Papa John’s International, Inc. (PZZA)

Earlier today, Papa Johns hosted an Analyst Meeting in Atlanta. Key themes from the meeting include: (1) more investment in digital technologies, (2) opportunities for U.S. unit growth – for example, through infilling of some of the stronger U.S. markets, (3) opportunities for International unit growth, (4) opportunities to refocus on the core on the menu (pizzas), including attaining better product consistency, and (5) increasing investments in digital technologies. Papa Johns cites the following as key takeaways from the meeting:

Earlier today, Papa Johns reported adjusted third-quarter EPS of $0.43. This was three cents better than our $0.40 estimate, and in line with sell-side consensus (according to Consensus Metrix) of $0.43.

Concurrent with this report, we are publishing our report entitled “Updating our Q3 Kalinowski Quick-Service Pizza Same-Store Sales Index.” In that report, we note that we are keeping unchanged our Q3E same-store sales forecast for Papa Johns North American of -5.5%. As of this writing, sell-side consensus (according to Consensus Metrix) is at -5.6%.

Earlier today (Thursday), Papa Johns reported second-quarter adjusted EPS of $0.61 despite weaker-than-expected North American same-store sales. This EPS result was above our $0.53 forecast and sell-side consensus (according to Consensus Metrix) of $0.53. Relative to our model, better-than-expected domestic commissary margins helped.

Earlier today (Thursday), Papa Johns reported that its Q1 adjusted EPS amounted to $0.67. This was ahead of our $0.60 forecast and sell-side consensus (according to Consensus Metrix) of $0.57.

Earlier today (Thursday), Papa Johns reported adjusted Q4 EPS of $0.91, coming in ahead of our $0.75 forecast and sell-side consensus (according to Consensus Metrix) of $0.71. We attribute part of the earnings beat to better-than-expected margins at company-operated stores. Fourth-quarter Domestic Company-Owned Restaurant Expenses/Domestic Company-Owned Restaurant Sales came in at 26.4%, more favorable than our 27.5% estimate. Lower year-over-year cheese costs helped.

Earlier today (Thursday), Papa Johns reported adjusted Q3 EPS of $0.53. This was below our $0.60 projection and sell-side consensus (according to Consensus Metrix) of $0.57. The company points out the “dilutive impact of our recently acquired restaurants in the UK.” This factor will pressure EPS over Q4 2023-Q2 2023 as well. Management comments that “We now expect our adjusted operating margins in 2023 to be down when compared with 2022 primarily driven by the recent acquisition of the UK restaurants. This headwind will offset the benefit of the 53rd week and positive impact of our operational excellence initiatives within our domestic company owned restaurants.”

Back in April 2018, we published a note entitled “Papa Johns (PZZA): Starts Tiny Test of Beer Delivery.” We noted that the time that Papa Johns “has started a test of beer delivery at a unit in Jeffersonville, Indiana (the city in which Papa Johns was founded). Five beer brands – Miller Lite, Coors, Coors Light, Dos Equis, and Yuengling – are being made available for delivery customers as part of this test.”

Earlier today (Thursday), Papa Johns announced that its second-quarter EPS came to $0.59, close to our $0.60 projection, and matching sell-side consensus (according to Consensus Metrix) of $0.59. We calculate that the Q2 adjusted tax rate amounted to 24.3%. This was unfavorable relative to our 22.5% projection and consensus of 22.6%. By our math, this detracted from Q2 EPS by about -1 cent. In other words, excluding this tax-rate issue, adjusted EPS in Q2 would have been $0.60.

Earlier today, Papa Johns reported that its first-quarter adjusted EPS came to $0.68, above our $0.63 forecast and sell-side consensus (according to Consensus Metrix) of $0.67. We attribute the Q1 EPS beat relative to our forecasts due to better-than-projected Q1 margins at company-owned units (helped by company-owned same-store sales rising by +3.4%, better than our +0.5% estimate and consensus of +0.4%), and also in the domestic commissary business.

The average unit volume for a Papa John’s U.S. franchised store open for the entirety of 2022 was $1,133,480. If one presumes that roughly 75% of this came through digital orders, that makes the digital sales about $850,110.

Earlier today, Papa Johns reported that its Q4 adjusted EPS amounted to $0.71. This was ahead of our $0.65 forecast and sell-side consensus (according to Consensus Metrix) of $0.67. We calculate that the adjusted Q4 tax rate came to 18.3%. This was more favorable than our 20.0% estimate and consensus at 20.7%. By our math, the better tax rate than expected helped Q4 EPS by about +2 cents relative to our projections.

Earlier today, Papa John’s reported adjusted Q3 EPS of $0.54, short of our $0.58 forecast and sell-side consensus (according to Consensus Metrix) of $0.61. Adverse factors hindering Q3 results included negative same-store sales in both North America and International, all-time high commodity costs, and wage inflation.

Back on August 31st, we raised our EPS estimates for Papa Johns, citing block cheese prices that had trended downward – important for a company that owns and operates about 9% of its store base. Block cheese closed on August 31st at $1.73 per pound (one cent above the 2012-21 historical average of $1.74 per pound).

On August 4th, when Papa Johns reported its Q2 earnings and hosted its related conference call, the company noted that its commodity costs were up by +18% year-over-year in Q2. The company cited cheese as a particular concern.

Earlier today, Papa Johns reported adjusted Q2 EPS of $0.74, coming in a little light of our $0.77 forecast and sell-side consensus (according to Consensus Metrix) of $0.75.

Papa Johns continues to be amongst the most innovative pizza concepts in the U.S., with the first line extension of Epic Stuffed Crust Pizzas – the Epic Pepperoni Stuffed Crust Pizza – having officially launched nationwide on April 18th. In addition, we would not be surprised to see Papa Bowls go nationwide as soon as mid-July (supply-chain issues permitting).

Under changed leadership, Papa Johns has unleashed what has arguably been the largest period of menu innovation in its history. This includes the nationwide (U.S.) launches of Papadias, Epic Stuffed Crust Pizzas, and New York Style Crust Pizzas.

Earlier today, Papa John’s reported adjusted Q1 EPS of $0.95. This was slightly ahead of our $0.94 projection and sell-side consensus (according to Consensus Metrix) of $0.94.

Earlier today, Papa John’s reported adjusted Q4 EPS of $0.75, coming in above our $0.74 forecast and sell-side consensus (according to Consensus Metrix) of $0.72. FYI, the Q4 adjusted tax rate amounted to 20.8%, close to our 21.0% estimate.

Papa Johns latest test menu item has appeared in multiple states. Under Rob Lynch — named CEO of Papa Johns in late August 2019 — menu innovation has been much greater, with Epic Stuffed Crust Pizzas and Papadias examples of that.

Earlier today, Papa John’s reported adjusted Q3 EPS of $0.83, coming in ahead of our $0.78 forecast and sell-side consensus (according to Consensus Metrix) of $0.72. The Q3 adjusted tax rate was 12.4% according to our calculations, more favorable than our 20.5% projection and consensus of 20.5%. We further calculation that this difference added about +8 cents to Q3 adjusted EPS. In other words, excluding tax-rate help, Q3 adjusted EPS would have been -3 cents below our forecast, but still +3 cents above consensus.

With hints that Domino’s (DPZ; Buy, $513.19) long-term unit growth opportunity may be better than the Street believes, perhaps this is also a hint that the same opportunity exists for Papa John’s.

Earlier today, Papa John’s reported Q2 adjusted EPS of $0.93. This was well above our $0.72 forecast and sell-side consensus (according to Consensus Metrix) of $0.73 (which had risen in recent days).

Are signs starting to emerge that Domino’s long-term worldwide unit growth potential could be meaningfully higher than the Street currently believes?

In this report we examine the bull and bear cases regarding Papa John’s (PZZA; Buy, $101.83). While we maintain our Buy rating on PZZA — it continues to be our top small/mid-cap restaurant-stock pick — it is good for investors interested in PZZA to be aware of the bull and bear cases surrounding the stock, no matter what our rating on the shares is.

Based on Papa John’s recent announcement that it will repurchase/convert all the convertible preferred stock owned by a strategic investor, we raise our full-year 2021E EPS estimate by +15 cents, to $3.00. And, based on this higher anticipated base of earnings coming off of this year — as well as net EPS benefits from the repurchase/conversion in Q1 2022 and the first half of Q2 2022, that did not accrue in Q1 2021 and the first half of Q2 2021 — we take up our full-year 2022E EPS forecast by +15 cents, to $3.40.

Earlier today, Papa John’s reported adjusted Q1 EPS of $0.90, well above our $0.53 forecast and sell-side consensus (according to Consensus Metrix) of $0.56. The EPS outperformance appears mainly driven by much better-than-expected same-store sales. The Q1 tax rate of 20.4% was a little more favorable than our 21.0% estimate, as well.

Papa John’s likely will release its Q1 2021 earnings in early May. How do PZZA shares tend to trade heading into earnings, and the day of (for a before-the-market-open) or after (for an after-the-market-close) an earnings release?

With this report, we increase our Q1E North American same-store sales forecast for Papa John’s by +130 basis points, to +13.5%. As of this writing, sell-side consensus (according to Consensus Metrix) is at +12.9%. Our increased forecast represents factors including: (1) quick-service delivery specialists still seem to be more appreciated by consumers in general, (2) stimulus-related consumer spending in January and in March, and (3) the return of the March Madness college basketball tournament — generating TV ratings on par with 2019 levels, unlike many other major sports games/events — seems to be driving demand for pizza delivery.

Earlier today, Papa John’s (PZZA; Buy, $102.64) reported Q4 adjusted EPS of $0.40, matching our $0.40 forecast, but coming below sell-side consensus (according to Consensus Metrix) of $0.45. Keep in mind, special year-end bonuses hampered Q4 EPS by approximately -6 cents, and this may not have been taken into account by some sell-side firms’ estimates.

With this report, we update our data-driven Kalinowski Quick-Service Pizza Index for Q4E to +12.1%. This figure is based on our latest proprietary checks/data as regards same-store sales performance for this segment during October, November, and December. We believe that December same-store sales were likely the best month of the quarter, while October was helped by arguably the busiest Halloween ever for pizza delivery/carryout.

Both Domino’s (DPZ; Buy, $392.57) and Papa John’s (PZZA; Buy, $80.36) begin lapping very difficult year-over-year domestic same-store sales comparisons in Q2 2021. What can we learn about the recent history of restaurant concepts that have lapped difficult comparisons, in this regard? And, what might Popeyes Louisiana Kitchen (owned by Restaurant Brands International [QSR; Not Rated]) teach us about what to expect for Domino’s and Papa John’s domestic same-store sales in 2021? Our bottom line is that Domino’s and Papa John’s could end up lapping these tough numbers better than the Street currently anticipates.

Looking at unit closures announced and planned by large restaurant chains, and comparing these to unit closures from mom-and-pops/independents, goes to show just how large a market-share shift is going on in the U.S. restaurant industry. We look for most, if not all, of this market-share shift in favor of large concepts to persist in the years after 2020.

We look for Papa John’s to launch Epic Stuffed Crust Pizzas nationwide in the U.S. shortly, with December 28, 2020 (the first day of Papa John’s fiscal 2021) one possible official launch date. This would not only be ahead of Super Bowl Sunday (scheduled for February 7, 2021), but also ahead of New Year’s Eve. In any case, it looks like a Q1 2021 launch date is likely, and sooner during that quarter rather than later.

Earlier today, Papa John’s announced Q3 EPS of $0.35, ahead of our $0.30 forecast and sell-side consensus of $0.32 (according to Consensus Metrix). Given an all-time high quarterly cheese cost in Q3 (block cheese in general averaged about $2.25 per pound in Q3) and costs that hampered rival Domino’s (DPZ; Buy, $392.52) Q3 EPS — some of these costs COVID-related — PZZA shares could benefit from a “relief factor” as it trades today.

Earlier today, Domino’s (DPZ; Buy, $403.46) reported a Q3 EPS miss relative to our expectations (and sell-side consensus). This miss was not caused by same-store sales trends, which came in above expectations for both the U.S. and International segments in Q3. Below the top line, multiple issues came into play, including spending related to the pandemic (such as higher pay for front-line employees, higher sick pay, and the need to buy more cleaning equipment), and what Domino’s described as all-time high cheese costs.

With this report, we update our data-driven Kalinowski Quick-Service Pizza Index for Q3E to +13.6%. This figure is based on our latest proprietary checks/data as regards same-store sales performance for this segment during July, August, and September.

Earlier today, Papa John’s (PZZA; Buy, $98.54) provided what we view as a favorable business update.

Quick-service pizza sector same-store sales have performed the best of any sector in the U.S. restaurant industry the last few months. This likely means that some large franchise companies who seek opportunities within the restaurant industry may examine possibilities in the pizza sector. Carryout/delivery pizza plays very well in a world uncertain about how COVID-19 and related issues will impact the future. On top of that, not only has Papa John’s (PZZA; Buy, $96.15) put up great domestic same-store sales numbers the last few months — up by +30.3% for June 29-July 26, of example — it also seeks franchisees. In this report, we examine some possible franchised companies that are not currently in the pizza space, but could join in under the right circumstances. All in all, we believe that Papa John’s is poised to reward shareholders by (1) improving the quality of its franchisee base, and (2) at some point engaging in meaningful refranchising activity, which could lead to a higher valuation multiple for PZZA shares.

Earlier today, Papa John’s (PZZA; Buy, $99.14) reported adjusted Q2 EPS of $0.48, coming in meaningfully above our $0.35 forecast and sell-side consensus of $0.44. We had been concerned that costs related to franchisee assistance — which amounted to a -$0.12 hit in Q2 — would hold back Q2 earnings, but the strength of the business (North American same-store sales up a previously-announced +28.0%) more than made up for this. Built into our Q2E estimate heading into today was an EPS hit of -18 cents related to franchisee assistance, so even specific to Q2, this came in +6 cents better than we expected.

In this report we examine the bull and bear cases regarding Papa John’s (PZZA; Buy, $88.26). While we maintain our Buy rating on PZZA — it continues to be our top small/mid-cap restaurant-stock pick — it is good for investors interested in PZZA to be aware of the bull and bear cases surrounding the stock, no matter what our rating on the shares is.

Is it possible the Street is underestimating sales and market-share opportunities in 2021 for the larger publicly-traded quick-service pizza concepts? We believe that Domino’s (DPZ; Buy, $374.09) and Papa John’s (PZZA; Buy, $83.66) both remain well-positioned for the future for multiple reasons, but this particular factor may be underappreciated. Incidentally, it’s possible for Pizza Hut (owned by Yum Brands [YUM; Neutral, $86.55]) to benefit from the same issue, although Pizza Hut will over the short-to-medium term likely have to deal with net unit closures, limiting to some meaningful degree its opportunity to take market share from other pizza outlets’ closures.

Earlier today, Papa John’s (PZZA; Buy, $76.32) reported that its North American same-store sales rose by a remarkable +33.5% for the April 27-May 24 timeframe. This comes on the heels of the previously-announced +26.9% for March 30-April 26, suggesting that Q2-to-date North American same-store sales are up by roughly +30% through May 24th. We raise our full-Q2E forecast by +900 basis points to +28.0%, which includes implied projections for May 25-June 28 of +20% for company-owned stores and +25% for franchised outlets.

Get ready for more innovation from Papa John’s (PZZA; Buy, $78.11) — we have learned that Papa John’s U.S. is testing several varieties of “Epic Stuffed Crust Pizzas” in at least one test market (Indianapolis). We believe there is a chance that one or more stuffed crust pizzas could receive a nationwide rollout by the end of 2020.

Earlier today regarding Papa John’s (PZZA; Buy, $76.16), we adjusted our 2020E EPS estimate downward by -40 cents to $1.15, reflecting: (1) a -50 cent hit for Q1A-Q3E adjustments to how Papa John’s records franchisee financial assistance (related to royalty relief and the discretionary marketing fund), with -26 cents of this having taken place in Q1, and our estimate of -12 cent hits each to Q2E and Q3E, and (2) +10 cents reflecting better-than-expected April North American same-store sales trends and the momentum resulting from this.

Earlier today, Papa John’s (PZZA; Buy, $76.16) reported Q1 EPS of $0.15, short of our $0.40 forecast and sell-side consensus (according to Consensus Metrix) of $0.41. However, the difference largely results from an accounting change in which “adjusted (non-GAAP) financial results… no longer present certain financial assistance provided to the North American system in the form of royalty relief and discretionary marketing fund investments as Special charges.” For Q1 2020, the impact to adjusted EPS from this change was -26 cents. In other words, excluding this change, Q1 EPS would have been $0.41 — one cent above our projection and matching consensus.

The price of block cheese has deteriorated from $1.8375 per pound as of March 23rd to $1.01 per pound as of April 14th. In our coverage list, the largest potential beneficiary of this dynamic is Papa John’s (PZZA; Buy), which owns and operates about 18% of its North American store base (or to look at it another way, Papa John’s owns and operates about 11% of its worldwide store base).

We adjust our North America blended (company-owned and franchised combined) same-store sales estimates for Papa John’s (PZZA; Buy) as follows:
Q1E 2020: up by +130 basis points to an actual of +5.3%
Q2E 2020: down by -30 basis points to +3.7%
Q3E 2020: down by -10 basis points to +2.9%
Q4E 2020: stays at +2.5%
Full-year 2020E: up by +20 basis points to +3.6%
Full-year 2021E: up by +40 basis points to +3.0%

Earlier today, Papa John’s (PZZA; Buy, $62.10) reported Q4 2019 adjusted EPS of $0.37. This exceeded our $0.35 forecast and sell-side consensus (according to Consensus Metrix) of $0.33.