PAPA JOHNS INTERNATIONAL INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s,” “Papa Johns” 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 Johns began operations in 1984. At March 30, 2025, there were 6,019 Papa John’s restaurants in operation, consisting of 552 Company-owned and 5,467 franchised restaurants operating in 50 countries and territories. Our revenues are derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, and sales of franchise and development rights. Additionally, we derive revenues from sales to franchisees of various items including food and paper products from our North America Quality Control Centers (“QC Centers”) and operation of our International QC Center in the United Kingdom (“UK”), contributions received by Papa John’s Marketing Fund (“PJMF”) which is our national marketing fund, and fees related to the use of information systems equipment as well as 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 Johns system. In discussions of our business, “Domestic” is defined as within the contiguous United States, “North America” includes Canada, and “International” includes the rest of the world other than North America. Recent Developments and Trends During the first quarter of 2025, we continued to build momentum and make progress on executing our strategic priorities as we position the business for long-term success while also navigating a dynamic macroeconomic and competitive environment. We continue to put our efforts and investments toward initiatives that improve our price/value perception and improve our digital and loyalty experience to increase conversion and reduce friction within the customer experience. Our key areas of focus are: • Marketing strategy: During the first quarter of 2025, we invested in our messaging and promotions on showcasing our BETTER INGREDIENTS. BETTER PIZZA ® platform through the launch of our “Meet the Makers” marketing campaign, which highlights the craftsmanship and passion behind the products we serve. We also focused marketing efforts on improving our value perception, such as emphasizing our Papa Pairings at appropriately-valued price points. We believe if we maintain an appropriate balance of value offerings and premium products, it will lead to improving sales trends and transactions over time. In 2025, we anticipate spending up to an additional $25 million in marketing investments, including investments in our customer relationship management platform and our loyalty program, when compared with 2024. This incremental spend will focus on ensuring a strong presence nationally as well as in key regional and local markets while leveraging our data to create more personalized offers for our customers. • Digital and loyalty strategy: Most of our sales occur through digital channels and we are actively identifying opportunities for customers to more quickly access information, streamline the ordering journey and improve the overall user experience. We are also placing additional focus on strategic investments in our technology infrastructure, with our recently announced partnership with Google Cloud to enhance our ordering and delivery experience serving as an example of our commitment to delivering a superior customer experience. In the fourth quarter of 2024, we also updated our loyalty program to allow members to unlock redeemable rewards in the form of “Papa Dough” faster by converting points to Papa Dough in smaller increments. We are pleased with the early response on the lower redemption threshold, which we believe will activate our members at higher rates to help drive transactions and frequency. We will continue evolving our loyalty and digital experiences as they must be flexible and easy to understand to create strong, emotionally connected consumer engagement that seamlessly integrates with our creative, paid, earned and owned messaging. • Domestic commissary growth strategy: We continue to evolve our commissary business to drive profitable growth and overall supply chain productivity that provides cost savings and incremental profit across the system. Effective in the first quarter of 2025, we increased the fixed operating margin that Domestic QC Centers charge by 100 basis points, and we will continue to increase the margin by the same increment in each of the next two years, moving from 4% in 2023 to 8% in 2027. To mitigate this cost for franchisees, we continue to offer opportunities for franchisees to earn annual incentive-based rebates as they increase volume and open new restaurants. Additionally, we expect the incremental volume driven by increased marketing and additional development will reduce the shared supply chain costs across the system over time. We are continuing to evaluate 24 opportunities to enhance productivity and profitability throughout the supply chain through improved operations and supplier relationships. • Development strategy: Development is a key long-term growth driver as we believe there is significant opportunity to offer our quality product to more customers globally and domestically. During the first quarter, we opened 47 new restaurants systemwide, comprised of 18 restaurant openings in North America and 29 restaurant openings in International markets. To pursue the opportunities we have identified in the United States and accelerate development, we are offering a three-year waiver of PJMF contributions for new restaurants opened in 2025, which is intended to deliver higher restaurant-level profit margins, add scale in key markets and attract growth-driven franchisees. Additionally, we continue to evaluate refranchising Company-owned restaurants within various Domestic markets to provide opportunities for growth-minded franchisees to grow their businesses, along with considering strategic closures in certain International markets. International Transformation Plan In December 2023, the Company announced international transformation initiatives (“International Transformation Plan”) designed to evolve our business structure to deliver an enhanced value proposition to our International customers and franchisees, ensure targeted investments and efficient resource management, and better position certain international markets, including the United Kingdom, for long-term profitable growth and brand strength. Total estimated pre-tax costs associated with the International Transformation Plan are expected to be approximately $33 million to $35 million (inclusive of the $31.6 million incurred through the first quarter of 2025), the remainder of which we expect to be recognized in 2025. See “Note 9. Restructuring” of “Notes to Condensed Consolidated Financial Statements” for additional details. The Company is in the final stages of executing the International Transformation Plan, expected to be completed during 2025, which has resulted in the following key accomplishments: • We evaluated and optimized our restaurant portfolio in the UK, which resulted in the closure of 43 underperforming UK Company-owned restaurants and 30 franchised locations. We also completed the refranchising of 60 formerly Company-owned restaurants to primarily existing franchisees and continue to operate 13 Company-owned restaurants in the UK. We have completed substantially all of the strategic restaurant closures in the UK market and the Company’s efforts have turned toward growth opportunities and mitigating closure-related costs as we complete the optimization of the portfolio through exiting leases and other contracts as well as transforming our operations to increase efficiency and effectiveness. • We established hubs for our key regions – APAC (Asia Pacific), EMEA (Europe, Middle East and Africa), and Latin America to align global best practices in operations, marketing and technology with local preferences to accomplish our long-term objective of increasing market share in key markets around the world. Global Restaurant Sales and Unit Information “Comparable sales” represents sales for the same base of restaurants for the same fiscal periods. “Comparable sales growth (decline)” represents the change in year-over-year comparable sales. “Global system-wide restaurant sales” represents total restaurant sales for all Company-owned and franchised restaurants open during the comparable periods, and “Global system-wide restaurant sales growth (decline)” represents the change in global system-wide restaurant sales year-over-year. Comparable sales, Comparable sales growth (decline), Global system-wide restaurant sales and Global system-wide sales growth (decline) exclude franchisees for which we suspended corporate support. “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. We believe Domestic Company-owned, North America franchised, and International Comparable sales growth (decline) and Global system-wide restaurant sales information is useful in analyzing our results since our franchisees pay royalties and marketing fund contributions that are based on a percentage of franchise sales. Comparable sales and Global system-wide restaurant sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation. Franchise sales also generate commissary revenue in the United States and in certain international markets. Comparable sales growth (decline) and Global system-wide restaurant sales information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of Global system-wide restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being 25 impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in the Company’s revenues. Three Months Ended Amounts below exclude the impact of foreign currency March 30, 2025 March 31, 2024 Comparable sales growth (decline): Domestic Company-owned restaurants (4.6)% (3.0)% North America franchised restaurants (2.3)% (1.5)% North America restaurants (2.7)% (1.8)% International restaurants 3.2% (2.6)% Total comparable sales decline (1.3)% (2.0)% System-wide restaurant sales growth (decline): Domestic Company-owned restaurants (3.7)% (2.0)% North America franchised restaurants (0.4)% (1.6)% North America restaurants (1.0)% (1.7)% International restaurants (a) 5.7% 1.6% Total global system-wide restaurant sales growth (decline) (a) 0.6% (0.9)% ___________________________________ (a) System-wide sales for the three months ended March 31, 2024 include $0.4 million of International sales related to the first quarter of 2024 that were erroneously omitted in prior periods. Restaurant Progression Three Months Ended March 30, 2025 March 31, 2024 North America Company-owned: Beginning of period 539 531 Opened 1 5 Closed (1) — End of period 539 536 North America franchised: Beginning of period 2,975 2,902 Opened 17 16 Closed (15) (7) End of period 2,977 2,911 International Company-owned Beginning of period 13 117 End of period 13 117 International franchised: Beginning of period 2,503 2,356 Opened 29 23 Closed (42) (29) End of period 2,490 2,350 Total restaurants – end of period 6,019 5,914 Trailing four quarters net restaurant growth 105 189 26 Results of Operations Financial Statement Updates During the year ended December 29, 2024, the Company implemented several financial statement changes in its Annual Report on Form 10-K, concurrent with the adoption of Accounting Standard Update (“ASU”) 2023-07, “Improvements to Reportable Segment Disclosures.” These changes evolve and modernize our financial statements and footnotes to increase transparency and better reflect management’s key performance metrics. Presentation changes to the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows have been applied retrospectively, and as such, the results from the three months ended March 31, 2024 have been reclassified for consistency with the current year presentation. Additionally, during the year ended December 29, 2024, the Company updated its internal cost allocation methodology to better reflect current levels of time and effort spent managing our different segments. These updates resulted in a higher allocation of previously unallocated corporate expenses to primarily each of the North America franchising and International segments. This update in methodology did not impact total reported expenses and was implemented prospectively beginning with the year ended December 29, 2024, and as such comparative information has been recast. Revenues The following table sets forth the various components of Revenues from the Condensed Consolidated Statements of Operations. Three Months Ended Increase (Decrease) (In thousands) March 30, 2025 March 31, 2024 QTD Revenues: Company-owned restaurant sales $ 173,881 $ 191,251 (9.1) % Franchise royalties and fees 48,056 47,153 1.9 % Commissary revenues 228,941 217,512 5.3 % Other revenues 23,757 20,935 13.5 % Advertising funds revenue 43,674 37,065 17.8 % Total revenues $ 518,309 $ 513,916 0.9 % The comparability of results between 2025 and 2024 is impacted by transactions that have changed the composition of restaurants in the UK during the periods presented. At the beginning of 2024, the Company operated 117 UK Company-owned restaurants. In the second and third quarters of 2024, the Company completed the closure of 43 Company-owned restaurants in the UK and refranchised 60 formerly Company-owned restaurants in the UK. After prior disposal of one mobile restaurant, the Company operated 13 UK Company-owned restaurants subsequent to July 1, 2024. These transactions impact the comparability of revenues and expenses from the International segment during the periods presented. See “Note 9. Restructuring” for additional information on these transactions. Total revenues increased $4.4 million, or 0.9%, to $518.3 million for the three months ended March 30, 2025 as compared to the prior year comparable period. Company-owned restaurant sales, which include sales from both Domestic and International Company-owned restaurants decreased $17.4 million, or 9.1%, for the three months ended March 30, 2025 as compared to the prior year comparable period. The decrease was primarily due to an $11.9 million decline in revenues from our Company-owned restaurants in the UK due to the transactions discussed above. The decrease also results from a $5.4 million decline in revenue from our Domestic Company-owned restaurants, reflecting a 4.6% decline in Domestic comparable sales as a result of lower transaction volumes and ticket sizes. Franchise royalties and fees, which include revenues generated from both North American and International franchisees, increased $0.9 million, or 1.9%, for the three months ended March 30, 2025 as compared to each prior year comparable period. The increase was primarily due to 2.7% growth in North America franchised equivalent units compared to the prior year comparable period and International comparable sales growth of 3.2%, partially offset by North America franchised comparable sales declining 2.3% for the three months ended March 30, 2025. 27 North America franchise restaurant sales decreased to $754.5 million, or 0.4% excluding the impact of foreign currency fluctuations, for the three months ended March 30, 2025 compared to the prior year comparable period. North America franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales. The main drivers in the lower franchise restaurant sales were the North America comparable sales declines, partially offset by equivalent unit growth noted above. International franchise restaurant sales increased $21.9 million to $297.3 million for the three months ended March 30, 2025 compared to the prior year comparable period. As mentioned above, the UK transactions in the second and third quarters of 2024 impacted the comparability of International franchise restaurant sales earned in each period. Excluding the impact of the UK restaurant changes and foreign currency fluctuations, International franchise restaurant sales would have increased $16.2 million, or 5.6% for the three months ended March 30, 2025. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales. Commissary revenues, which includes sales from our North American and International QC Centers, increased $11.4 million or 5.3% for the three months ended March 30, 2025 as compared to the prior year comparable period. The increase for the three months ended March 30, 2025 was primarily due to higher commodity prices during the quarter, particularly cheese and proteins, as well as the previously-disclosed annual 1% increase to our fixed operating margin charged to Domestic QC Centers that took effect at the beginning of the first quarter of 2025. These increases were partially offset by lower transaction volumes during the quarter. Other revenues, which primarily includes revenues derived from our online and mobile ordering business, increased $2.8 million, or 13.5% for the three months ended March 30, 2025 compared to the prior year comparable period primarily due to higher revenues generated from technology services as a result of an increase in the technology fee charged to franchisees that began in the second half of 2024. Advertising funds revenue, which includes the operations of PJMF, local marketing funds and International marketing funds, increased $6.6 million, or 17.8%, for the three months ended March 30, 2025 compared to the prior year comparable period. Beginning with the second quarter of 2024, PJMF increased its contribution percentage, which increased Advertising funds revenue. Costs and Expenses The following table sets forth the various components of Costs and expenses from the Condensed Consolidated Statements of Operations: (In thousands) Three Months Ended March 30, 2025 March 31, 2024 Costs and expenses: Cost of sales $ 366,496 $ 367,666 General and administrative expenses 65,167 57,877 Depreciation and amortization 18,343 17,674 Advertising funds expense 44,338 36,981 Total costs and expenses $ 494,344 $ 480,198 Total costs and expenses were approximately $494.3 million, or 95.4% of total revenues for the three months ended March 30, 2025, as compared to $480.2 million, or 93.4% of total revenues compared to the prior year comparable period. This increase in total costs and expenses, as a percentage of revenues, was primarily due to the following: Cost of sales consists primarily of Company-owned restaurant and supply chain costs incurred to generate related revenues. Components of cost of sales primarily include food and paper products, labor, freight and delivery, occupancy costs, advertising costs related to Company-owned restaurants, and insurance expense. Cost of sales was $366.5 million for the three months ended March 30, 2025, a decrease of $1.2 million from the prior year comparable period. Cost of sales was favorably impacted by approximately $11.0 million due to lower food and labor costs from our Company-owned restaurants in the UK as a result of the restaurant closures and refranchising transactions discussed above, offset by higher commodity costs for our Domestic QC Centers as well as higher food and advertising expenses for our Domestic Company-owned restaurants. 28 Costs of sales by segment for the three months ended March 30, 2025 and March 31, 2024, respectively, were as follows: Three Months Ended (Dollars in thousands) March 30, 2025 March 31, 2024 Increase/Decrease Domestic Company-owned restaurants (b) $ 155,256 $ 151,429 $ 3,827 North America commissaries 235,731 226,287 9,444 International 19,785 30,855 (11,070) Total cost of sales by segment 410,772 408,571 2,201 All other (a) 12,630 12,895 (265) Intersegment cost of sales (56,906) (53,800) (3,106) Total cost of sales $ 366,496 $ 367,666 $ (1,170) ___________________________________ (a) “ All other” refers to all other business units that do not meet the quantitative thresholds for determining reportable segments, which primarily includes our online and mobile ordering business and our marketing funds and are not operating segments. (b) This information is presented on a GAAP basis. As a result, amounts include stock-based compensation expenses that are excluded from our segment results, which are presented on an Adjusted basis (see “Note 11. Segment Information”). General and administrative expenses (“G&A”) expenses were $65.2 million, or 12.6% of revenues for the three months ended March 30, 2025, as compared to $57.9 million, or 11.3% of revenues for the prior year comparable period. G&A expenses consisted of the following: Three Months Ended (In thousands) March 30, 2025 March 31, 2024 Administrative and other general expenses, net (a) $ 61,565 $ 48,354 International restructuring costs (b) 2,135 9,523 Net expenses due to natural disasters (c) 892 — Strategic initiative costs (d) 575 — General and administrative expenses $ 65,167 $ 57,877 ___________________________________ (a) Administrative and other general expenses, net increased by $13.2 million during the three months ended March 30, 2025. The increase was primarily due to costs incurred related to incremental marketing and loyalty investments and expenses resulting from our bi-annual franchise operating conference held in the first quarter of 2025. The 2024 comparative period included lower equity compensation costs related to leadership changes during the first quarter of 2024. (b) Represents costs associated with the Company’s International Restructuring plan. See “Note 9. Restructuring”. (c) Represents expenses incurred, net of expected insurance recoveries, resulting from a tornado that struck our Texas QC Center in March 2025. See “Note 2. Significant Accounting Policies” for additional details. (d) Represents costs associated with project-based strategic initiatives that are not related to our ongoing operations. Depreciation and amortization expense was $18.3 million, or 3.5% of revenues for the three months ended March 30, 2025, as compared to $17.7 million, or 3.4% of revenues for the prior year comparable period. Advertising funds expense was $44.3 million or 101.5% of advertising revenues for the three months ended March 30, 2025 as compared to $37.0 million or 99.8% of advertising revenues for the comparable prior period. Advertising funds expense is comprised primarily of expenses incurred by PJMF, which is designed to operate at break-even as it spends all annual contributions received from the system. The increase was primarily due to higher advertising spend resulting from the previously discussed increase in contributions to the national marketing fund. Advertising funds expense also contains expenses incurred through our international marketing funds to support our International business, which may lead to Advertising funds expense being less than or in excess of Advertising funds revenue due to timing differences. 29 Segment Financial Performance We evaluate the performance of our reportable segments and allocate resources to them based on earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, and other, referred to as adjusted EBITDA. See “Note 11. Segment Information” for further information regarding the Company’s segments. Adjusted EBITDA for each of our reportable segments is summarized in the table below. Three Months Ended Increase (Decrease) (In thousands) March 30, 2025 March 31, 2024 QTD Domestic Company-owned restaurants $ 5,032 $ 14,938 $ (9,906) North America franchising 27,248 28,508 (1,260) North America commissaries 19,353 17,176 2,177 International 5,381 4,193 1,188 Domestic Company-owned restaurants decreased $9.9 million for the three months ended March 30, 2025 primarily due to a 4.6% decline in Domestic comparable sales as well as higher food costs and local advertising costs for our Domestic Company-owned restaurants, offset by decreases in insurance costs. North America franchising decreased $1.3 million for the three months ended March 30, 2025 primarily due to higher incentive compensation allocated to the segment for the three months ended March 30, 2025 compared to the prior year period, partially offset by higher royalty and franchise fee revenue as discussed above. North America commissaries increased $2.2 million for the three months ended March 30, 2025 primarily due to the annual increase in the commissary fixed operating margin mentioned above. This was offset by higher food costs, higher salaries and benefits, and increases in rent due to the sale and subsequent leaseback of two Domestic Quality Control Center properties (“QC Centers”) in Texas and Florida in the third quarter of 2024. International increased $1.2 million for the three months ended March 30, 2025. The increase was primarily due to operating losses attributable to the UK Company-owned restaurants during the prior year quarter, when we owned and operated more restaurants in the UK. This was offset by increases in advertising costs in 2025. Items Below Operating Income The following table sets forth the various items below Operating income from the Condensed Consolidated Statements of Operations: Three Months Ended Increase (Decrease) (In thousands, except per share amounts) March 30, 2025 March 31, 2024 QTD Operating income $ 23,965 $ 33,718 $ (9,753) Net interest expense (10,079) (11,063) (984) Income before income taxes 13,886 22,655 (8,769) Income tax expense (a) (4,543) (7,741) (3,198) Net income 9,343 14,914 (5,571) Net income attributable to noncontrolling interests (121) (278) (157) Net income attributable to the Company $ 9,222 $ 14,636 $ (5,414) Basic earnings per common share $ 0.28 $ 0.45 $ (0.17) Diluted earnings per common share $ 0.27 $ 0.44 $ (0.17) (a) Note that we have changed the signage of income tax expense from historic presentation for consistency purposes. 30 Net Interest Expense Net interest expense decreased $1.0 million for the three months ended March 30, 2025. The decrease for the three months ended March 30, 2025 was primarily due to lower average interest rates during the quarter. Income Tax Expense Our effective income tax rate was 32.7% for three months ended March 30, 2025 as compared to an income tax rate of 34.2% for the prior year comparable period. The lower effective tax rate for three months ended March 30, 2025 was primarily driven by impairment charges related to the International Restructuring that created unrecognized tax losses and prevented the Company from generating foreign tax credits in 2024, partially offset by increased tax shortfall generated by stock option exercises and vesting of restricted shares in 2025 and increased foreign tax withholding on royalties. Three Months Ended (Dollars in thousands) March 30, 2025 March 31, 2024 Income before income taxes $ 13,886 $ 22,655 Income tax expense $ (4,543) $ (7,741) Effective tax rate 32.7 % 34.2 % Net Income Attributable to Noncontrolling Interests Net income included income of $0.1 million attributable to noncontrolling interests for three months ended March 30, 2025 as compared to income of $0.3 million for the prior year comparable period. Diluted Earnings Per Common Share Diluted earnings per common share was $0.27 for three months ended March 30, 2025 as compared to $0.44 for the prior year comparable period, representing an decrease of $0.17. Adjusted diluted earnings per common share, a non-GAAP measure, was $0.36 for three months ended March 30, 2025 as compared to adjusted diluted earnings per common share of $0.67 for the prior year comparable period representing a decrease of $0.31. See “Non-GAAP Measures” for additional information. 31 Non-GAAP Measures In addition to the results provided in accordance with U.S. GAAP, we provide certain non-GAAP measures, which present results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with U.S. GAAP and include the following: adjusted EBITDA, adjusted net income attributable to common shareholders and adjusted diluted earnings per common share. We believe that our non-GAAP financial measures enable investors to assess the operating performance of our business relative to our performance based on U.S. GAAP results and relative to other companies. We believe that the disclosure of these non-GAAP measures is useful to investors as they reflect metrics that our management team and Board utilize to evaluate our operating performance, allocate resources and administer employee incentive plans. The most directly comparable U.S. GAAP measures to adjusted EBITDA, adjusted net income attributable to common shareholders and adjusted diluted earnings per common share are net income, net income attributable to common shareholders and diluted earnings per common share, respectively. These non-GAAP measures should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s U.S. GAAP results. The table below reconciles our GAAP financial results to our non-GAAP financial measures. Three Months Ended (In thousands, except per share amounts) March 30, 2025 March 31, 2024 Net income $ 9,343 $ 14,914 Income tax expense 4,543 7,741 Net interest expense 10,079 11,063 Depreciation and amortization 18,343 17,674 International restructuring costs (a) 2,180 9,543 Net expenses due to natural disasters (b) 892 — Strategic initiative costs (c) 575 — Stock-based compensation expense 3,669 (370) Adjusted EBITDA $ 49,624 $ 60,565 Net income attributable to common shareholders $ 9,028 $ 14,636 International restructuring costs (a) 2,135 9,523 Net expenses due to natural disasters (b) 892 — Strategic initiative costs (c) 575 — Tax effect of adjustments (d) (818) (2,152) Adjusted net income attributable to common shareholders $ 11,812 $ 22,007 Diluted earnings per common share $ 0.27 $ 0.44 International restructuring costs (a) 0.06 0.29 Net expenses due to natural disasters (b) 0.03 — Strategic initiative costs (c) 0.02 — Tax effect of adjustments (d) (0.02) (0.06) Adjusted diluted earnings per common share $ 0.36 $ 0.67 ` 32 ___________________________________ (a) Represents costs associated with the Company’s International Transformation Plan. See “Note 9. Restructuring” for additional details. (b) Represents expenses incurred, net of expected insurance recoveries, resulting from a tornado that struck our Texas QC Center in March 2025. See “Note 2. Significant Accounting Policies” for additional details. (c) Represents costs associated with project-based strategic initiatives. We consider these costs to be separate and distinct from other professional fees incurred in the ordinary course of business and not reflective of the ongoing costs to operate our business. (d) The tax effect on non-GAAP adjustments was calculated by applying the marginal tax rates of 22.7% and 22.6% for the three months ended March 30, 2025 and March 31, 2024, respectively. In addition, we present free cash flow in this report, which is a non-GAAP measure. Please see “Liquidity and Capital Resources – Free Cash Flow” for a discussion of why we believe free cash flow provides useful information regarding our financial condition and results of operations, and a reconciliation of free cash flow to the most directly comparable U.S. GAAP measure. 33 Liquidity and Capital Resources Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under the Second Amended and Restated Credit Agreement, dated as of March 26, 2025, which amended and restated the Amended and Restated Credit Agreement dated as of September 14, 2021 and amended May 30, 2023. The Second Amended and Restated Credit Agreement provides for a senior secured term loan in a principal amount of $200.0 million (the “Term Loan”) and a senior secured revolving credit facility in an aggregate available principal amount of $600.0 million (the “PJI Revolving Facility” together with the Term Loan, the “PJI Credit Facilities”). See “Note 8. Debt” for additional detail regarding the Second Amended and Restated Credit Agreement. Our principal uses of cash are operating expenses, capital expenditures, and returning value to our shareholders in the form of cash dividends and share repurchases. Our capital priorities are: • investing for growth • maintaining a strong balance sheet, and • returning capital to shareholders The Company believes that its balances of cash and cash equivalents and borrowing capacity, along with cash generated by operations and from asset sales, will be sufficient to satisfy its cash requirements, cash dividends, interest payments and share repurchases over the next twelve months and beyond. Cash Flows The table below summarizes our cash flows for the three months ended March 30, 2025 and March 31, 2024 (in thousands): Three Months Ended March 30, 2025 March 31, 2024 Total cash provided by (used in): Operating activities $ 31,336 $ 11,987 Investing activities (7,083) (10,152) Financing activities (18,567) (14,602) Effect of exchange rate changes on cash and cash equivalents 371 (52) Change in cash and cash equivalents $ 6,057 $ (12,819) Operating Activities Total cash provided by operating activities was $31.3 million for the three months ended March 30, 2025 compared to $12.0 million for the corresponding period of 2024. The increase of $19.3 million primarily reflects a favorable impact from timing of collections and marketing spend within our advertising fund as well as favorable changes in working capital accounts compared to the prior period. Investing Activities Total cash used in investing activities was $7.1 million for the three months ended March 30, 2025 compared to $10.2 million for the same period in 2024. The decrease in cash used in investing activities is due primarily to the receipt of investment distributions of $4.7 million and $2.3 million during the three months ended March 30, 2025 and March 31, 2024, respectively, related to our deferred compensation plan. Our capital expenditures consisted primarily of capital investments for existing restaurants and new restaurant locations as well as investments in technology platforms. We estimate that our capital expenditures during 2025 will be approximately $75 million to $85 million. This estimate includes the acquisition of sites and construction costs for new Company-owned restaurants that have opened or that we expect to open during 2025. We intend to fund our capital expenditures with cash generated by operations and borrowings under our PJI Revolving Facility, as necessary. 34 Financing Activities Total cash used in financing activities was $18.6 million for the three months ended March 30, 2025 compared to $14.6 million for the same period of 2024. In the first quarter of 2025, the principal financing outflows were related to dividend payments of $15.2 million, $2.4 million in payments related to financing leases, and $1.1 million in tax payments on equity compensation award issuances. Cash used in financing activities also reflects the impact of the refinancing of our debt via the Second Amended and Restated Credit Agreement, which resulted in borrowings of $200.0 million under the new Term Loan, from which the proceeds were used to repay $196.8 million to the PJI Revolving Facility during the quarter and $3.0 million in related issuance costs. In the first quarter of 2024, the primary uses of cash for financing activities were $15.1 million in dividend payments, $3.2 million in tax payments on equity award issuances and $2.4 million in payments related to financing leases. These outflows were offset by net borrowings of $3.5 million from the PJI Revolving Facility and $1.8 million from the PJMF revolving line of credit (the “PJMF Revolving Facility”). There were no share repurchases in the first quarter of 2025 or 2024. Debt Our outstanding debt as of March 30, 2025 was $749.9 million, which was comprised of $400.0 million principal amount of our 3.875% senior notes (the “Notes”), $200.0 million of Term Loan borrowings, and $149.9 million outstanding under the PJI Revolving Facility. Remaining availability under the PJI Revolving Facility was approximately $450.1 million as of March 30, 2025. Our Second Amended and Restated Credit Agreement contains customary affirmative and negative covenants that, among other things, require customary reporting obligations, and restrict, subject to certain exceptions, the incurrence of additional indebtedness and liens, the consummation of certain mergers, consolidations, sales of assets and similar transactions, the making of investments, equity distributions and other restricted payments, and transactions with affiliates, in each case, that are substantially similar to our previous credit agreement (the “Existing Credit Agreement”). In addition, the Company will be subject to the following financial covenants substantially similar to those in the Existing Credit Agreement (other than the new liquidity requirement described in clause (3)): (1) a maximum Leverage Ratio of 5.25 to 1.00, subject to the Company’s election to increase the maximum Leverage Ratio by 0.5 to 1.0 in connection with material acquisitions if the Company satisfies certain requirements; (2) a minimum ratio of EBITDA plus consolidated rental expense to consolidated interest expense plus consolidated rental expense of 2.00 to 1.00; and (3) applicable only during the time period beginning 91 days prior to the maturity of the Company’s existing senior notes due 2029 (the “Senior Notes”) and until such Senior Notes are repaid in full or the maturity thereof is extended at least 91 days after the latest maturity date applicable to the Credit Facilities, liquidity of not less than $150.0 million. The Company is also subject to certain financial covenants, as shown in the following table, that could restrict or impose constraints on the liquidity of our business: Permitted Ratio Actual Ratio as of March 30, 2025 Leverage ratio Not to exceed 5.25 to 1.0 3.4 to 1.0 Interest coverage ratio Not less than 2.00 to 1.0 3.1 to 1.0 Our leverage ratio is defined as outstanding debt divided by Consolidated EBITDA (as defined in the Second Amended and Restated Credit Agreement) for the most recent four fiscal quarters. Our interest coverage ratio is defined as the sum of Consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all financial covenants as of March 30, 2025. In addition, the Indenture governing the Notes contains customary covenants that, among other things and subject to certain exceptions, limit our ability and the ability of certain of our subsidiaries to: incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions or repurchase or redeem our capital stock; prepay, redeem or repurchase certain debt; issue certain preferred stock or similar equity securities; make loans and investments; sell assets; incur liens; enter into transactions with affiliates; enter into agreements restricting our subsidiaries’ ability to pay dividends; and consolidate, merge or sell all or substantially all of our assets. The PJMF Revolving Facility consists of a $30.0 million revolving line of credit pursuant to a Revolving Loan Agreement, dated September 30, 2015 and most recently amended on September 30, 2024. We did not have any borrowings under the 35 PJMF Revolving Facility as of March 30, 2025 or December 29, 2024. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the Company’s Second Amended and Restated Credit Agreement. Refer to Note 12 of the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 29, 2024 for additional information. Share Repurchases As part of our long-term growth and capital allocation strategy, we are committed to investing in share repurchases to provide ongoing value and enhanced returns to our shareholders. On October 28, 2021, our Board of Directors approved a share repurchase program with an indefinite duration for up to $425.0 million of the Company’s common stock.There was no share repurchase activity during the three months ended March 30, 2025 and March 31, 2024. Approximately $90.2 million remained available under the Company’s share repurchase program as of March 30, 2025. 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. Dividends The Company paid aggregate cash dividends to common stockholders of $15.2 million ($0.46 per share) and $15.1 million ($0.46 per share) for the three months ended March 30, 2025 and March 31, 2024, respectively. On May 1, 2025, our Board of Directors declared a second quarter dividend of $0.46 per common share (approximately $15.4 million in the aggregate), which will be paid on May 30, 2025 to stockholders of record as of the close of business on May 19, 2025. The declaration and payment of any future dividends will be at the discretion of our Board of Directors. Free Cash Flow Free cash flow, a non-GAAP measure, is defined as net cash provided by operating activities (from the Condensed Consolidated Statements of Cash Flows) less the purchases of property and equipment. We view free cash flow as an important financial 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 the Company’s performance than the Company’s GAAP measures. The Company’s free cash flow was as follows for the three month periods of 2025 and 2024 (in thousands): Three Months Ended March 30, 2025 March 31, 2024 Net cash provided by operating activities $ 31,336 $ 11,987 Purchases of property and equipment (12,231) (13,058) Free cash flow $ 19,105 $ (1,071) Cash Requirements There have been no material changes in our cash requirements other than in the ordinary course of business since the end of 2024. Refer to “Contractual Obligations” presented within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2024 for additional information regarding our cash requirements. Impact of Inflation and Macroeconomic Trends In recent years, we have experienced price increases in food items and other commodities, labor and benefits, and fuel and other energy costs. Inflationary pressures affect our profitability both directly, in our Company-owned restaurants and delivery mechanisms and through gross margins experienced by sales of food and supply items via our QC Centers, as well as indirectly, through higher food ingredient and paper and supply costs, rising fees from delivery aggregators driven by higher wage demands and increases in the cost of gasoline that, once reflected in upward price adjustments on their fees, 36 can exert downward pressure on unit sales, reducing royalty fees we realize from our Domestic and International franchisees. Compensating menu price increases are subject to competitive pressure in the markets in which we operate. Expense control measures are also deployed to offset higher costs when possible. Food costs, in particular the cost of cheese, are managed to an extent by pricing agreements with suppliers and forward purchase contracts we enter into, as discussed in “Item 3. Quantitative and Qualitative Disclosures About Market Risk.” While we are still evaluating the potential impact of proposed tariffs as well as our ability to manage their impacts, we currently do not believe that tariffs in the form currently proposed by the United States government would have a significant negative impact to our domestic business, as a substantial proportion of our ingredients and supply items are sourced domestically. However, the extent to which tariffs may increase the price of other goods and services and how they may alter discretionary spending patterns by our customers or impact our franchisees’ profitability is currently unknown and may adversely affect the Company’s results of operations and/or financial position. Forward-Looking Statements Certain matters discussed in this Quarterly Report on Form 10-Q and other Company communications that are not statements of historical fact constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “intend,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “outlook”, “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements include or may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, depreciation and amortization, interest expenses, tax rates, system-wide sales, adjusted EBITDA, the current economic environment, industry trends, consumer behavior and preferences, commodity and labor costs, currency fluctuations, profit margins, supply chain operating margin, net unit growth, unit level performance, capital expenditures, restaurant and franchise development, restaurant acquisitions, restaurant closures, labor shortages, labor cost increases, changes in management, inflation, royalty relief, franchisee support and incentives, the effectiveness of our menu innovations and other business initiatives, investments in product, digital and technology innovation, marketing efforts and investments, liquidity, compliance with debt covenants, impairments, strategic decisions and actions, changes to our national marketing fund, changes to our commissary model, dividends, effective tax rates, regulatory changes and impacts, repositioning of the UK market, International restructuring plans, including timing of completion, expected benefits and costs, International consumer demand, adoption of new accounting standards, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to: • the ability of the Company to manage challenging macroeconomic conditions in the United States and internationally; • the ability of the Company to retain key management and manage staffing and labor shortages at Company and/or franchised restaurants and our Quality Control Centers; • increases in labor costs, food costs or sustained higher other operating costs, including as a result of supply chain disruption, inflation and related impacts, increased tariffs or other trade barriers, immigration policies, or climate change; • the potential for delayed new restaurant openings, both domestically and internationally; • the increased risk of phishing, ransomware and other cyber-attacks; • risks to the global economy and our business related to geopolitical conflicts, including those in Ukraine and the Middle East; • increased costs for branding initiatives and launching new advertising and marketing campaigns and promotions to boost consumer sentiment and sales trends, and the risk that such initiatives will not be effective; • risks related to a possible economic slowdown that could, among other things, reduce consumer spending or demand and result in changing consumer practices; • risks related to social media, including publicity adversely and rapidly impacting our brand and reputation; • aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors; • changes in consumer preferences or consumer buying habits, including the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending, including higher unemployment; 37 • the adverse impact on the Company or our results caused by global health concerns, product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our Company-owned or franchised restaurants or others in the restaurant industry; • the effectiveness of our technology investments and changes in unit-level operations; • the ability of the Company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, restaurant level employees or suitable sites; • increases in insurance claims and related costs for programs funded by the Company up to certain retention limits, including medical, owned and non-owned vehicles, workers’ compensation, general liability and property; • disruption of our supply chain or commissary operations which could be caused by our sole source of supply of mozzarella cheese, desserts, garlic cups or limited source of suppliers for other key ingredients or more generally due to weather, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control; • increased risks associated with our International operations, including economic and political conditions, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets, regulatory changes, increased tariffs and other trade barriers, and new restaurant growth; • the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business; • risks related to our indebtedness and borrowing costs, including prolonged higher interest rates, and the current state of the credit markets; • the Company’s ability to continue to pay dividends to stockholders based upon profitability, cash flows and capital adequacy if restaurant sales and operating results decline; • our ability to effectively operate and improve the performance of International Company-owned restaurants; • disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and cybersecurity incidents, including theft of confidential Company, employee and customer information, including payment cards; and • changes in Federal or state income, general and other tax laws, rules and regulations and changes in generally accepted accounting principles. These and other risk factors are discussed in detail in “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2024. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.