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Papa John's Down 26% in 6 Months: What's Hurting the Stock?

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Are you still holding shares of Papa John's International, Inc. (PZZA - Free Report) and waiting for a miracle to take the stock higher in the near term? If yes, then you might lose more money as chances are very slim that the stock, which lost its value by 25.6% in the past six months, will take a U-turn in the near term. On the contrary, the Zacks Retail-Restaurants industry has increased 5.5% in the same time. Let’s delve deeper and try to find out what is dragging this Zacks Rank #5 (Strong Sell) company down.

Earnings & Sales Decline a Major Concern

Decline in both top and bottom lines over the past few quarters, has been a major concern for Papa John’s. In second-quarter 2018, adjusted earnings of 49 cents per share came in line with consensus estimate. The bottom line fell 24.6% from the year-ago quarter figure owing to weak operating results. Meanwhile, revenues not only declined 6.2% year over year but also missed the consensus mark. The downside can be attributed to dismal domestic company-owned restaurant sales and decline in North America commissary sales on weak volumes. This was partially mitigated by an increase in international sales, other revenues and favorable impact of foreign exchange rates.

Moreover, the company’s top and bottom lines have also missed the consensus mark in the trailing two out of three quarters.

Soft Comps Performance

The company’s comps performance over the past few quarters is also a cause of concern for investors. Comps had declined 6.1% in both the first and second quarter 2018.  Moreover, comps at North America franchised restaurants fell 7.2% against comps growth of 2.3% in the second quarter of 2017. Comps at system-wide North American franchised restaurants decreased 5.7% versus comps growth of 1.1% in the year-ago quarter. The dismal comps trend is likely to continue in the rest of this year. In 2018, North America comps are expected to decline in the range of 7-10% compared with earlier guidance of negative 3% to flat. International comps are anticipated to be between negative 2% to up 1%, sharply down from previous guidance of up 3-5%.

Estimates Trending Downward

Let’s look at Papa John’s earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company. In the past 30 days, the Zacks Consensus Estimate for 2018 and 2019 has declined by 13.8% and 9% to $1.81 and $1.92, respectively. Moreover, the consensus estimates for third-quarter 2018 has also moved down 45.5% to 24 cents.

Bottom Line

Apart from witnessing a consistent decline in revenue trends, Papa John’s has been under the reeling under negative publicity of late, after its ex-CEO, John Schnatter was publicly denounced for using racist terms. In order to revive its brand image and reinvigorate growth, the company recently announced an assistance program for its U.S. and Canada franchisees. The program is expected to offer advice on the sales and operating challenges that Papa John’s franchisees are facing, with full support from the company’s Franchise Advisory Council (“FAC”) and Papa John’s Franchise Association (“PJFA”).

Key Picks

Some better-ranked stocks in the same space are Carrols Restaurant Group, Inc. (TAST - Free Report) , Dine Brands Global, Inc. (DIN - Free Report) and Darden Restaurants, Inc. (DRI - Free Report) . All the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Carrols Restaurant Group’s earnings have surpassed the Zacks Consensus Estimate by an average of 25%.

Dine Brands Global reported better-than-expected earnings in the trailing four quarters, with an average beat of 8.1%.

Darden Restaurants delivered better-than-expected earnings in the preceding four quarters, with an average beat of 3.1%.

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