Papa John's (PZZA) Digital Initiatives Stay Strong, Traffic Low
Papa John’s International, Inc. PZZA is likely to benefit from digital initiatives, solid comps growth and menu innovation. Also, focus on expansion initiatives bodes well. However, a decline in traffic from pre-pandemic levels and inflationary commodity pressures are a concern.
Let’s discuss the factors highlighting why investors should retain the stock for the time being.
Factors Driving Growth
Papa John’s is investing 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 the higher utilization of online and mobile web technology. PZZA is committed to providing a better customer experience with enhancements to the digital ordering process. The company’s loyalty program continued to witness a rise in digital transactions during the fourth quarter of fiscal 2021. Larger transaction sizes and better targeting of offers and promotions have been benefiting the company. In 2021, digital sales contributed more than 75% to the company’s domestic sales, reflecting a rise of 300 basis points from 2020 and 1,000 basis points from 2019 levels.
Papa John’s continues to impress investors with robust comparable sales growth. The company recorded positive comparable sales growth in fourth-quarter fiscal 2021, which marks the ninth straight quarter of comps growth. It benefited from initiatives related to menu innovation, operational efficiencies and cost-saving efforts. Solid contributions were reported from third-party delivery aggregators. In the fiscal fourth quarter, total comparable sales rose 8.6% year over year compared with growth of 15.6% reported in the prior-year quarter. At North America franchised restaurants, comps rose 11.3% year over year compared with a 14.5% rally in the year-ago quarter. Comps at international restaurants were up 2.4% year over year compared with a 21.4% increase in the prior-year quarter. During the fiscal fourth quarter, total global system-wide restaurant sales growth came in at 13.1% year over year compared with a 15.4% rise in the prior-year quarter.
Papa John’s continues to focus on product introduction to drive growth. Menu innovations like toasted handheld Papadias and Epics Stuffed Crust continue 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 and complicating operations at other stores. During fourth-quarter fiscal 2021, the company launched New York Style Pizza featuring eight oversized slices on a thin foldable crust. Following the launch, the company reported solid demand in regards to the same. Given the solid consumer acceptance with reference to the Papadias platform, Epic Stuffed Crust and New York Style Pizza, the company expects the products to drive ticket and customer traffic for the rest of 2022.
Papa John’s is committed to developing and maintaining a strong franchise system. The company is striving to eliminate barriers for expanding in existing international markets and identifying new market opportunities. In August 2021, the company expanded its partnership with Drake Food Service International to open more than 220 Papa John’s restaurants by 2025. This includes more than 170 stores across Latin America, Spain and Portugal. Drake Food Service plans to open 50 new restaurants in the U.K. over the next four years. Under the terms of this expanded partnership, Drake Food Service will operate more than 560 Papa John’s restaurants by 2025. Apart from this, the company signed a new deal with the company signed a development deal with Sun Holdings (in September 2021) to open 100 new stores across Texas and the South by 2029. The company announced a partnership with FountainVest Partners (in January 2022) to open more than 1,350 new stores across South China by 2040. Backed by its accelerated development plan, the company now anticipates opening 260-300 net new restaurants globally in fiscal 2022. This represents approximately 5% growth in its system for the year. 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.
Concerns
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Shares of Papa John's have declined 23.3% in the past three months compared with the industry’s 19.4% fall. The downside was primarily due to the coronavirus crisis. Pandemic-induced restrictions, labor challenges and supply chain disruptions have taken a toll on the company. Although the majority of dining services are open, traffic is still low compared with pre-pandemic levels. The company intends to monitor the situation on a regular basis to gauge the impacts of COVID-19.
The company has been continuously shouldering increased expenses, which are detrimental to margins. It has been facing significant supply chain challenges and inflation across most commodities and categories. This resulted in cost pressure in the fourth quarter of fiscal 2021, including costs related to strategic staffing initiatives. Also, new hiring, referral and appreciation bonuses added to the woes. During the quarter under review, total costs and expenses amounted to $490.7 million, up 9% from the prior-year quarter’s 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 Zacks Retail-Wholesale sector include Genesco Inc. GCO, Arcos Dorados Holdings Inc. ARCO and Tapestry, Inc. TPR.
Genesco sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 2,739.6%, on average. Shares of the company have increased 26.4% in the past year.
The Zacks Consensus Estimate for Genesco’s 2022 sales and earnings per share (EPS) suggests growth of 35.5% and 677.1%, respectively, from the year-ago period’s levels.
Arcos Dorados carries a Zacks Rank #2 (Buy). ARCO has a long-term earnings growth of 24.7%. Shares of the company have increased 48.5% in the past year.
The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 9.2% and 148.9%, respectively, from the year-ago period’s levels.
Tapestry carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 28.2%, on average. Shares of the company have declined 18.6% in the past year.
The Zacks Consensus Estimate for Tapestry’s 2022 sales and EPS suggests growth of 17.5% and 22.9%, respectively, from the year-ago period’s levels.
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