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Here's Why Papa John's (PZZA) Rough Ride May Continue

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"Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."- Warren Buffett.

At the moment, the quote fits perfectly for Papa John's International, Inc. (PZZA - Free Report) as the company’s near-term future looks bleak. Investors need to exercise extreme caution when it comes to the stock as it is unlikely to show any major improvement in the near term. In a year’s time, shares of Papa John's have plunged 36.2%, wider than the industry’s decline of 0.3%.

Let’s delve deeper to find out what’s taking this Zacks Rank #4 (Sell) company downhill.

Papa John's vs. Industry Scorecard


Lower-Than-Expected Results

Papa John's disappointing performance in first-quarter 2018 further hurt investor sentiment. The company’s earnings missed the Zacks Consensus Estimate for the second straight quarter, while revenues lagged the same after two consecutive beats. Adjusted earnings of 50 cents per share lagged the consensus estimate of 62 cents by 19.4%. The bottom-line figure also fell 35.1% compared with the year-ago quarter due to weak operating results.

Revenues came in at $427.4 million, which fell short of the consensus mark of $438 million by 2.4% and decreased 4.9% year over year. The downside can be attributed to dismal North America restaurants comparable sales and decline in North America commissary sales on weak volumes. This was partially overshadowed by an increase in international sales and favorable impact of foreign exchange rates.

For 2018, the company expects adjusted earnings to decline in the range of 4.5-12% year over year. Lower operating results, primarily due to expected pressure on Domestic restaurants’ sales, higher delivery and insurance costs for the company-owned restaurants as well as increased costs for technology and marketing investments might lead to the downturn.

Dismal Comps Performance

Over the past couple of quarters, soft comps performance has been a major concern for investors. In first-quarter 2018, domestic company-owned restaurant comps fell 6.1%, following a decline of 4.7% in the preceding quarter. Moreover, comps at North America franchised restaurants were down 5%, after witnessing a decrease of 3.5% in fourth-quarter 2017.

Higher Costs Denting Profit

The Affordable Care Act, commonly known as Obamacare, will continue to have an adverse impact on restaurant operators. Consequently, these operators will have to continue shouldering increased labor costs, which in turn, will hurt margins.

Stocks to Consider

Some better-ranked stocks in the same space are Wingstop Inc. (WING - Free Report) , Dine Brands Global, Inc. (DIN - Free Report) and Denny's Corp. (DENN - Free Report) . While Wingstop and Dine Brands Global sport a Zacks Rank #1 (Strong Buy), Denny's carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Wingstop has an impressive long-term earnings growth rate of 19.5%.

Dine Brands Global has reported better-than-expected earnings in the trailing four quarters, with an average beat of 7.8%.

Denny's has reported better-than-expected earnings in the preceding two quarters.

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