- 36.5% tax rate - advertising budget which may rise (from press reports) from $4 million to $20 milllion - 31.6 million diluted shares
Current year earnings are expected to be $1.60. This is $1.60 * 31.6 = $50.6 million (after-tax)
Before tax this represents $50.6 / (1 - 36.5%) = $79.6 million
Next year's earnings projections call for $2 per share approximately. Before tax, that's
$2 * 31.6 million shares / (1 - 36.5%) = $99.5 million
So, pre-tax income is expected to increase about $20 million. Excluding the speculated $16 million increase in the advertising budget (assuming they don't have offsetting cost savings elsewhere), pre-tax income needs to increase by $36 million.
Revenue is projected to grow by $170 million ($634 vs. $804 according to Yahoo!). So, incremental revenue of $170 million needs to produce $36 million in pre-tax earnings (to offset the $16 million in incremental ad spending), i.e. each additional $1 in sales needs to add about 21 cents to pre-tax profit.
Incremental revenue gain in the current fiscal year is projected to be $155 million ($479 vs. $634). Incremental pre-tax income in the current fiscal year is projected to be $18.2 ($60.8 vs. $79.6). Therefore, in the current fiscal year each additional $1 in sales adds about 11.7 cents.
Now, these numbers don't make much sense (roughly doubling of incremental profitability) so something likely has to be incorrect (possibly including this analysis).
Is the estimate for the 5 fold increase in advertising expense exaggerated?
Is the incremental revenue to be generated by the incremental $16 million in ad expenditures greatly understated?
Will $16 million in cost savings be found elsewhere to offset the increase in advertising?
Are next year's profit expectations too high?
Assuming the press reports are correct, PNRA needs to generate very large comp store sales to pay for the ad budget AND meet analyst profitability expectations.
Note: The revenue gain is projected to be approximately 27%. If comp store sales increase 5% next year, this will require roughly 21% more stores. Systemwide store count at the end of fy04 was 741. It is projected to be about 900 at the end of fy05. A 21% increase in store count in fy06 will require 189 new stores. These are approximations as the mix of company vs. franchisee effect incremental profitability, of course.