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Is Papa John's (PZZA) a Better Investment Without the Papa Himself?

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Shares of Papa John’s (PZZA - Free Report) surged as high as 14% Thursday after founder and face of the company “Papa” John Schnatter resigned as chairman of the board. This came a day after a Forbes article detailing a May call in which Schnatter made a comment using the n-word. Thursday’s gains held on Friday as the stock is moving sideways in morning trading.

A History of Saucy Behavior

Papa John’s has been in the spotlight for the wrong reasons recently. Schnatter stepped down from his role as CEO last November after comments he made during the firm’s Q3 FY17 earnings call. He claimed that his company, which is an NFL sponsor and advertiser, was “hurt” by the kneeling protests that took place across the league. He went on to comment that “by not resolving the current debacle to the player and owners’ satisfaction, NFL leadership has hurt Papa John’s shareholders.”

Yet, shares of Papa John’s have been on a downward spiral since reaching an all-time high of $89.17 in December of 2016. Even after Thursday’s huge gain, the stock has still lost nearly 28% in value in the last 12 months, a practical mirror image of the industry average 27% gain. By comparison, Dominos (DPZ - Free Report) is up about 33% in that same timeframe.

Bland Domestic Growth Figures

Papa John’s saw lackluster performance in its Q1 FY18 earnings report, posting $0.50 per share on revenues of $427.4 million. EPS numbers were particularly grim, missing our estimates by 19% and representing a 35% year-over-year collapse. This is the company’s second straight earnings miss after 9 consecutive quarters of beats.

Disappointing comps numbers were a major cause for the slump. Domestic company-owned restaurant comps fell 6.1%, which is quite high and follows a 4.7% decrease during Q4 FY17. Franchised stores figures were not much better, declining 5% following a 3.5% decline in the previous quarter.

Finding Flavor Abroad

Many of Papa John’s restaurants are located overseas, in Latin America, China, Europe, and the Middle East. It has inked deals to expand into more countries, including Mexico, Egypt, Russia, and Spain, to name a few.

While the company had seen particularly solid growth in China, it announced at the end of last month that it is selling all 34 of its restaurants in Beijing and Tianjin, a worrying development. Still, it continues to expand its Middle Eastern footprint, opening in mid-May what is now the company’s 50th location in Turkey.

All of Papa John’s international restaurants are locally franchised, and it plans for most of its future openings to continue the trend. Franchising provides solid value for the company as it requires less capital commitment and thus improves margins. This also helps grow the firm’s free cash flows, which will only become more crucial as it continues to grow and leverage its brand.

Overall global restaurant sales fell 1.3% in Q1, a stark difference from the 9.9% surge in Q4. On the (slightly) bright side, international comps saw an overall increase of 0.3%, although this too is a far cry from the previous quarter’s 6%.

Spicing It Up With Tech

Papa John’s is trying to turn things around by allocating more capital to tech investments. As a growing number of consumers gravitate toward online and mobile technology, the firm is boosting its digital marketing activities and streamlining the ordering process. Recently, the company launched instant ordering through Facebook (FB - Free Report) , as well as an ordering app for Apple TV (AAPL - Free Report) .

The initiatives are working, with 60 percent of the company’s orders in the US now coming from online customers. As labor costs continue to rise, shifting towards further reliance on technology may be an unfortunate but necessary measure.

Outlook

Papa John’s branding will be a key indicator of success moving forward. In the wake of Schnatter’s resignation, curious investors have begun wondering if the company will rename itself. Although no longer CEO or Chairman, Schnatter is plastered across the company’s posters and pizza boxes.

In order to get back into many consumers’ good graces, the company may need to start over with a fresh image. However, there are conflicting hypotheses on the value of an eponymous brand versus one without a figurehead, making it a difficult choice. Either way, Schnatter’s resignation will likely provide much-needed PR relief for the pizza giant.

In the last 60 days, Papa John’s has seen negative earnings estimate revisions for the current quarter along with the current and following fiscal years. Current quarter estimates have ticked down three cents to $0.52, while fiscal year estimates have slipped from $2.48 in February to its current value of $2.31. These revision trends have given Papa John’s a Zacks Rank #5 (Strong Sell).

Given the information currently available, Papa John’s does not appear to be a good buy. Its growth initiatives do hold promise and could help correct the firm’s path, and it might very well be better off without its opinionated founder. Still, at this point investors probably shouldn’t commit to anything more than just monitoring Papa John’s.

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