Papa Johns International Inc. (PZZA) Q2 2022 Earnings Call Transcript

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Papa Johns International Inc. (NASDAQ: PZZA) Q2 2022 earnings call dated Aug. 04, 2022

Corporate Participants:

Stacy Frole — Investor Relations

Robert Lynch — President and Chief Executive Officer

Ann Gugino — Chief Financial Officer

Analysts:

Christopher Thomas O’Cull — Stifel — Analyst

Eric Andrew Gonzalez — KeyBanc — Analyst

Brian John Bittner — Oppenheimer — Analyst

Alexander Russell Slagle — Jefferies — Analyst

Lauren Danielle Silberman — Credit Suisse — Analyst

Brian Hugh Mullan — Deutsche Bank — Analyst

Peter Mokhlis Saleh — BTIG — Analyst

Andrew Strelzik — BMO Capital — Analyst

Nerses Setyan — Wedbush Securities — Analyst

James Jon Sanderson — Northcoast Research — Analyst

Todd Morrison Brooks — The Benchmark Company — Analyst

Presentation:

Operator

Good day, and thank you for standing by. Welcome to Papa John’s Second Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, Stacy Frole. You may begin.

Stacy Frole — Investor Relations

Thank you. Good morning, and welcome to our second quarter earnings conference call. This morning, we issued our 2022 second quarter earnings release. A copy of the release can be obtained on our Investor Relations website at ir.papajohn.com under the News Releases tab or by contacting our Investor Relations department at investor_relations@ papajohn.com.

On the call this morning are Rob Lynch, our President and CEO; and Ann Gugino, our CFO. Before we begin, I need to remind you that comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These statements may involve risks and uncertainties that could cause actual results to differ materially from these statements.

Forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings. In addition, please refer to our earnings release for the required reconciliation of non-GAAP financial measures discussed on today’s call.

Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Rob?

Robert Lynch — President and Chief Executive Officer

Thank you, Stacy. Good morning, everyone, and thanks for joining us today. Before we begin, I’d like to welcome Stacy to our first Papa John’s earnings call since joining the company in May. Many of you have already met with her or will have the opportunity soon as we ramp up our outreach and shareholder engagement over the coming year. She has a very strong finance and IR background, and we’re excited to have her as part of our team.

This morning, my remarks are going to focus on Papa John’s top line sales growth how we’re navigating this dynamic environment and our continued development momentum. I want to start off by saying I’m so proud of our team members and franchisees. Thanks to their hard work and dedication, we delivered our 12th consecutive quarter of positive comparable sales in North America, building on our significant gains over the past two years. And we delivered these results despite an increasingly difficult macro environment.

This proves the resiliency of our differentiated brand, product innovation, digital capabilities and winning culture. In fact, weekly per store average sales across every one of our markets are higher today than they were before the pandemic and our franchisees continue to grow and prosper.

That being said, accelerating commodities and labor costs impacted unit economics, margins and operating income in the second quarter. But with continued strategic price increases and the strong performance from our premium priced menu innovations, we were able to partially but not completely offset these higher costs.

As consumer sentiment continues to soften, I’d like to reiterate a point I’ve made before. Pizza offers tremendous value relative to other QSR, fast casual or casual dining concepts. For this reason, the segment has been historically resilient through past economic cycles because we invest in better ingredients, consumers recognize the superior value already offered by Papa John’s pizza and can see their family a delicious, high-quality meal very affordably.

As we have discussed in the past, our loyalty program and one-on-one marketing capabilities offer more price-sensitive customers compelling incentives to order our high-quality pizza at great value.

At the same time, those customers who are less price sensitive are targeted with opportunities to self-select into our premium innovations, bifurcating our customer base and maximizing profitability for our restaurants. We’re navigating this dynamic environment with a balanced approach to optimize short-term results, while investing for our future. This positions us even better for long-term growth and margin accretion when the commodity cycle reverses and costs eventually normalize, which we expect heading into 2023.

Our long-term perspective and optimism are also reflected in our franchisees development activities. We continue to open new stores and signed significant new development deals, further validating and supporting the brand’s long-term potential.

In the second quarter, we delivered positive sales growth on top of best-in-class growth over the last two years. Comparable sales in North America rose 1%, contributing positively to a three-year stack of 34%. Driving these positive comps were premium menu innovations, technology integrations with third-party aggregators and in our revenue management capabilities, which allowed us to strategically execute pricing actions, while maintaining demand.

Our brand’s unique promise of better ingredients, better pizza combined with our menu innovations and Papa Rewards loyalty program, enables us to provide strong value to each customer segment at the right price.

In the current environment, there’s always temptation to chase transactions through aggressive discounting. As we evolve our revenue management capabilities, we have instilled a disciplined approach to provide the right promotions to the super value-oriented customer without risking the erosion of our brand or pricing integrity.

Since the beginning of the year, menu prices on average at Papa John’s have risen approximately 7% to 8% system-wide. From a menu innovation standpoint, our Epic Pepperoni-Stuffed Crust Pizza introduced in April, has been a huge hit with customers.

It is strengthening our stuffed crust menu platform, which is driving orders and some of the highest percentages of customers expressing an intent to repurchase that we’ve ever seen. We’re also excited about our innovation pipeline for the second half of the year as we balance the introduction of new innovations with bringing back fan favorites.

Additionally, our efforts over the past few years to build strong partnerships with each of the nationwide third-party delivery aggregators continues to be a strategic differentiator for us. We are dedicated to meeting our customers where they are and these partnerships provide us with a new opportunity for consumers to discover our brand through an incremental sales channel and an ability to leverage their incremental delivery capabilities, particularly at peak times.

In our international business, comps declined 8%, though still delivered a three-year stack of 19%. These results primarily reflect declines in the UK, our largest international market, which is experiencing some of the same challenges that we are facing here in the US and some unique to the UK.

They have seen record high inflation, the lapping of government stimulus, the vat [Phonetic] tax holiday and the lifting of COVID restrictions, which may have disrupted normal industry seasonality last year.

As we mentioned on our first quarter call, we have strong leadership overseeing our international business and the UK. This team is focused on differentiating the brand from our competitors, growing our share in existing markets and efficiently scaling in new markets. Excluding the UK, our other international markets remained healthy in the quarter, lapping two strong years of positive comp growth.

In the UK specifically, and our international markets more generally, we see enormous opportunities to apply the model we have developed in the US, including our revenue management capabilities, product and technological innovation and third-party delivery relationships, to achieve significant gains in restaurant level profitability in the future which will help fuel further development acceleration outside the US.

After two years of double-digit comp growth, on our top priorities for keeping our employees and customers safe and meeting customer demand, today, we’re operating in a very different environment. This is providing the impetus to focus our innovation mindset on our operations to improve customer service and delivery capabilities and efficiencies which will grow long-term restaurant profitability across the system.

To optimize labor, we are evolving our management tools and systems to improve execution. Over the last few years, we made significant operational changes. We introduced centralized call centers, partnered with third-party aggregators and improved efficiencies through equipment innovation.

With these and more improvements underway, we are currently working to build new labor optimization tools to increase restaurant profitability moving forward. We’re extremely excited about our new unit development growth story, as there is significant market expansion opportunities in North America and internationally. We already have development agreements in place with nearly all of our top 25 North American franchisees versus only three in 2019 and we are actively pursuing new deals with highly experienced, well-capitalized franchisees around the globe.

In the second quarter, we opened 47 net new units, consistent with our expectations. And plan to open between 280 and 320 net new units for the full year of 2022. We continue to sign new deals, which further reinforces our confidence in our multiyear development goal to grow global net units by 6% to 8% annually for fiscal 2023 through 2025, continuing the acceleration we have seen over the past year.

When franchisees open up new Papa John’s restaurant or sign a new development deal, they’re making a long-term investment decision. Q2 solid development activity and new deals are a strong indicator of our brand’s long-term momentum and profitable growth potential.

Now, I’d like to turn the call over to Ann to discuss our financial results in greater detail. Ann?

Ann Gugino — Chief Financial Officer

Thanks, Rob, and good morning, everyone. As you read in our earnings release this morning, we continue to deliver topline growth on top of significant gains over the past two years. For the second quarter Global system-wide sales were $1.2 billion, up 2.6% in constant currency.

Accelerating net unit growth, particularly in international markets, contributed to system-wide sales growth in the second quarter in addition to our sustained positive North America comp sales. As Rob just mentioned, this growth is a great example of the strength of our brand and our franchisees’ excitement to investment.

Comp sales in North America were up 1.4% across franchise restaurants and down 1.5% in company-owned restaurants. Like the first quarter, the difference largely reflects localized differences in the economy. In markets with both franchised and company-owned restaurants, we saw a similar performance in the quarter.

International comps were down 8% in the second quarter, reflecting the continued softness in the UK, Rob mentioned earlier. Partially offsetting the UK performance were solid comps from our other international markets, including the Middle East and Latin America. Consolidated revenue increased 1.5% to $522.7 million in the second quarter, largely driven by commissary revenues tied to higher commodity costs.

Excluding the impact of our strategic refranchising of a 90 restaurant joint venture in the first quarter, total company revenues increased 5.2% versus the prior year.

The year-over-year impact of this strategic refranchising was most pronounced in revenue as revenues from the JV were no longer consolidated in restaurant sales revenue and instead recorded in royalties and commissary sales. Its impact on adjusted operating income was less than $1 million and neutral to EPS consistent with our previous announcement.

Turning to margins. Adjusted consolidated operating income for the second quarter was $40.4 million compared with $48 million for the second quarter of 2021. Adjusted operating margins were 7.7%, down from 9.3% last year and down sequentially from 8.3% in the first quarter.

As we discussed on our last call, we expected adjusted operating margins to decline sequentially due to the acceleration of inflation we were seeing in our company-owned restaurants. This inflation was even greater than initially anticipated.

Food basket costs were up 18% in the quarter, impacted by accelerating cheese costs. Labor costs also remained elevated in the quarter. Together, these factors represented nearly 800 basis points of headwind for Corporate restaurant segment margins year-over-year.

Strategic pricing actions reduced the impact of this record inflation, resulting in a 400 basis point decline in restaurant level margins year-over-year. The cost headwinds we experienced in the corporate restaurants were also somewhat offset by a $7.2 million decline in general and administrative expenses.

Commissary revenues rose 17.5% in the quarter, driven by the continued acceleration of costs. Remember, since our commissary arrangement with North American franchisees passes through food, labor and fuel costs on a cost plus fixed margin basis rising costs are slightly accretive to commissary operating income but dilutive to consolidated operating margins.

Altogether, these factors were an approximate 160 basis point drag on second quarter adjusted corporate operating margins in line with the reduction we experienced in Q1. Going forward, we expect commodity costs, in particular, cheese and wheat will remain elevated in the near term before beginning to moderate towards the end of the year.

Longer term, we expect to fully offset the impact of increased food and labor costs through strategic pricing actions and productivity initiatives. However, as we saw in Q2, these cost pressures are immediate and strategic pricing must be executed carefully as do not significantly impact demand. We will continue to take a surgical approach, being mindful of retaining the strong customer base and positive momentum we’ve built over the past three years.

It’s important to understand that the decisions we are making focus on optimizing results in the near term while leaning into our differentiated strategy and securing our growing market share position for the long-term. We are confident that when the current headwinds normalize, we will be in an even better position for long-term growth and margin accretion.

Continuing to earnings. For the quarter, on a GAAP basis, diluted earnings per share were $0.70 versus a loss of $2.30 last year, including $0.04 and $3.23 in special items, respectively. Recall included in the 2021 special items was a one-time cost of $3.15 related to the repurchase and conversion of the Series B preferred Excluding these special items, the second quarter adjusted earnings per diluted share was $0.74, down from $0.93 a year ago. Primarily reflecting margin compression in our corporate restaurants and the lower international performance, which included approximately a penny and a half of headwind from year-over-year foreign currency exchange rates.

Now turning to cash flow and the balance sheet. For the first six months of the year, net cash provided by operating activities was $45.6 million. After deducting $30.7 million in capital expenditures for the development of new domestic restaurants and investments in technology innovation, we generated free cash flow of $14.8 million.

This was down from $100.1 million from the first six months of 2021, reflecting the impact of our overall business performance, working capital changes and a $9 million increase in capital expenditures.

We ended the second quarter with ample liquidity, more than $500 million in cash and borrowing available under our revolving credit facility and have a conservative gross leverage ratio of 2.3 times. We also continued to return significant cash to our shareholders.

Last quarter, we repurchased $42.8 million in shares with an additional $20 million repurchased after the quarter as of July 28. In total, we have repurchased more than 975,000 shares since the beginning of the year. We also paid out $12.5 million in common dividends during the quarter.

In addition, based on our strong balance sheet and our positive outlook, our Board has declared a 20% increase in our 2022 third quarter dividend to $0.42 per share or $1.68 annualized. Our capital structure provides us with substantial operating flexibility. We’ll continue to take a disciplined and balanced approach to managing our cash flows to maximize value for our shareholders through organic growth opportunities, share repurchases and cash dividends.

Now to our outlook. With new menu innovations, the return of fan favorite, strategic pricing actions and targeted offerings for our most value-conscious customers, we expect North America comp sales to continue their three-year positive trend for the second half of the year.

As for international, we expect softness in the UK to continue into the second half of 2022 and then improve into 2023 as strategic initiatives are executed. Since the UK currently represents more than 20% of our international sales, these headwinds will result in international comp sales being down for the full year, but up high single digits on a two-year stack.

Regarding adjusted operating margins, we expect near-term pressure to continue from lower UK contributions and while commodity costs remain elevated and wage inflation continues. For the full year, we now anticipate a decline in consolidated operating margins between 100 basis points to 150 basis points when compared with 2021.

We do expect to see margins improve heading into 2023 as operational productivity initiatives are executed and costs begin to normalize. We continue to target fiscal 2022 capex of between $75 million and $85 million as we invest in technology innovation and the development of new company stores.

Full year net interest expense is expected to be approximately $25 million. We expect the tax rate for the remaining quarters to range between 20% and 22% and for the full year to be between 18% and 20%.

And I want to close by saying how proud I am of our team and their ability to evolve and adapt to every possible scenario that has been thrown their way over the past few years.

We operate in an attractive global market that offers significant white space. With strong AUVs and a robust development pipeline, I’m confident our long-term development opportunities and our ability to drive steady earnings expansion to sustainable comp sales growth will continue to deliver significant value for our franchisees, our team members and our investors. I’m excited for the future of Papa John’s.

And with that, I’ll turn the call back over to Rob for some final comments. Rob?

Robert Lynch — President and Chief Executive Officer

Thanks, Ann. As you’ve heard from us today, we continue to drive growth by executing on our strategy of being agile in the current environment and sensitive to the additional pressures our customers are facing. We are a company with a proven brand, loyal customers and solid underlying cash flows that can be used to support value-enhancing initiatives in the future. Our system remains healthy and strong, and I’m more excited than ever about the future.

With that, I’ll turn the call over to the operator for Q&A.

Questions and Answers:

Operator

[Operator instructions] And our first question will come from Chris O’Cull of Stifel. Your line is open.

Christopher Thomas O’Cull — Stifel — Analyst

Thank you. Good morning, guys. I had a clarification on the outlook and then a question. Ann, did you say that you expect North America comps to remain positive for the balance of the year? Or did you give more specificity on that?

Ann Gugino — Chief Financial Officer

Yes, that was the guide was that we expect North American comp sales to be positive in the back half of the year.

Christopher Thomas O’Cull — Stifel — Analyst

Okay. Thank you. And then, Rob, it appears the larger chains are starting to promote price point value and discounts for limited times. And I know you said that Papa John’s is not going to lead with price point value and discounts. But as consumer spending slows, can you elaborate how the company’s marketing strategy could evolve? And then how does the company determine the level of transaction declines it’s willing to accept to avoid that discount type strategy?

Robert Lynch — President and Chief Executive Officer

Hi Chris. We have said that we’ve been pretty consistent in the past that we’re not going to promote national deep discounts. And I think we’re pretty much the only pizza player that’s delivering positive comps. So I think that there’s something to being able to deliver positive comp sales and better transactions without having to go and race to the bottom for the lowest price points.

That being said, we absolutely deliver value. We deliver value locally. A discount in San Francisco, then it’s different than a discount in Atlanta and Ohio. So our co-ops all have funds that they contribute into that they can use to manage their markets the way they need to manage them, dependent upon the price sensitivity of the customers in that region. So, it’s not actually accurate to say that we don’t have value platforms and promote value. We just don’t do it at the national level and kind of peanut butter across the country.

The other way we’re really focused on delivering value through our loyalty program. I mean we have 25 million loyalty members at this point, and we’re able to surgically deliver incentives that motivate people in different ways to drive transactions. So, we have a very robust value strategy. It’s just not the same as everyone else going out and putting the lowest price point on national television.

Christopher Thomas O’Cull — Stifel — Analyst

Excellent. Thank you.

Operator

And our next question will come from Eric Gonzalez. Your line is open.

Eric Andrew Gonzalez — KeyBanc — Analyst

Hey. Thanks. Good morning. I want to ask about the UK because it seems like the consumer might be deteriorating at a kind of faster rate than the US. So, I’m really wondering what’s the strategic plan is for that market? I think you mentioned doing something in 2023 or laying the groundwork for 2023. But how might that plan differ from what you might do in the US should the domestic economy deteriorate more rapidly?

Robert Lynch — President and Chief Executive Officer

Thanks for the question, Eric. The UK is very unique. I mean, the VAT tax implications, I think it was called out in some of the other calls have had a big impact on the comps. Their pricing structure and their tax — the way their taxes are reflected in their prices and the revenue stream is quite different than how we do it here in the state. So the VAT tax implications are unavoidable. And I think everyone’s kind of pointed to that.

But in regards to the base business, we haven’t necessarily built the same type of capabilities in the UK or frankly, we haven’t transferred the capabilities we’ve built in the US yet to the UK. So I’ll point out specifically our revenue management function here in the US. I mean we get the purchase data from almost every transaction that flows through our restaurants.

And we understand because of our loyalty programs, who’s buying what, how and when, and we leverage all that to make sure that we understand the elasticities very closely. And we’re managing that both at our company restaurants, but we’re also leveraging that expertise up against our franchisee operations. In the UK, we haven’t done any of that yet.

So I use that as only one example of a capability that we have here in the US that can easily be transferred into different markets. The UK being our biggest and most important international market, but we’re going to overlay that across all of our geographies. So, we’re doing a lot of work on operations and how we run our restaurants better. We’re doing a lot of work on how we buy and utilize media to advertise.

So all of those things that we’re developing here in the US have not yet been transferred into our other markets. And I feel like that is going to — that provides a lot of upside possibility and potential on the comps and the PSAs in those markets.

So we talk a lot about international representing a huge white space opportunity for development. We’re getting more and more confident that the tools that we have here in the U.S. once transferred over to these other markets can also drive a significant amount of comp sales and PSA growth.

Eric Andrew Gonzalez — KeyBanc — Analyst

Thank you.

Robert Lynch — President and Chief Executive Officer

Thanks, Eric.

Operator

And our next question comes from Brian Bittner of Oppenheimer. Your line is open.

Brian John Bittner — Oppenheimer — Analyst

Thanks. Good morning. Good morning, Rob and Ann. The fact that you did keep North America comps positive in the second quarter. It was actually a very impressive represented actually an acceleration on a three-year basis. And it’s also impressive and that I think you said you anticipate the three-year trend to continue in the second half of the year. I think I heard you correctly.

So this result and this outlook is happening despite a lot of mixed messages that we’re getting on how the consumer is behaving more recently. A lot of people are talking about weakness at the lower end. Are you seeing any noteworthy changes in behavior within your own business? And Rob, what levers do you believe the brand has to pull if we do enter a much more decisive slower spending environment?

Robert Lynch — President and Chief Executive Officer

Great question, Brian. One, consumer behavior change that I will point out that’s absolutely having an impact is the return to travel. I mean, as our —

Traditional QSR, I think, is pretty neutral to people going on vacation because a lot of those folks are in their cars driving on the highways and pulling through drive-throughs. We are a planned dinner purchase. And when people go on vacation, it impacts our business. We’ve always had seasonality in our business, particularly in the summer months while people go on vacation.

The last two years, that’s been muted. The last two years, as people haven’t gone on vacation as readily as people haven’t enjoyed international travel. We haven’t seen that seasonality. This year, we absolutely are seeing it. We were tracking even higher on comp sales coming into June. We were very bullish on our ability to really exceed expectations, both ours and everyone else’s. And then in June, we saw a bit of a slowdown, which we attribute to the travel behaviors that are returning.

And we evidence that by looking at travel markets where there’s a lot of people going to like Florida, where our business is up significantly. So I think there is a return to some of the seasonality that we’ve seen in the past, and that’s why we’re really bullish on the back half once we get through this these tougher comps in the summer months, we see an acceleration in our business.

So in terms of the value piece, we can do value. I mean, like I said, we already do value. We offer an $8 carryout, especially in almost every market for a large pizza. So it’s not like we don’t have low price points. We just do it in a different way. You know, 75% of our business is e-commerce. So our customers are going on the apps, going on the web and looking at our price points. And our localized offers are available — readily available to everyone going on those digital channels. So we absolutely can compete for that value customer. We’re just doing it in a different way. And I think so far, we’ve been differentiated in that and have been able to outperform as a result.

Brian John Bittner — Oppenheimer — Analyst

Great. Thank you.

Robert Lynch — President and Chief Executive Officer

Thanks, Brian.

Operator

And our next question will come from Alexander Slagle of Jefferies. Your line is open.

Alexander Russell Slagle — Jefferies — Analyst

Thanks. Good morning. Have a question on people, and I guess, a company store and franchise stores that’s known and you kind of comment on retention and wage levels and hiring activity. And — just trying to get a sense for how the improved people culture and all the efforts around purpose and values and initiatives to take care of your employees is permeating further through the system and perhaps helping on a relative basis? I mean I know it’s still a very difficult environment out there, hiring and keeping people and wondering if you could talk to that.

Robert Lynch — President and Chief Executive Officer

Thanks for the question, Alex. Yes, I mean, staffing has been — is always a challenge in this industry. It has been our number one challenge for the — throughout the pandemic for obvious reasons. So, our restaurants for two years, we’re focused on doing everything they could to get as many hours in the store as possible. And so, there really wasn’t a lot of concern around productivity or overtime or any of these other KPIs, it was really just about making sure that we had people in the restaurants to make pizzas and deliver pieces.

Staffing has actually improved over the last few months. We’ve seen our recruiting and retention levels improve which gives us a lot of excitement. However, as Ann mentioned, our labor costs have gone up, both as a function of wage inflation, which we do expect to normalize to a certain extent moving forward. But also as a function of some of our behavior over the last two years of just every hour, put every hour we can in the restaurant.

So our team, we have a new — some new leadership in our US operations group, and they’re focused on making sure that we can not only staff and recruit and make sure we have the people to run the restaurants, but we do it in the most optimized and productive way. And we’ve got a lot of great talent working on that, and it’s not just going to benefit our company restaurants and our corporate P&L. The insights that we’re garnering and the methods that we’re developing, the processes that we’re going to develop are going to be able to then transfer to all of our franchisees and make them better managers of their labor moving forward, which should improve productivity and margins, which should help us continue to spur domestic development.

Alexander Russell Slagle — Jefferies — Analyst

Got it. Thank you.

Robert Lynch — President and Chief Executive Officer

Thanks, Alex.

Operator

Thank you. And our next question will come from Lauren Silberman of Credit Suisse. Your line is open, Lauren.

Lauren Danielle Silberman — Credit Suisse — Analyst

Thank you so much. Rob, you spoke to the challenging consumer environment. You’re lapping over some pretty tough comps in the back half, especially when including 2019. So can you talk about the most meaningful drivers of comps? And it sounds like you’re embedding an acceleration through the quarter. So I just want to confirm that. And then just related, you highlighted the value opportunity from the loyalty, where are you guys in your journey with respect to personalization and your ability to offer specific promotions more value-oriented consumers. Thank you.

Robert Lynch — President and Chief Executive Officer

Thanks, Lauren. Yes, we are confident in the back half of the year. We’re confident for a couple of primary reasons. One is we’ve got some new innovation coming early in the back half, coming here in the next couple of weeks. And then we’ve got more innovation layered in through the balance of the calendar. Great new items that we feel can complement the huge success that we’ve seen on our Stuffed Crust platform. I mean Stuffed Crust, we launched, obviously, last year and really kind of created a whole new sales layer lifting our AUVs, and that hasn’t left.

And then when we launched Epic Pepperoni. We saw that very incremental, both on the revenue side and the margin side. But here we are looking at the back half and we’ve got some new ideas that I think are going to complement that. So we’re really excited about our innovation. But we’re also — and I’ll tie the second piece of why we’re excited about comps to the loyalty piece. We are just becoming better and better with our data. I mean, we have so much data here given the e-commerce nature of our business and all the transactional data that we get.

And our teams over the last two years have been mining and enriching that data and we continue to get better and better at it. And now given our strategy on how we’re going to become a great player in this value mindset in this industry it’s accelerated.

And we’re even more confident with the ways we’re using that data to really reach out both through our organic channels, but also through paid channels. I mean we’re leveraging paid media to directly target across digital channels, customers that we have determined have the highest propensity to buy our products.

And we’re targeting lapsed users. We’re targeting light users to come back to the brand through both organic and paid media. So, we our confidence is really driven by the revenue side of the business and the comps that we feel.

But we’re also making a lot of enhancements on the margin side of the business, too. So it’s not just about delivering those positive comps, it’s about doing it in a profitable way. And that’s part of the reason why we’re not going out and just layering and peanut buttering large discounted national price points.

Lauren Danielle Silberman — Credit Suisse — Analyst

Thank you very much.

Robert Lynch — President and Chief Executive Officer

Thanks, Lauren.

Operator

And our next question will come from Brian Mullan of Deutsche Bank. Your line is open.

Brian Hugh Mullan — Deutsche Bank — Analyst

Hey. Thank you. Just a question on development. I know it’s a bit early here, but as you think about the guidance range of 60% over the next couple of years. As you start to think about 2023, what are the factors that might cause you to come in towards the lower end or the higher end of that? Is there anything you’re monitoring either optimistically or cautiously just outside of like equipment permitting delays, which we all understand can create hiccups? Just really any color on how you’re feeling about that multiyear ramp?

Robert Lynch — President and Chief Executive Officer

So we continue to sign agreements and feel really great about the franchisee excitement around this brand globally, both in our markets that we’re currently in, but underpenetrated as well as new markets. To answer your question, I would tell you the only thing that is unforeseen right now is some of the conflicts. The conflict that we’re seeing in the Ukraine continues on, and that impacts that region. And so, we’re continuing to watch the global environment and make sure that we can support our franchisees and our development capabilities despite any of that.

Brian Hugh Mullan — Deutsche Bank — Analyst

Thank you.

Operator

And our next question will come from Peter Saleh of BTIG. Your line is open.

Peter Mokhlis Saleh — BTIG — Analyst

Great, thanks. I wanted to come back to unit development, just to ask it a different way. I guess given the softness that you’re seeing in the UK and international, does that have any impact whatsoever on the goal of getting to 6% to 8% annual growth starting in 2023? Are you seeing any pushback or any pullback from franchisees internationally?

And then secondly, can you just talk about what you expect on company unit development this year and maybe on a go-forward basis? Thank you.

Robert Lynch — President and Chief Executive Officer

Thanks, Pete. So, we are actually having a very solid year outside of the UK for our international business. We have incredibly bright spots like the Middle East and even Spain and Continental Europe, which has been a challenging market for us to really get a foothold in is up significantly this year.

And — so we’re positive in almost every market outside of the UK. So there’s not — there’s not a lot of concern around the globe on development. In the UK, although being our largest developed market, a big contributor to our current results represents a relatively small percentage of our international development opportunity.

So that being said, we’re what, as I mentioned in the last question, we’re watching everything. Obviously, volatile global environment right now. But we’re as confident as we’ve ever been on the excitement around this brand internationally.

Company development, we continue to evaluate that. We’ve built, I think, 12 restaurants this — over the last not 12 months. And we’re looking at the performance of that. Obviously, we’re using that as a proxy for kind of this strategy of going in into these penetrated markets and being able to carve them up. That’s a longer-term strategy.

And so we’re watching how those restaurants perform. I’ll also just tell you, in the environment where we open these restaurants, a lot of them opened up in Q4 last year, and we went in into Q1 and it was hard to staff these new restaurants.

So we’re really trying to take a more long-term approach and try to make sure that we have set these restaurants up to be as successful as possible and evaluate them and their contribution to the markets in which we put them in over the long-term.

So — over the next year, we’re still planning on opening company restaurants, but in the double-digits, but we’re — it’s going to be dependent upon whether or not we feel we’re going to be able to open them up in the way that they need to be open to give them the best chance of success.

Peter Mokhlis Saleh — BTIG — Analyst

Thank you.

Robert Lynch — President and Chief Executive Officer

Thank you.

Operator

And our next question will come from Andrew Strelzik of BMO. Your line is open.

Andrew Strelzik — BMO Capital — Analyst

Good morning. Thanks for taking the question. I actually wanted to ask one on the commissary profit dollars. And you mentioned the impact that inflation has on that, but we’re not really seeing that come through this year. So can you just kind of walk through what’s going on there? Is that just a timing dynamic? And has your outlook for profit — commentary profit dollars changed for this year? And maybe can you frame the impact that’s having on the operating margin change in terms of the outlook? Thanks.

Robert Lynch — President and Chief Executive Officer

Sure. So the impact on the operating margin is really more from a mix perspective just because you’re seeing such a large sales increase because of the commodities inflation, and you’ve got that relatively quick lower margin. Generally speaking, as I talked about, we pass-through those costs on a fixed margin basis.

And so we do believe on a full year basis, that will translate into increased commissary operating income dollars year-over-year. We still think that’s going to be in the high single digits. We didn’t see the year-over-year accretion in Q1 given the acceleration of cost and just the timing to recapture. We definitely caught up a bit here in Q2, but we definitely have more to come in the back half. So yes, we’re still confident that will deliver the high single-digit operating income increase in the QCC line.

Operator

Moving forward. Our next question will come from Mr. Nick Setyan of Wedbush. Your line is open.

Nerses Setyan — Wedbush Securities — Analyst

Thank you. I think there was a comment about 7% to 8% menu pricing year-over-year. When we look at the second half, where do we think the incremental pricing will get coal pricing too in terms of year-over-year? And is that part of the accelerating comp equation in the second half?

Robert Lynch — President and Chief Executive Officer

Great question, Nick. We are planning some pricing here in the near future, a couple of hundred basis points. That being said, it is not it’s not what we believe is going to drive the comps in the back half. And frankly, we believe that there will be some normalization of this cost structure. We’re starting to see a little bit of that very preliminary.

And we think that, that will mitigate our need to continue to take pricing. We didn’t take — we took almost no pricing during the pandemic. All of our check growth was driven by innovation that allow our consumers to trade up. And we’re not trying to drive sales with pricing. We’re just trying to mitigate the cost. So we will take as little pricing as necessary while still delivering — getting back to the margins we need to get to. And that’s — that’s a very important focus for us is making sure that we’re getting back to the margin structure that we believe is commensurate with the health of this business. And that’s going to be more, I think, driven by normalization of commodities that necessarily our need take significantly more cost. And you’re right on that 7% to 8% number. That is what we have taken year-to-date.

Nerses Setyan — Wedbush Securities — Analyst

Thank you.

Operator

And our next question will come from Jim Sanderson of Northcoast Research. Your line is open.

James Jon Sanderson — Northcoast Research — Analyst

Hi. Thanks for the question. I just wanted to follow up on the issue of pricing. Is that second half menu price increasing? Does that also — is that also baked into the operating margin decline on a year-over-year basis, the 100 to 150 basis points. What are the puts and takes to getting that operating margin maybe to the higher range of your guidance for the back half of the year. Thank you.

Ann Gugino — Chief Financial Officer

Yes. The pricing would be baked into that guide on the 150 basis point decline year-over-year. Just to add a little bit of color there. We’ve talked a lot about the inflationary pressure in both wage and commodities that we expect to continue in the corporate restaurants. So when you look at it by segment, we would expect the year-over-year margin pressure to be a little bit more pronounced there. The upside to outperform that to Rob’s point, would be continued easing of commodity prices. We also talked about a number of investments that we’re making in wage and productivity, which, as Rob pointed out, has not been a huge focus for us. During the pandemic, where we were really more focused on that surge in demand, meeting the demand and keeping people safe. So as those initiatives start to take hold, that could provide some upside.

We’ll continue to see pressure internationally as a result of the UK. But offsetting that, as we’ve talked a lot about, is the positive comp sales growth, not just in North America, but as Rob pointed out, internationally outside of the UK.

And then, we also expect G&A to be down year-over-year in the second half as we continue to take a disciplined approach to cost management. So those would be kind of the high-level insights I provide.

James Jon Sanderson — Northcoast Research — Analyst

Thank you.

Operator

And our next question will come from Todd Brooks of Benchmark Company. Your line is open. And I’d now removed Todd Brooks from the queue.

Todd Morrison Brooks — The Benchmark Company — Analyst

I’m here. I didn’t hear that I was announced. Sorry about that.

Operator

No problem. Your line is open.

Todd Morrison Brooks — The Benchmark Company — Analyst

Great. Just two quick follow-ups, if I may. One, on the international, I know Ann, you just talked about expecting process same-store sales growth in the second half, excluding the UK. Was international positive in the second quarter, excluding UK? And is there any way you can size maybe the drag from what you’re seeing in the UK?

Ann Gugino — Chief Financial Officer

So yes, the other international markets, excluding the UK, were positive in Q2. In terms of size, I think what I would offer is that the UK in terms of percent of international system sales is about 20%. So that would be kind of the guidance there. We were definitely down double digits in the UK.

Todd Morrison Brooks — The Benchmark Company — Analyst

Okay. Great. And then one other quick follow-up. Rob, you talked about better success with staffing in the last few months. If we parse that specifically to driver staffing, have you seen the type of staffing improvement there in that specific function.

Robert Lynch — President and Chief Executive Officer

Slowly, but surely, I don’t mean to imply that we are fully staffed. We’re nowhere near where we want to be. But leveraging our partnerships with the third party aggregators coupled with a bit of improvement in our organic driver recruiting and retention has definitely helped ease some of the strain on the restaurants.

We still have a long way to go. But it’s definitely moving in the right direction relative to where we were throughout the pandemic and especially where we were in December and January when Omicron was really impacting our staffing.

Todd Morrison Brooks — The Benchmark Company — Analyst

Okay, great. Thank you, both.

Robert Lynch — President and Chief Executive Officer

Sure. Thank you, Todd.

Operator

I would now like to turn the call back to Rob Lynch for closing remarks.

Robert Lynch — President and Chief Executive Officer

Well, thanks again, everybody, for joining us and for your thoughtful questions this morning. As you can tell from our comments today, we’re incredibly proud of what our team members and franchisees achieved this quarter and over the past few years. It’s been a remarkable three years for this company.

And over the last couple of months, we have moved very nimbly guided by our customers to navigate an incredibly volatile and challenging environment. We stayed true to our values, continuing to innovate and leaning into what makes Papa John’s unique. Going forward, we will continue to carefully manage short-term opportunities and challenges with an eye toward our long-term potential.

We hope that you’re as excited about the future of Papa John’s as we are. As always, I’d like to thank our shareholders and everyone on this call for their interest in our company and for their continued support. Thanks, and have a great day.

Operator

[Operator Closing Remarks]

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