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Papa John's (PZZA) Focus on Franchising Aids Despite High Costs

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Papa John's International, Inc.’s (PZZA - Free Report) focus on expansion, franchising, technology-driven initiatives and commitment toward strong brand building through good quality offerings are likely to boost its performance. However, challenging sales environment and dismal comps performance are the major concerns. Further, shares of Papa John’s lost 19% in a year against the industry’s increase of 8.5%.

Growth Catalysts

Papa John’s, a leading take-out and pizza delivery restaurant chain, is committed to provide quality food and deliver better ingredients to its customers. In fact, it is the first pizza delivery chain to announce the removal of preservatives such as BHA and BHT as well as flavor enhancers.

We believe that the company’s continuous focus on international expansion and franchising are likely to drive growth. It is continually striving to eliminate barriers to expansion in existing international markets and identify opportunities in new markets. The company’s commitment to develop and maintain a strong franchise system lends it a competitive edge.

In fact, the company inked developmental agreements in many regions — including Mexico, Egypt, Russia, Spain, Chile, the Netherlands, Colombia and Boston. It also debuted in France and Israel in the past year, and in Morocco in 2017. Meanwhile, the company plans to open five units in the Bahamas by 2021.



We believe re-franchising a large chunk of its system reduces a company’s capital requirements, and facilitates earnings per share growth and ROE expansion. Alongside, free cash flow continues to grow, allowing reinvestment for increasing brand recognition and shareholder return.

Further, the company recently announced an assistance program for its U.S. and Canada franchisees in a bid to revive its brand image, and reinvigorate growth. Under the assistance program, the company plans to reduce royalties, food-service pricing and online fees throughout the current year.

Moreover, the company is investing heavily in technology-driven initiatives like digital ordering to boost sales. In fact, its online and digital marketing activities have increased significantly over the past several years in response to the increasing use of online and mobile web technology. Moreover, the company became the foremost national restaurant chain to launch Facebook Instant Ordering. Hence, its focus on expanding its digital ordering capabilities aids Papa John's.

Headwinds

High costs amid a challenging sales environment have been affecting the company’s performance of late. In the first nine months of 2018, total revenues dropped 8.8% year over year. In fact, in the third quarter, revenues declined 15.7% year over year due to dismal domestic company-owned restaurant sales and a decrease in North America commissary sales on soft volumes.

Moreover, in the first nine months of 2018, the bottom line plunged 41.6% year over year. In the third quarter, the bottom line fell 66.7% from the year-ago quarter’s figure, owing to weak operating results. Additionally, following third-quarter results, the company trimmed its 2018 view, which further increased investors’ apprehension.

Not only this, but dismal comps performance over the past couple of quarters has also been a major concern for investors. In the third quarter, domestic company-owned restaurant comps declined 13.2% versus 1.7% comps growth in the year-ago period. Comps at North America franchised restaurants fell 8.6% against comps growth of 0.7% in the quarter under review.

Thus, pressure on domestic restaurants’ sales, increased delivery and insurance costs for the company-owned restaurants, and higher costs for technology and marketing investments are expected to linger in the months ahead.

Zacks Rank & Stocks to Consider

Papa John's currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Retail-Restaurants industry are The Habit Restaurants, Inc. (HABT - Free Report) , Bojangles', Inc. (BOJA - Free Report) and BJ's Restaurants, Inc. (BJRI - Free Report) . While Habit Restaurants presently sports a Zacks Rank #1 (Strong Buy), Bojangles' and BJ's Restaurants carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Habit Restaurants reported better-than-expected earnings in three of the trailing four quarters.

Bojangles' reported better-than-expected earnings in three of the trailing four quarters, the average beat being 13.1%.

BJ's Restaurants has an expected earnings growth rate of 66.7% for the current year.

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