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Why Is Papa John's (PZZA) Down 7.3% Since Last Earnings Report?

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A month has gone by since the last earnings report for Papa John's (PZZA - Free Report) . Shares have lost about 7.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Papa John's due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Papa John's Q2 Earnings Beat Estimates, Increase Y/Y

Papa John’s reported mixed second-quarter 2020 results, wherein earnings beat the Zacks Consensus Estimate, while revenues missed the same. The top and the bottom line increased on a year-over-year basis.

Adjusted earnings of 48 cents per share surpassed the Zacks Consensus Estimate of 40 cents by 20% and increased 300% from 16 cents reported in the prior-year quarter.

During the second quarter, total revenues of $460.6 million missed the Zacks Consensus Estimate of $463.9 million by 0.7%. However, the top line grew 15.3% on a year-over-year basis. Notably, the upside can be attributed to positive comparable sales in North America, higher royalties and commissary revenues from the United Kingdom as well as increased marketing fund revenues on an increase in national marketing fund contribution rate and higher online revenues.

Global Restaurant Sales & Comps

In the second quarter, global restaurant sales rose 19.1% against the year-ago quarter’s fall of 3.8%. Excluding foreign currency impact, global restaurant sales rose 20.8% against the year-ago quarter’s decline of 2.6%.

Domestic company-owned restaurant comps moved up 22.6% in the reported quarter against a 6.8% decline in the year-ago quarter.

At North America franchised restaurants, comps rose 29.7% against a decline of 5.3% in second-quarter 2019. Also, comps at system-wide North America restaurants improved 28% against a 5.7% decline seen in the year-ago quarter.

Comps at system-wide international restaurants were up 5.3% compared with 0.3% growth in the prior-year quarter.

Nonetheless, for the first month of the third quarter (Jun 29-Jul 26, 2020), comparable sales at domestic company-owned, North America franchised and systemwide North America restaurants are estimated to grow 23.6%, 32.4% and 30.3%, year over year, respectively. Comps at system-wide international restaurants are estimated to grow 13.9% year over year.  

Operating Highlights

Total operating income in the second quarter was $30.5 million compared with $14.2 million in the year-ago quarter. Total costs and expenses amounted to $430.1 million, up 11.6% from the prior-year quarter.

Balance Sheet

As of Jun 28, 2020, cash and cash equivalents totaled $75.7 million compared with $27.9 million as on Dec 29, 2019. Long-term debt was $327.9 million at the end of second-quarter 2020 compared with $347.3 million at 2019-end.

Inventories at the end of the reported quarter increased to $32.5 million from $27.5 million on Dec 29, 2019. Free cash flow for the six months ended Jun 28, 2020, summed $67 million compared with $8.9 million in the year-ago period.

The company paid out cash dividends worth $10.7 million in second-quarter 2020 and announced third-quarter 2020 cash dividend of approximately $10.8 million. The third-quarter dividend will be payable on Oct 1, 2020.

Unit Developments

During the second quarter, Papa John’s opened nine restaurants in North America and exited 10, with the global restaurant count being 5,347. Currently, the company is operating in 48 countries and territories worldwide.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.33% due to these changes.

VGM Scores

At this time, Papa John's has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Papa John's has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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