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Will Soft Comps Hurt Papa John's (PZZA) Earnings in Q2?

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Papa John’s International, Inc. (PZZA - Free Report) is scheduled to report second-quarter 2018 financial numbers on Aug 7. In the last reported quarter, the company’s earnings missed the Zacks Consensus Estimate by a margin of 19.4%. Also, it fell short of the consensus mark for earnings by an average of 4.7% in two of the trailing four quarters.

What to Expect?

The question lingering on investors’ minds now is whether Papa John’s will be able to deliver a positive earnings surprise in the quarter to be reported. The Zacks Consensus Estimate for second-quarter earnings is pegged at 49 cents, lower than 65 cents in the year-ago quarter. Additionally, over the past seven days, the company’s earnings have witnessed a downward revision of 3 cents, reflecting analysts’ concern surrounding the stock. In the first quarter of 2018, the company’s bottom line declined 35.1% on a year-over-year basis.

Meanwhile, the Zacks Consensus Estimate for revenues stands at $418 million, reflecting a decline of 3.8% from the prior-year quarter actual figure.

Let’s delve deeper to find out how the company’s top and bottom line will shape up this earnings season.

Factors at Play

Papa John’s, which reported disappointing results in first-quarter 2018, is likely to continue the momentum in the soon-to-be reported quarter as well. Over the past couple of quarters, soft comps performance has been a major concern for investors. Analyst expects the company to report negative comps in second-quarter 2018. Domestic company-owned restaurant comps fell 6.1% in the last reported quarter, following a decline of 4.7% in the fourth-quarter 2017. Also, comps at North America franchised restaurants dropped 5%, after witnessing a decrease of 3.5% in fourth-quarter 2017.

Additionally, Papa John’s is plagued with high costs associated with restaurant operations. Costs related to marketing initiatives, unit expansion, digital ordering, and increasing use of online and mobile web technology might keep the company’s earnings under pressure. The company is also shouldering higher labor costs due to the implementation of The Affordable Care Act, commonly known as Obamacare. Over the past few quarters, Papa John’s operating margin has contracted and is likely to continue the downtrend in the second quarter too. Total operating margin was 6.4% in the first quarter, a decrease of 330 basis points (bps) from the year-ago quarter.

Nevertheless, Papa John’s is relentlessly fortifying its global presence driven by optimization of the company’s restaurant model, brand design enhancements and increased integration with third-party aggregators that is broadening its reach as part of its sales boosting initiatives. It is undertaking strategic partnerships to build traffic and sales as well.

Papa John's International, Inc. Price, Consensus and EPS Surprise

What Does the Zacks Model Unveil?

Our proven model does not show that Papa John’s is likely to beat earnings estimates in the second quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Papa John’s has an Earnings ESP of 0.00% and a Zacks Rank #5 (Strong Sell).

We caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies in the Restaurant space, which per our model have the right combination of elements to post an earnings beat in the to-be-reported quarter.

Jack in the Box (JACK - Free Report) has an Earnings ESP of +0.88% and a Zacks Rank #3. The company is scheduled to report quarterly results on Aug 8. You can see the complete list of today’s Zacks #1 Rank stocks here.

Brinker (EAT - Free Report) , with a Zacks Rank #3, has an Earnings ESP of +2.03%. The company is expected to report quarterly results on Aug 9.

Dave & Buster’s (PLAY - Free Report) has an Earnings ESP of +10.72% and a Zacks Rank #2. The company is anticipated to report quarterly results on Sep 4.

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