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Reasons Why Investors May Want to Steer Clear of Papa John's

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Papa John's International, Inc. (PZZA - Free Report) has been losing sheen of late. Although other pizza bigwigs are gaining from a flourishing market, Papa John’s revenue trend has been showing a decline.

The company’s unsatisfactory performance in the first quarter of 2018 further raised investors’ skepticism surrounding the company. A look at Papa John’s price trend reveals that the stock has had an unimpressive run on the bourses in the past year. Shares of the company have lost 29.6% compared with the industry’s collective decline of 0.4% in the same time frame. Moreover, over the past two months, earnings estimates for the current year have been revised downward by 5.3%, thereby reflecting analysts’ doubt surrounding the company’s future earnings potential.

Sluggish Comps to Affect Overall Top Line

Despite being a forerunner in the U.S. restaurant space, Papa John’s is unable to revive sales lately. 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 decline of 3.5% in fourth-quarter 2017. Notably, for 2018, the Zacks Consensus Estimate for sales is pegged at $1.7 billion, mirroring a decline of 4.4% from 2017.

High Costs Likely to Continue Denting Earnings

Apart from high labor costs associated with restaurant operations, Papa John’s has been bearing the brunt of high delivery and insurance costs for the company-owned restaurants. Despite greater focus on franchising, the company’s earnings are still pressurized. Increased costs for technology and marketing investments might continue to hurt earnings of the company, going ahead.

In the last reported quarter, Papa John’s earnings fell 35.1% year over year due to weak operating results. The company expects earnings to decline in the range of 4.5-12% for 2018. Subsequently, the consensus estimate for 2018 earnings is likely to fall 11.1% from 2017.

Lackluster ROE

Papa John’s trailing 12-month return on equity (ROE) undercuts its growth potential. The company’s ROE of negative 90.3% compares unfavorably with ROE of 6.1% for the industry, reflecting the fact that it is less efficient in using shareholders’ funds.

Competitive Environment Hurts Papa John’s

A broader look at the pizza space reveals that it has been growing rapidly, overshadowing independent restaurants. Papa John’s, however, is unable to strategize its business and utilize the favorable industry scenario. Consequently, it continues to face competitive pressure from pizza bigwigs like Domino’s (DPZ - Free Report) and Yum Brands’ (YUM - Free Report) Pizza Hut. Papa John’s profits are likely to remain pressurized, going ahead.

Meanwhile the pizza space is growing by leaps and bounds. Per The Statistics Portal report, United States sees approximately $33 billion of consumer spending in the quick-service pizza category every year. Out of the total, roughly $15 billion constitutes take-out pizza services, followed by pizza delivery of around $10 billion. Notably, per unit sales for chain pizzerias are nearly 70% higher than that of the independent restaurants. According to Euromonitor, pizza chains grew 5.8% in 2017, while independent restaurants recorded a 2.7% sales increase. The PMQ Pizza Magazine estimates a total of $45.1 billion sales for 2018, out of which $26.6 billion will come from the top 50 chains in the country.

Zacks Rank & A Restaurant Stock to Consider

Currently, Papa John’s carries a Zacks Rank #5 (Strong Sell). However, a better-ranked stock in the restaurant industry is Dine Brands (DIN - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Dine Brands’ earnings for 2018 are projected to increase 23.1% year over year.

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