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Papa John's (PZZA) Down 18.6% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Papa John's (PZZA - Free Report) . Shares have lost about 18.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Papa John's due for a breakout? 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 drivers.

Papa John's Q3 Earnings and Revenues Miss Estimates

Papa John’s reported lower-than-expected results for the third quarter of 2018. Adjusted earnings of 20 cents per share lagged the Zacks Consensus Estimate by 13%. The bottom line also fell 66.6% from the year-ago quarter figure due to weak operating results.

Revenues were $364.01 million, missing the consensus mark of $384 million. Revenues declined 15.7% 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.

Apart from witnessing a consistent decline in revenue trends, the company has been under the spotlight of negative publicity recently after its ex-CEO, John Schnatter, was publicly denounced for using racist term. Moreover, labor costs, coupled with increased operating costs from digital initiatives and marketing expenses, put substantial pressure on the company’s bottom line. The pressure is expected to linger in 2018 as reflected in the company’s outlook for the year.

Global Restaurant Sales & Comps

In the third quarter, global restaurant sales decreased 6.6%, comparing unfavorably with the third quarter’s decline of 2.3% and the year-ago quarter’s growth of 4.4%. Excluding foreign currency impact, global restaurant sales were down 5.9% compared with the previous quarter and the year-ago quarter’s increase of 2.3% and 5%, respectively.

Domestic company-owned restaurant comps were down 13.2% in the reported quarter compared with comps growth of 1.7% in the year-ago quarter.

Comps at North America franchised restaurants fell 8.6%, comparing unfavorably with comps growth of 0.7% in the third quarter of 2018. Comps at system-wide North American franchised restaurants decreased 9.8% compared with 1% comps growth in the year-ago quarter.

Comps at system-wide international restaurants were down 3.3% compared with comps growth of 5.3% in the prior-year quarter.

Operating Highlights

Total operating loss was $14 million in the third quarter compared with operating income of $33.5 million in the year-ago quarter. Total costs and expenses amounted to $378 million, down 5.1% from third-quarter 2017.

Balance Sheet

As of Sep 30, 2018, cash and cash equivalents totaled $24.9 million compared with $22.3 million as of Dec 31, 2017. Long-term debt was $555.8 million at the end of the third quarter of 2018 compared with $446.6 million at the end of 2017.

Inventories at the end of the reported quarter decreased to $29.3 million from $30.6 million at the end of Dec 31, 2017. Free cash flow for the first nine months of 2018 summed $68.2 million compared with $71.7 million at the end of the first nine months of 2017.

For the first nine months of 2018, Papa John's repurchased 2.7 million shares for $158 million. Management declared a dividend of 225 cents per common share for the fourth quarter, payable on Nov 23, 2018, to shareholders of record at the close of business as of Nov 12, 2018.

2018 Guidance

Papa John's trimmed its previously announced guidance for 2018. Management expects EPS of $1.30-$1.60 compared with $1.30-$1.80 mentioned earlier. Adjusted earnings are expected to be impacted by lower operating results, primarily due to 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 by 6.5-8.5% compared with decrease of 7% to 10% mentioned earlier. International comps are still anticipated to be between negative 2% to up 1%.

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

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.26% 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 an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile 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 trending upward for the stock, and the magnitude of this revision looks promising. Notably, Papa John's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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