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Papa John's (PZZA) Up 18.2% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Papa John's (PZZA - Free Report) . Shares have added about 18.2% in that time frame, outperforming the S&P 500.

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

Papa John's Q2 Earnings Meet Estimates, Revenues Lag

Papa John's reported second-quarter 2018 results, wherein earnings came in line with the Zacks Consensus Estimate but revenues missed the same. Also, the company trimmed its full-year guidance.

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 due to weak operating results.

Revenues came in at $408 million, missing the consensus mark of $418 million and decline 6.2% on a year-over-year basis. 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 overshadowed by an increase in international sales, other revenues and favorable impact of foreign exchange rates.

Also, a challenging sales environment in the U.S. restaurant space has been weighing on the company’s performance for quite some time. This is quite evident from Papa John's dismal 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 second quarter, global restaurant sales decreased 2.3% compared unfavorably with the last reported quarter’s decline of 1.3% and the year-ago quarter’s growth of 4.1%. Excluding foreign currency impact, global restaurant sales were up 2.3% compared to the previous quarter and the year-ago quarter’s decrease of 1% and increase of 5.1%, 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 7.2% comparing unfavorably with comps growth of 2.3% in the second quarter of 2017. Comps at system-wide North American franchised restaurants decreased 5.7% compared to 1.1% comps growth in the year-ago quarter.

Comps at system-wide international restaurants were down 0.8% compared with comps growth of 3.9% in the prior-year quarter.

Operating Highlights

Total operating margin was 6.2% in the second quarter, down 240 basis points (bps) from the year-ago quarter. Total costs and expenses amounted to $380.5 million, down 4.3% from second-quarter 2017.

Balance Sheet

As of Jul 1, 2018, cash and cash equivalents totaled $25.7 million compared with $22.3 million as of Dec 31, 2017. Long-term debt came in at $556.4 million at the end of the second quarter compared with $446.6 million at the end of 2017.

Inventories at the end of quarter decreased to $27.1 million from $30.6 million at the end of Dec 31, 2017. Free cash flow for the first and second quarter of 2018 summed $52.6 million, compared with $47.4 million at the end of first and second quarter of 2017.

For the first six months of 2018, Papa John's repurchased 2.5 million shares at a cost of $148 million. Management declared third-quarter dividend of 225 cents per common share, payable Aug 24, 2018 to shareholders of record at the close of business on Aug 13, 2018.

2018 Guidance

Papa John's trimmed its previously announced guidance for 2018. Management continues to expect GAAP EPS in the range of $1.30-$1.80 compared with $2.40-$2.60 anticipated earlier. Adjusted earnings are expected to be impacted by lower operating results, primarily from expected pressure on Domestic restaurants’ sales, increased delivery and insurance costs for the company-owned restaurants, and higher costs for technology and marketing investments.

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%.

Capital expenditures of $45-$50 million are expected in 2018, whereas total Debt/EBITDA is expected be above 4.0x.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -44.83% due to these changes.

VGM Scores

Currently, Papa John's has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Papa John's has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.



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