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Papa John's (PZZA) Banks on Expansion Efforts, High Costs Ail

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Papa John’s International, Inc. (PZZA - Free Report) is likely to benefit from expansion initiatives, digital efforts and strong comps growth. Also, focus on menu innovation efforts bodes well. However, higher expenses and coronavirus-induced soft traffic are a concern.

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

Factors Driving Growth

Papa John’s is committed to developing and maintaining a strong franchise system. The company strives to eliminate barriers to expanding in existing international markets and identifying 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. The company also 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. The company expects its worldwide net unit (from fiscal 2023 through 2025) to grow in the range of 6-8% annually. 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.

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 first-quarter fiscal 2022, the company launched a New York Style pizza crust comprising larger slices and a thinner stretched crust. It also launched Epic Pepperoni Stuffed Crust (as an LTO). Following the launch, the company reported solid demand regarding the same. With significant LTO and long-term platform launches in the pipeline, the company anticipates menu innovation efforts to drive long-term ticket and transaction growth in the upcoming periods.

Papa John’s invests 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 first quarter of fiscal 2022. 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 first-quarter fiscal 2022, marking the 10th straight quarter of comps growth. It benefitted from initiatives related to menu innovation, strategic pricing actions and higher unit counts. In the fiscal first quarter, total comparable sales rose 1.6% year over year compared with growth of 25.4% reported in the prior-year quarter. Comps at North America restaurants increased 1.9% year over year compared with 26.2% growth reported in the year-ago quarter. Comps at international restaurants were up 0.8% year over year compared with a 23.2% increase reported in the prior-year quarter.

Concerns

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Shares of Papa John's have declined 42.7% so far this year compared with the industry’s fall of 24.8%. The dismal performance was caused by the coronavirus crisis. 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.

Papa John's is 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 first quarter of fiscal 2022, total costs and expenses amounted to $517.1 million, up 11.2% from the prior-year quarter’s level. Going forward, the company anticipates commodities and labor headwinds to continue in the near term.

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 are MarineMax, Inc. (HZO - Free Report) , BBQ Holdings, Inc. (BBQ - Free Report) and Arcos Dorados Holdings Inc. (ARCO - Free Report) .

MarineMax sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 32.8%, on average. Shares of the company have declined 24% in the past year.

The Zacks Consensus Estimate for MarineMax’s 2022 sales and EPS suggests growth of 21.8% and 16%, respectively, from the year-ago period’s levels.

BBQ Holdings carries a Zacks Rank #2 (Buy). BBQ Holdings has a long-term earnings growth of 14%. Shares of the company have decreased 15.8% in the past year.

The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and earnings per share (EPS) suggests growth of 46.1% and 67.6%, respectively, from the year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2. Arcos Dorados has a long-term earnings growth of 31.3%. Shares of the company have risen 22.3% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 16.6% and 66.7%, respectively, from the year-ago period’s levels.

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