Papa Johns 2004 Annual Report Download - page 32

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only one Company-owned restaurant during 2004 as compared to an average of five restaurants for the
comparable period in 2003.
Costs and Expenses. The restaurant operating margin at domestic Company-owned units was 15.5% for
2004 compared to 16.9% in 2003, consisting of the following differences as a percent of Company-
owned restaurant sales:
• Cost of sales was 1.9% higher as a percentage of sales in 2004 primarily due to the consolidation of
BIBP, which increased cost of sales 1.5% in 2004. The remaining 0.4% increase in cost of sales is
due to higher cheese costs charged by BIBP, partially offset by lower costs for other commodities as
a result of various product cost savings initiatives and the impact of restaurant pricing increases.
• Salaries and benefits were 0.9% lower as a percentage of sales in 2004 due to staffing efficiencies
and leverage on restaurant pricing increases.
• Advertising and related costs, occupancy costs and other operating expenses were relatively flat as a
percentage of sales.
Domestic commissary and other margin was 8.0% for 2004 compared to 9.1% for 2003. Cost of sales
was 72.1% of revenues in 2004 compared to 69.8% in 2003 primarily due to higher cheese costs incurred
by our commissaries (cheese has a fixed-dollar, as opposed to fixed-percentage, mark-up) and increased
sales of lower margin products, such as promotional items (principally DVDs and the items sold in the
first quarter related to the March 2004 NCAA national promotion). Salaries and benefits were lower as a
percentage of sales, 6.6% in 2004 as compared to 6.9% in 2003 due to staffing efficiencies and the
impact of higher cheese prices on sales. Other operating expenses decreased to 13.3% of sales in 2004
from 14.1% in 2003, primarily as a result of a $6.3 million increase in claims loss reserves in 2003
related to our franchise insurance program compared to a $1.1 million increase for 2004.
The loss from the franchise cheese-purchasing program, net of minority interest, was $16.6 million in
2004. This line item represents the portion of BIBP operating margin losses from purchasing cheese at
the spot market price and selling to franchised restaurants at a fixed quarterly price, net of any loss
attributable to the BIBP shareholders.
International operating margin increased to 17.0% in 2004 from 14.2% in 2003, primarily due to the
disposition of Company-owned restaurants, which had a lower operating margin than our commissary
operation, expense leverage on the increased franchise unit openings and an improvement in commissary
operating margins.
General and administrative expenses were $72.5 million or 7.7% of revenues for 2004 as compared to
$67.2 million or 7.3% of revenues for 2003. This $5.3 million increase was primarily attributable to: the
previously mentioned $1.5 million rent expense adjustment associated with leases (the remaining
$400,000 of the adjustment associated with our review of leases was recorded in depreciation expense), a
$1.8 million increase in bonuses to corporate and restaurant management who met pre-established goals
for their operating units, a $1.6 million increase in compensation expense related to stock options
awarded in late 2003 that vest over a 12-month period throughout 2004, a $1.1 million increase in
administrative costs associated with our expanded domestic franchise sales efforts, $750,000 of
severance and other costs associated with staffing reductions during the fourth quarter of 2004 and $1.3
million of administrative expenses associated with variable interest entities now required to be
consolidated. These increases were partially offset by lower insurance and benefit costs, and savings
related to various administrative efficiencies implemented throughout 2004.
A provision for uncollectible notes receivable of $638,000 was recorded in 2004 as compared to $1.9
million in 2003. These provisions were based on our evaluation of our franchise loan portfolio, and