GAAP adjustments as a separate adjustment and disclosing how it was computed.
Response:
The Company respectfully acknowledges the Staff's comment and will present in its reconciliations the income tax impacts related to adjusted net income attributable to common shareholders and adjusted diluted earnings per share in future filings.
Below is the Company’s proposed disclosure for each of the fiscal years ended 2019, 2018 and 2017 for illustrative purposes to show changes from the Company’s non-GAAP reconciliations included in its Form 10-K for the fiscal year ended December 29, 2019. The reconciliations reflect the income tax impacts attributable to the non-GAAP adjustments as separate adjustments and disclose how the tax effects were computed in each applicable footnote. The newly added captions and applicable footnotes to the table have been highlighted to facilitate the Staff’s review.
Items Impacting Comparability; Non-GAAP Measures
The below table reconciles our GAAP financial results to our adjusted (non-GAAP) financial results, excluding identified “Special items,” as detailed below. We present these non-GAAP measures because we believe the Special items impact the comparability of our results of operations. Additionally, the impact of the Company’s 53-week fiscal year in 2017 as compared to 52 weeks in 2019 and 2018 is highlighted below.
Year Ended
Dec. 29,
Dec. 30,
Dec. 31,
(In thousands, except per share amounts)
GAAP income before income taxes
$
5,046
$
6,697
$
140,342
Special items:
Special charges (1)
60,817
50,732
—
Refranchising (gains) losses, net (2)(3)
(4,739
)
1,674
Adjusted income before income taxes
61,124
57,718
142,016
53rd week of operations
—
—
(5,900
)
Adjusted income before income taxes - 52 weeks
$
61,124
$
57,718
$
136,116
GAAP net (loss) income attributable to common shareholders
$
(7,633
)
$
2,474
$
102,292
Special items:
Special charges (1)
60,817
50,732
—
Refranchising (gains) losses, net (2)(3)
(4,739
)
1,674
Tax effect of Special charges and Refranchising (gains) losses, net (4)
(11,236
)
(11,842
)
(351
)
Tax impact of China refranchising (3)
—
2,435
—
Equity compensation tax benefit (6)
—
—
(1,879
)
Adjusted net income attributable to common shareholders
37,209
44,088
94,716
53rd week of operations
—
—
(5,900
)
Tax effect of 53rd week of operations (7)
—
—
2,000
Adjusted net income attributable to common shareholders - 52 weeks
$
37,209
$
44,088
$
90,816
GAAP diluted (loss) earnings per share
$
(0.24
)
$
0.08
$
2.83
Special items:
Special charges (1)
1.91
1.57
—
Refranchising (gains) losses, net (2)(3)
(0.15
)
0.01
0.05
Tax effect of Special charges and Refranchising (gains) losses, net (4)
(0.35
)
(0.36
)
(0.01
)
Tax impact of China refranchising (3)
—
0.07
—
U.S. tax legislation effect on deferred taxes (5)
—
—
(0.20
)
Equity compensation tax benefit (6)
Show Raw Text
CORRESP
1
filename1.htm
April 13, 2020
VIA EDGAR
Mr. Blaise Rhodes
Mr. Rufus Decker
Division of Corporation Finance
Office of Trade and Services
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re:
Papa John's International, Inc.
Form 10-K for the Fiscal Year Ended December 29, 2019
Filed February 26, 2020
File No. 000-21660
Dear Messrs. Rhodes and Decker:
We are writing in response to your letter dated March 16, 2020, commenting on the above-referenced filing of Papa John’s International, Inc. (“Papa John’s” or the “Company”). For your convenience, we have repeated
each of the staff’s comments below together with the subheadings used in your letter. Each comment is followed by our response to that comment.
Form 10-K for the Fiscal Year Ended December 29, 2019
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Items Impacting Comparability; Non-GAAP Measures, page 40
Comment:
1.
Please tell us the consideration you gave to Question 100.01 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations in adjusting your
non-GAAP measures to remove marketing fund investments made by you.
Response:
We did consider the guidance in Question 100.01 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations in our presentation of our
adjusted (non-GAAP) financial results excluding marketing fund investments identified as “Special charges.” The marketing fund investments included in “Special charges” of $27.5 million and $10.0 million for the years ended December 29,
2019 and December 30, 2018, respectively, represent discretionary, non-contractual marketing fund investments to support national media initiatives. Domestic Company-owned and franchised Papa John’s
restaurants are required to contribute a certain minimum percentage of their sales (currently 5.0% of sales) to the Papa John’s Marketing Fund, our national marketing fund, which are not included as part of the “Special charges.” The
national marketing fund is responsible for developing and conducting marketing and advertising for the domestic Papa John’s system. Beginning in the fourth quarter of 2018, the Company began making
significant discretionary, non-contractual marketing fund investments to supplement the contractual Company-owned and franchised restaurant-level system contributions. These discretionary, non-contractual marketing fund investments were part of
the Company’s previously announced program of increased support and financial assistance to the North America franchise system in response to the severe decline in North America sales. The decline
in North America sales followed extensive negative publicity and consumer sentiment as a result of statements by the Company’s founder and former spokesman in late 2017 and July 2018. The discretionary, non-contractual marketing fund
investments were made as a response to these extraordinary adverse events to defend and repair the brand’s reputation and were not made in the ordinary course of business.
1
Question 100.01 notes that a non-GAAP financial measure may be misleading if it excludes “normal,
recurring, cash operating expenses necessary to operate a registrant’s business.” The Company does not consider the incremental marketing fund investments to be normal, recurring, cash operating
expenses necessary to operate the Company’s business. Furthermore, as stated in the Company’s Form 10-K for the fiscal year ended December 29, 2019, such investments are of a limited duration and are only “expected to continue through the third
quarter of 2020”, which further supports the conclusion that the charges are not of a recurring nature. As a result, we do not consider these investments to be representative of our underlying operating performance and thus believe the exclusion
in our non-GAAP financial results provides investors with important additional information regarding our underlying operating results and is important for purposes of comparisons to prior year results. In addition, management uses the non-GAAP
financial results to evaluate the Company’s underlying operating performance and to analyze trends. Accordingly, we respectfully advise the staff that we considered the guidance in Question 100.01 and believe that the exclusion of the
discretionary marketing fund investments from our non-GAAP financial results and the related presentation and disclosure does not cause those results to be misleading.
To help further clarify the nature of these charges, beginning in our Form 10-Q for the quarter ended March 29, 2020, we will revise the footnoted
description of these marketing fund investments in our “Special charges” table as follows: “Represents incremental discretionary marketing fund investments in excess of contractual Company-owned restaurant-level contributions, which were made as
part of our previously announced temporary support package to our franchisees.”
Comment:
2.
Please tell us the consideration you gave to Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations in adjusting your
non-GAAP measures to add revenues you did not receive due to royalty relief.
Response:
We did consider the guidance in Question 100.04 in connection with our inclusion in “Special charges” of royalty reductions that are above and beyond the level of franchise support the Company
would incur in the ordinary course of its business. We also evaluated Rule 100(b) of Regulation G, which states that a registrant may not make public a non-GAAP financial measure that, taken together with the information accompanying the measure,
is misleading. We believe the adjustment reflects the add-back of contractually due and waived franchise royalties in our financial statements rather than the tailoring of the recognition or measurement principles under GAAP.
Papa John’s franchisees are contractually required to pay a 5% royalty on sales. As part of its voluntary program to provide temporary financial
assistance for traditional North America franchisees in response to declining North America sales discussed above, the Company extended financial assistance to its traditional North America franchisees in the form of a reduction in the
contractually due royalties beginning in the third quarter of 2018, for a limited time period. The decline in sales was due to the negative publicity and consumer sentiment surrounding the Company’s brand as noted in Comment 1 above. Sales remained
negative into 2019, which led the Company to formalize a temporary relief package, publicly announced in July 2019, to provide its franchisees with certainty regarding the availability and schedule of the relief which will continue through the
third quarter of 2020. The total royalty relief included in “Special charges” was $19.1 million and $15.4 million for the years ended December 29, 2019 and December 30, 2018, respectively. The scheduled royalty reductions presented in “Special
charges” represent the difference between the usual 5.0% contractual royalty rate applicable to North America franchise sales and the reduced royalty rate under our franchisee assistance program ranging from 0.5% to 2.0% of franchise restaurant
sales varying by quarter. Additionally, North America franchisees that met certain defined service measures also received a 0.25% reduction in the royalty rate in the third and fourth quarters of 2019.
2
We believe that presenting these royalty reductions as “Special charges” is consistent with the objectives of our non-GAAP presentation, which is to show
the financial performance of our ongoing operations excluding the temporary impact of the Company’s initiative of providing short-term support and financial assistance to the North America franchise
system in response to the severe decline in North America sales. The Company did not receive the revenue foregone from its royalty relief program, as it is waiving a contractual right to recognize the revenue earned. We excluded the temporary
waiver of this contractual right together with the marketing investments discussed in our response to Comment 1 for internal comparison purposes when evaluating the Company’s underlying operating performance and when analyzing trends. When
presented next to the most directly comparable GAAP measure, we believe we are presenting a supplemental measure that shows the impact of our discretionary, non-contractual franchise support and relief program to our operating results.
Accordingly, the Company respectfully advises the staff that we have considered the prescribed guidance and we believe that the presentation of royalty relief from our non-GAAP financial results, taken together with the information accompanying
the measure, does not cause those results to be misleading.
To help further clarify the nature of the royalty reductions, beginning in our Form 10-Q for the quarter ended March 29, 2020, we will revise the
footnoted description of the royalty relief in our “Special charges” table as follows: “Represents financial assistance provided to the North America system in the form of temporary royalty reductions that are above and beyond the level of
franchise support the Company would incur in the ordinary course of its business. This temporary financial assistance provides our North America franchisees with certainty regarding the availability and schedule of the temporary relief through
the third quarter of 2020. Under the formal relief program, the franchisees pay royalties below the 5.0% contractual rate on franchise restaurant sales with varying rates by quarter as specified under the terms of the program.”
Comment:
3.
For your reconciliations of adjusted net income attributable to common shareholders and adjusted diluted earnings per share, please tell us the consideration you
gave to Question 102.11 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations, including presenting the income tax impact attributable to your non-GAAP adjustments as a separate adjustment and disclosing how it was
computed.
Response:
The Company respectfully acknowledges the Staff's comment and will present in its reconciliations the income tax impacts related to adjusted net income attributable to common shareholders and adjusted diluted
earnings per share in future filings.
Below is the Company’s proposed disclosure for each of the fiscal years ended 2019, 2018 and 2017 for illustrative purposes to show changes from the Company’s non-GAAP reconciliations included in
its Form 10-K for the fiscal year ended December 29, 2019. The reconciliations reflect the income tax impacts attributable to the non-GAAP adjustments as separate adjustments and disclose how the tax effects were computed in each applicable
footnote. The newly added captions and applicable footnotes to the table have been highlighted to facilitate the Staff’s review.
3
Items Impacting Comparability; Non-GAAP Measures
The below table reconciles our GAAP financial results to our adjusted (non-GAAP) financial results, excluding identified “Special items,” as detailed below. We present these non-GAAP measures because we believe the
Special items impact the comparability of our results of operations. Additionally, the impact of the Company’s 53-week fiscal year in 2017 as compared to 52 weeks in 2019 and 2018 is highlighted below.
Year Ended
Dec. 29,
Dec. 30,
Dec. 31,
(In thousands, except per share amounts)
2019
2018
2017
GAAP income before income taxes
$
5,046
$
6,697
$
140,342
Special items:
Special charges (1)
60,817
50,732
—
Refranchising (gains) losses, net (2)(3)
(4,739
)
289
1,674
Adjusted income before income taxes
61,124
57,718
142,016
53rd week of operations
—
—
(5,900
)
Adjusted income before income taxes - 52 weeks
$
61,124
$
57,718
$
136,116
GAAP net (loss) income attributable to common shareholders
$
(7,633
)
$
2,474
$
102,292
Special items:
Special charges (1)
60,817
50,732
—
Refranchising (gains) losses, net (2)(3)
(4,739
)
289
1,674
Tax effect of Special charges and Refranchising (gains) losses, net (4)
(11,236
)
(11,842
)
(351
)
Tax impact of China refranchising (3)
—
2,435
—
Equity compensation tax benefit (6)
—
—
(1,879
)
Adjusted net income attributable to common shareholders
37,209
44,088
94,716
53rd week of operations
—
—
(5,900
)
Tax effect of 53rd week of operations (7)
—
—
2,000
Adjusted net income attributable to common shareholders - 52 weeks
$
37,209
$
44,088
$
90,816
GAAP diluted (loss) earnings per share
$
(0.24
)
$
0.08
$
2.83
Special items:
Special charges (1)
1.91
1.57
—
Refranchising (gains) losses, net (2)(3)
(0.15
)
0.01
0.05
Tax effect of Special charges and Refranchising (gains) losses, net (4)
(0.35
)
(0.36
)
(0.01
)
Tax impact of China refranchising (3)
—
0.07
—
U.S. tax legislation effect on deferred taxes (5)
—
—
(0.20
)
Equity compensation tax benefit (6)