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Papa John's (PZZA) Rides On Solid Comps Growth, Debts High

·4 min read

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

Let’s delve deeper.

Factors Driving Growth

Papa John’s continues to impress investor with robust comparable sales growth. The company recorded positive comparable sales growth in first-quarter fiscal 2021, which marks the fifth straight quarter of comps growth. Notably, the company benefitted from initiatives revolving around menu innovation, operational efficiencies and cost-saving efforts. In fiscal first quarter, global restaurant sales (excluding foreign currency impact) rose 26.6% compared with 5.4% growth reported in the prior-year quarter. During the quarter, comps at system-wide international restaurants were up 23.2% year over year compared with 2.3% growth in the prior-year quarter.

Meanwhile, Papa John’s is committed toward developing and maintaining a strong franchise system. The company is continually striving to eliminate barriers for expanding in existing international markets and identify new market opportunities. During first-quarter 2021, the company opened 68 international restaurants with new restaurant openings in Cambodia and Germany.

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 digital ordering process.

Moreover, the company continues to focus on product introduction to drive growth. Notably, menu innovation like Garlic Parmesan Crust, toasted handheld Papadias and Jalapeno Popper Rolls 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, the company’s shares have gained 20% compared with the industry’s 10.3% growth.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Concerns

Maintaining liquidity is a herculean task for most companies in the current scenario. 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.

The coronavirus pandemic and high costs are potent headwinds. During 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.

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 Dine Brands Global, Inc. DIN, Texas Roadhouse, Inc. TXRH and BJ's Restaurants, Inc. BJRI. Dine Brands and Texas Roadhouse sport a Zacks Rank #1, while BJ's Restaurants carries a Zacks Rank #2 (Buy).

Dine Brands’ 2021 earnings are expected to surge 269.3%.

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

BJ's Restaurants has a trailing four-quarter earnings surprise of 40.4%, on average.

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