Factors Setting The Tone For Papa John's (PZZA) Q1 Earnings

Papa John’s International, Inc. (NASDAQ:PZZA) is likely to report first-quarter 2018 financial numbers on May 1. In the last reported quarter, the company’s earnings missed the Zacks Consensus Estimate by a margin of 4.4%. Also, it fell short of the consensus mark for earnings by an average of 0.2% in two of the trailing four quarters.

What to Expect?

The question lingering in investors’ minds now is whether Papa John’s will be able to deliver a positive earnings surprise in the quarter to be reported. The Zacks Consensus Estimate for the first quarter is pegged at 62 cents, lower than 74 cents in the year-ago quarter. Additionally, over the past 30 days, the company’s earnings have witnessed downward revision of a penny, reflecting analysts’ concern surrounding the stock. In the fourth quarter of 2017, the company’s witnessed earnings decline of 6% on a year-over-year basis.

Meanwhile, analysts polled by Zacks expect revenues of nearly $442 million, down 1.6% from the prior-year quarter.

Let’s delve deeper to find out how the company’s top and bottom line will shape up this earnings season.

Factors at Play

From the above discussion it is quite evident that Papa John’s International is likely to witness year-over-year decline in both top and bottom line. Also, the company has been grappling with declining comparable sales in domestic market for quite some time. In the third and fourth quarter of 2017, domestic company-owned restaurant comps declined 1.4% and 4.7%, respectively. Further, comps at North America franchised restaurants fell 3.5% in the last reported quarter versus comps growth of 3.4% in the fourth quarter of 2016. Comps at system-wide North American restaurants dropped 3.9% against 3.8% comps growth in the year-ago quarter.

Additionally, Papa John’s is plagued with high costs associated with restaurant operations. Costs related to marketing initiatives, unit expansion, digital ordering, and increasing use of online and mobile web technology might keep the company’s earnings under pressure. The company is also shouldering higher labor costs due to the implementation of The Affordable Care Act, commonly known as Obamacare.

In the fourth quarter, total costs and expenses amounted to $429.3 million, up 7.8% from the prior-year quarter. Total operating margin contracted 390 basis points (bps) to 7.8% on a year-over-year basis.

Nevertheless, Papa John’s is investing heavily in technology-driven initiatives like digital ordering to boost sales. In fact, the company’s online and digital marketing activities have grown significantly over the past several years in response to increasing use of online and mobile web technology. Furthermore, the company continues reinforcing its commitment toward a better customer experience and improvements in its digital ordering process.

Papa John’s is also relentlessly fortifying its global presence driven by optimization of the company’s restaurant model, brand design enhancements and increased integration with third-party aggregators that is broadening its reach as part of its sales boosting initiatives. It is undertaking strategic partnerships to build traffic and sales as well.

Papa John's International, Inc. Price, Consensus and EPS Surprise

What Does the Zacks Model Unveil?

Our proven model does not show that Papa John’s is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Papa John’s has an Earnings ESP of 0.00% and a Zacks Rank #4 (Sell).

As it is, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a few other stocks from the Restaurant space that investors may consider, as our model shows that they also have the right combination of elements to post an earnings beat this quarter:

Ruth's Hospitality Group, Inc. (NASDAQ:RUTH) has an Earnings ESP of +1.70% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Jack in the Box Inc. (NASDAQ:JACK) has an Earnings ESP of +2.33% and a Zacks Rank of 3.

Brinker International, Inc. (NYSE:EAT) has an Earnings ESP of +0.69% and a Zacks Rank #3.

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