Rapid increase in menu prices, average check growth and expansion efforts are driving the restaurant industry. The industry participants are also benefiting from partnerships with delivery channels and digital platforms.

Restaurant operators’ focus on digital innovation, sales-building initiatives and cost-saving efforts have been acting as catalysts. With growing influence of Internet, digital innovation has become the need of the hour. Restaurant operators are constantly partnering with delivery channels and digital platforms to drive incremental sales.

However, high wages and food cost inflation woes stay. Rising prices are also hurting the industry’s traffic.

In line with the industry's growth, leading restaurant companies — Domino's Pizza, Inc. (DPZ Quick QuoteDPZ - Free Report) and Papa John's International, Inc. (PZZA Quick QuotePZZA - Free Report) — are trying out different strategies to generate profits. With each stock carrying a Zacks Rank #3 (Hold), let's check out which is poised better with respect to different parameters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance and Valuation

Shares of Domino's have declined 13.7% in the past year, while Papa John's has decreased 12.4%.   

On the basis of forward 12-month P/E ratio, which is a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 24.74X compared with the S&P 500’s 18.48X. Domino's has an edge with a lower forward 12-month P/E ratio of 21.98X compared with Papa John's figure of 25.08X.

Estimated Earnings & Revenues

Arguably, earnings growth is of utmost importance for determining a stock’s potential as surging profit levels indicate strong prospects (and stock price gains).

For the current year, DPZ’s earnings per share are expected to increase 6.4% year over year. Notably, sales are expected to improve 1.8% year over year. Meanwhile, PZZA’s current-year earnings per share are likely to decline 4.8% year over year. However, sales are likely to improve 3.8% year over year. Thus, this round goes to Domino's.

Fundamentals

DPZ’s international growth continues to be strong and diversified across markets due to exceptional unit-level economics. During fiscal first quarter, it added 22 net new stores in the United States, thereby bringing the total U.S. system store count to 6,708 stores.

It is investing heavily in technology-driven initiatives like digital ordering to bolster sales. In 2022, digital sales, accounted for approximately two-thirds of the global retail sales, were $11.7 billion. Meanwhile, Domino’s digital loyalty program — Piece of the Pie Rewards — continues to contribute significantly to traffic gains.

The extended ways to order a pizza have kept DPZ at the forefront of digital ordering and customer convenience. As of fiscal 2022, it has approximately 30 million active members in its loyalty program. The company has more than 77 million customers enrolled in its loyalty database.

Papa John's continues to focus on product introduction to drive growth. Notably, menu innovation, like toasted handheld Papadias and Epics Stuffed Crust, continues to witness solid popularity among customers, thereby boosting the top line. Backed by better brand positioning, new products have driven higher ticket and traffic across dayparts without cannibalizing core premium products and complexing operations at other stores.

Increased focus on identifying new markets (to enter) and attracting new capitalized franchisees (for partnership) bode well for PZZA. During third-quarter fiscal 2022, it signed a deal with a global franchisee — Levant — to add two new countries. The company intends to open more than 100 restaurants through the partnership. The initiative also supports PZZA’s overall commitment to operate more than 335 stores in four countries by 2030.

Our Take

The fundamentals of both companies are solid. However, earnings growth of Domino’s has an edge over Papa John's.