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Here's Why You Should Hold Onto Papa John's (PZZA) Stock Now

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Shares of Papa John’s International, Inc. (PZZA - Free Report) have gained 9.6% in the past year against the industry’s fall of 14.2%. The company is benefiting from menu innovation, digital initiatives and robust comps growth. Moreover, focus on re-franchising initiatives bodes well. However, higher expenses and coronavirus-induced soft traffic are a headwind.

Let’s discuss the factors highlighting why investors should retain the stock for the time being.

Factors Driving Growth

Papa John’s continues to focus on product introduction to drive growth. Menu innovations like toasted handheld Papadias and Epics Stuffed Crust continue to witness solid popularity among customers, boosting the top line. Backed by better brand positioning, the new products have driven higher tickets and traffic across dayparts without cannibalizing core premium products and complicating operations at other stores. During fourth-quarter fiscal 2021, the company launched New York Style Pizza that features eight oversized slices on a thin foldable crust. Following the launch, the company reported solid demand for the same. Given the solid consumer acceptance regarding the Papadias platform, Epic Stuffed Crust and New York Style Pizza, the company expects the products to drive ticket and customer traffic for the rest of 2022.

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Papa John’s is investing 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, owing to the higher utilization of online and mobile web technology. PZZA is committed to providing a better customer experience with enhancements to the digital ordering process. The company’s loyalty program continued to witness a rise in digital transactions during the fourth quarter of fiscal 2021. Larger transaction sizes and better targeting of offers and promotions have benefited the company.

Papa John’s continues to impress investors with robust comparable sales growth. The company recorded positive comparable sales growth in fourth-quarter fiscal 2021, marking the ninth straight quarter of comps growth. It benefited from menu innovations, operational efficiencies and cost-saving efforts. Solid contributions were reported from third-party delivery aggregators. In the fiscal fourth quarter, total comparable sales rose 8.6% year over year compared with growth of 15.6% reported in the prior-year quarter. At North America franchised restaurants, comps rose 11.3% year over year compared with a 14.5% rally in the year-ago quarter. Comps at international restaurants were up 2.4% year over year compared with a 21.4% increase in the prior-year quarter.

Papa John’s is committed to developing and maintaining a strong franchise system. The company is striving to eliminate barriers to expand in existing international markets and identify new market opportunities. In August 2021, the company expanded its partnership with Drake Food Service International to open more than 220 Papa John’s restaurants by 2025. This includes more than 170 stores across Latin America, Spain and Portugal. Drake Food Service plans to open 50 new restaurants in the U.K. over the next four years. Per the expanded partnership, Drake Food Service will operate more than 560 Papa John’s restaurants by 2025. Apart from this, the company signed a new deal with the company signed a development deal with Sun Holdings (in September 2021) to open 100 new stores across Texas and the South by 2029. The company announced a partnership with FountainVest Partners (in January 2022) to open more than 1,350 new stores across South China by 2040.

Backed by its accelerated development plan, the company now anticipates opening 260-300 net new restaurants globally in fiscal 2022. This suggests approximately 5% growth in its system for the year. We believe re-franchising a large chunk of its system reduces a company’s capital requirements and facilitates earnings per share growth and ROE expansion.

Concerns

Papa John's has been continuously shouldering increased expenses, which are detrimental to margins. It has been facing significant supply-chain challenges and inflation across most commodities and categories. This resulted in cost pressure in the third quarter of fiscal 2021, including costs related to strategic staffing initiatives. New hiring, referral and appreciation bonuses added to the woes. During the third quarter of fiscal 2021, total costs increased 5.8% year over year to $474.2 million from $448.4 million reported in the prior-year quarter. Going forward, the company anticipates commodities and labor headwinds to continue in the near term.

Pandemic-induced restrictions, labor challenges and supply chain disruptions have taken a toll on the company. Although most dining services are open, traffic is still low compared with pre-pandemic levels. The company intends to monitor the situation regularly to gauge the impacts of COVID-19.

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 same space include BBQ Holdings, Inc. , Dave & Buster's Entertainment, Inc. (PLAY - Free Report) and Arcos Dorados Holdings Inc. (ARCO - Free Report) .

BBQ Holdings sports a Zacks Rank #1. BBQ Holdings has a long-term earnings growth of 14%. Shares of the company have gained 41.5% in the past year.

The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and earnings per share (EPS) suggests growth of 40.9% and 66.2%, respectively, from the year-ago period’s levels.

Dave & Buster's sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 212%, on average. Shares of the company have declined 4.8% in the past year.

The Zacks Consensus Estimate for Dave & Buster's current year sales and EPS suggests growth of 24.4% and 49.3%, respectively, from the year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2 (Buy). Arcos Dorados has a long-term earnings growth of 31.3%. Shares of the company have risen 54.7% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 10.3% and 62.5%, respectively, from the year-ago period’s levels.

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