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Papa John's (PZZA) Down 12.7% Since Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Papa John's International, Inc. (PZZA - Free Report) . Shares have lost about 12.7% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is PZZA due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Papa John's Q1 Earnings and Revenues Miss Estimates

Papa John's International reported dismal first-quarter 2018 results. 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 also fell 35.1% compared with the year-ago quarter figure due to weak operating results.

Revenues came in at $427.4 million, missing 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. The decrease was partially overshadowed by an increase in international sales and favorable impact of foreign exchange rates.

Also, a challenging sales environment in the U.S. restaurant space has been affecting the company for quite some time, which is evident from Papa John's top-line performance. Moreover, labor costs coupled with increased operating costs from digital initiatives and marketing expenses has put a substantial pressure on the company’s bottom line, which is expected to linger in 2018 as reflected in its outlook for the year.

Global Restaurant Sales & Comps

In the first quarter, global restaurant sales decreased 1.3% compared unfavorably with the last reported quarter’s rise of 9.9% and the year-ago quarter’s growth of 4.9%. Excluding foreign currency impact, global restaurant sales inched down 1% compared to the previous quarter and the year-ago quarter’s increase of 9.6% and 5.5%, respectively.

Domestic company-owned restaurant comps were down 6.1% in the reported quarter compared to comps growth of 3% in the year-ago quarter.
Comps at North America franchised restaurants fell 5% comparing unfavorably with comps growth of 1.7% in the first quarter of 2017. Comps at system-wide North American restaurants decreased 5.3% compared to 2% comps growth in the year-ago quarter.

Comps at system-wide international restaurants inched up 0.3%, lower than comps growth of 6% in the year-ago quarter.

Operating Highlights

Total operating margin was 6.4% in the first quarter, a decrease of 330 basis points (bps) from the year-ago quarter. Total costs and expenses amounted $400.3 million, down 1.3% from the first-quarter 2017.

Net income declined 41.1% year over year to $16.7 million.

Balance Sheet

As of Apr 1, 2018, cash and cash equivalents totaled $31.9 million compared with $22.3 million as of Dec 31, 2017. Long-term debt came in at $568.8 million at the end of the first quarter compared with $446.6 million at the end of 2017.

Inventories at the end of quarter decreased to $28.3 million from $30.6 million at the end of Dec 31, 2017. Free cash flow totaled $31.7 million at the end of the reported quarter, compared with $32.3 million at the end of first-quarter 2017.

In the quarter under review, Papa John's repurchased 2,001 shares at a cost of $119.7 million. Management declared second-quarter dividend of 225 cents per common share, which will be paid on May 25, 2018 to shareholders of record at the close of business on May 14, 2018.

2018 Guidance

The company reiterated its previously announced guidance for 2018. Management continues to expect GAAP EPS in the range of $2.40-$2.60. Adjusted earnings are expected to decline in the range of 4.5-12% year over year due to lower operating results, primarily from expected pressure on Domestic restaurants’ sales, higher delivery and insurance costs for the company-owned restaurants, and higher costs for technology and marketing investments.

North America comps are expected in the range of negative 3% to flat. International comps are anticipated to grow in the 3% to 5% band.

Capital expenditures of $45-$55 million are expected in 2018, whereas Total Debt/EBITDA is expected between 3x and 3.5x.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. There has been one revision higher for the current quarter compared to one lower.

Papa John's International, Inc. Price and Consensus

 

VGM Scores

At this time, PZZA has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was also allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value, growth, and momentum investors.

Outlook

PZZA has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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