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Papa John's (PZZA) Banks on Expansion Initiatives, Costs High

Zacks Equity Research
·4-min read

Papa John’s International, Inc. PZZA is likely to benefit from unit expansion, re-franchising efforts, digital initiatives and menu innovation. However, coronavirus-related woes along with rise in operating costs and debt level are concerns.

Let us delve into the factors that highlight why investors should hold on to the stock for the time being.

Factors Driving Growth

Papa John’s is committed to develop and maintain a strong franchise system. The company is continually striving to eliminate barriers to expansion in existing international markets and identify new market opportunities. During the third quarter of fiscal 2020, the company collaborated with HB Restaurant Group to boost presence in Philadelphia and southern New Jersey market. Under the development agreement, the company will open 49 new stores between 2021 and 2028. Also, the company intends to tap on growth opportunities in France and Italy.

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

Meanwhile, Papa John’s continues to impress investors with robust comparable sales growth. The company recorded positive comparable sales growth in the first quarter of fiscal 2021, which marks the fifth straight quarter of comps growth. Notably, the company benefitted from initiatives revolving around menu innovation, digitalization, delivery as well as carryout options and other operational efficiencies.

In the fiscal first quarter, global restaurant sales (excluding foreign currency impact) rose 26.6% compared with 5.4% growth reported in the prior-year quarter. Further, domestic company-owned restaurant comps in the reported quarter increased 23.3% year over year compared with 6.1% growth in the year-ago quarter.

Papa John’s is investing heavily in technology-driven initiatives like digital ordering to boost sales. The company’s online and digital marketing activities have increased significantly in the past several years in response to increasing utilization of online and mobile web technology. In fact, Papa John’s is committed toward providing better customer experience with enhancements to its digital ordering process.

Moreover, the company continues to focus on product introduction to drive growth. Notably, menu innovation like Papadias and Epic Stuffed Crust pizza continues to witness solid popularity among customers, thereby boosting the top line. Backed by better brand positioning, the new products have driven higher ticket and traffic across dayparts without cannibalizing core premium products as well as complicating operations at other stores.



So far this year, shares of the company have gained 14.3% compared with the industry’s 13.3% growth

Concerns

The coronavirus pandemic and high costs are potent headwinds. During the fiscal first quarter, the company witnessed high costs associated with product launch, marketing campaigns and other sales-building initiatives. Also, rise in commodity and other operating costs took a toll on margins. Notably, total costs in first-quarter fiscal 2021 increased 17.9% year over year to $464.9 million from $394.4 million reported in the prior-year quarter.

Coming to the balance sheet, long-term debt as of Mar 28, 2021, came in at $328.5 million compared with $328.3 million as of Dec 27, 2020. The company’s debt-to-capitalization at the end of first-quarter fiscal 2021 is at 289.1%. Moreover, the company ended fiscal first quarter with cash and cash equivalents of $171.3 million, which may not be enough to manage the high debt level.

Zacks Rank & Key Picks

Papa John's currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Chuy's Holdings, Inc. CHUY, Dine Brands Global, Inc. DIN and Texas Roadhouse, Inc. TXRH, each sporting a Zacks Rank #1.

Chuy's Holdings has a trailing four-quarter earnings surprise of 127.6%, on average.

Dine Brands’ 2021 earnings are expected to surge 268.7%.

Texas Roadhouse has a three-five year earnings per share growth rate of 10%.

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Zacks Investment Research