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Papa John's Earnings Beat, Guidance Up

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Papa John’s International Inc. (PZZA - Free Report) reported first-quarter 2013 earnings of 84 cents per share, outperforming the Zacks Consensus Estimate of 81 cents by 3.7% and the comparable year-ago quarter’s earnings by 6.3%. Strong revenue growth boosted the earnings for the quarter.

Total revenues jumped 7.3% year over year to $355.6 million but missed the Zacks Consensus Estimate of $364 million by 2.6%. The year-over-year improvement was attributable to higher comparable restaurant sales (comps) in both domestic and international markets, increased North America franchise royalty revenues and unit expansion.

Revenues in the quarter also gained from Papa John’s’ higher volume generation and traffic growth.

Behind the Headline Numbers

Domestic company-owned restaurant revenues increased 9.8% to $157.9 million, signifying a 3.9% increase in comps. In the first quarter, Papa John’s acquired 50 restaurants from its franchisee, which also helped augmenting the domestic company-owned restaurant revenues.

Rise in net franchised units and positive comps of 0.8%, resulted in a 1% increase in North America franchise royalty revenues to $20.7 million. However, Papa John’s acquisition of the aforementioned 50 restaurants resulted in a reduction in the number of franchised stores, which in turn negatively impacted royalty revenues.

International revenues increased 18.2% year over year to $19.9 million, powered by comps growth of 8.2% and rise in the number of restaurants in the international market.

Domestic commissaries revenues witnessed an improvement of 4.6% year over year to $143.9 million, driven by higher sales volume and rise in commodity prices.

In the quarter under review, Papa John’s’ operating income also grew 8.6% year over year to $29.6 million, reflecting higher operating income generation in North America franchising as well as in the international market,.

Amid a growing sales environment, adjusted operating income (incentive contribution excluded) for the domestic company-owned restaurants were down nearly 3% year over year to $11 million because of higher cheese prices.

Operating income for the North America franchising unit was up 0.5% year over year to $18.2 million, led by unit growth and higher comps neutralizing the adverse impact of lower royalties.

The International segment’s comps as well as unit expansion also resulted in a 25.4% increase in the operating income to $341 million. However, a loss in the Corporate China division was a slight drag on the operating income during the quarter.

Domestic commissaries segment’s operating income was down 9% annually to $10.2 million due to tough year-over-year comparison.

Unit Growth

During the quarter, the company opened 34 restaurants worldwide. As of Mar 31, 2013, Papa John’s had 4,200 restaurants across 34 countries.


Papa John’s recently raised its earnings guidance for 2013. The company now expects the earnings within $2.90 to $3.00, up from the previous guidance of $2.85- $2.95.

Papa John’s continues to expect that North America system-wide comps will increase in the range of 1.5% to 2.5%. International comparable revenues are expected to increase in the range of 5.0% to 7.0% in 2013.

Moreover, international restaurant sales are likely to grow by 20%-25% on the back of unit growth and comps improvement. Worldwide net units are expected to grow by 230 to 260. Further, the company anticipated that total revenue growth will be in the range of 6% to 7% with both the number of units and comps growing.

Our Viewpoint

Papa John’s earnings and revenue growth, international expansion and margin gains are quite impressive. The company remains on an expansion spree, which will provide it with greater scale and cost efficiency, going forward.

However, stiff competition and a tepid macroeconomic outlook, which might affect footfall at the restaurants, are expected to remain headwinds in the coming quarters.

Papa John’s carries a Zacks Rank #2 (Buy). Some other restaurateurs like Domino's Pizza Inc. (DPZ - Free Report) and CEC Entertainment Inc. surpassed our estimates on both lines this season while Burger King Worldwide, Inc. beat revenues but earnings were in line with the Zacks Consensus Estimate.

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