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Papa John's (PZZA) Up 17% in 3 Months: More Room to Run?

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Papa John’s International, Inc. (PZZA - Free Report) is benefiting from its digital initiatives, menu innovation and re-franchising efforts. In the past three months, the company’s shares have gained 17.4% compared with the industry’s 4.5% growth. However, coronavirus-related woes along with rise in operating costs and debt level are concerns.

Let’s delve deeper.

Factors Driving Growth

Papa John’s is investing heavily in technology-driven initiatives like digital ordering to boost sales. The company’s online and digital marketing activities have increased significantly in the past several years in response to increasing utilization of online and mobile web technology. In fact, Papa John’s is committed toward providing better customer experience with enhancements to its digital ordering process.

Moreover, the company continues to focus on product introduction to drive growth. Notably, menu innovation like Garlic Parmesan Crust, toasted handheld Papadias and Jalapeno Popper Rolls continues to witness solid popularity among customers, thereby boosting the top line. Backed by better brand positioning, the new products have driven higher ticket and traffic across dayparts without cannibalizing core premium products as well as complicating operations at other stores.

Notably, the company recorded positive comparable sales growth in the third quarter of fiscal 2020, which marks the third straight quarter of comps growth. In the fiscal third quarter, global restaurant sales rose 21.6% compared with 2.3% growth reported in the prior-year quarter. Further, domestic company-owned restaurant comps moved up 18.2% in the reported quarter compared with 2.2% growth in the year-ago quarter.



Meanwhile, Papa John’s is committed to develop and maintain a strong franchise system. The company is continually striving to eliminate barriers to expansion in existing international markets and identify new market opportunities.

Notably, the China region continues to experience growth, driven by the company’s optimized restaurant model, brand design enhancements and increased integration with third-party aggregators that is broadening its accessibility channels. Also, the company’s developmental agreements across Mexico, Egypt, Russia, Spain, Chile, the Netherlands, Colombia and Boston are encouraging.

Concerns

The coronavirus pandemic, high costs and a challenging sales environment are potent headwinds. During the fiscal third quarter, the company witnessed high costs associated with product launch, marketing campaigns and other sales-building initiatives. Also, rise in commodity and other operating costs took a toll on margins. Notably, total costs in third-quarter fiscal 2020 increased 12% year over year to $448.4 million from $400.5 million reported in the prior-year quarter.

Coming to the balance sheet, long-term debt as of Sep 27, 2020, came in at $328.1 million compared with $327.9 million as of Jun 28, 2020. The company’s debt-to-capitalization at the end of third-quarter fiscal 2020 is at 430%. Moreover, the company ended fiscal third quarter with cash and cash equivalents of $140.1 million, which may not be enough to manage the high debt level.

Zacks Rank & Key Picks

Papa John's currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Retail-Wholesale sector include Jack in the Box Inc. (JACK - Free Report) , L Brands, Inc. (LB - Free Report) and Tapestry, Inc. (TPR - Free Report) , each sporting a Zacks Rank #1.

Jack in the Box has a three-five year earnings per share growth rate of 10.6%.

L Brands has a long-term earnings growth rate of 13%.

Tapestry’s 2021 earnings are expected to surge 133%.

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