Here's Why Investors May Want To Steer Clear Of Papa John's

Papa John's International, Inc. (NASDAQ:PZZA) has been losing sheen of late. Unlike other pizza giants in the industry, Papa John’s have been struggling with declining revenues. Additionally, the company has been under the spotlight of negative publicity after its ex-CEO, John Schnatter, has been publicly denounced for making a racist comment.

A look at Papa John’s price trend reveals that the stock has had an unimpressive run on the bourses in the past year. Shares of the company have lost 27.1% against the industry’s collective increase of 1.9%. This underperformance can be primarily attributed to a sharp fall in the company’s bottom line over the last few quarters.

Moreover, the company’s top and the bottom line missed the consensus mark in three of the reported quarters. Following the third-quarter results, Papa John’s trimmed its 2018 view, which has further increased investors’ apprehension. Also, earning estimate for the same year decreased by 2% over the past 30 days.

Dismal Comps Performance

Despite being a forerunner in the U.S. restaurant space, Papa John’s is unable to revive sales lately. Over the past couple of quarters, dismal comps performance has been a major concern for investors. In the first and second quarter 2018, comps had declined 6.1% each. At North America franchised restaurants, the metric fell 7.2% against comps growth of 2.3% in the second quarter of 2017. Comps at system-wide North American franchised restaurants decreased 5.7% versus comps growth of 1.1% in the year-ago quarter.

In the third quarter, domestic company-owned restaurant comps declined 13.2% versus 1.7% comps growth in the year-ago period. At North America franchised restaurants, comps fell 8.6% against comps growth of 0.7% in the quarter under review. At system-wide North American franchised restaurants, the same decreased 9.8% in contrast to 1% comps growth in the year-earlier quarter. Comps at system-wide international restaurants were down 3.3% as opposed to comps growth of 5.3% in the prior-year quarter.

North America comps are expected to decline 6.5-8.5% compared with 7-10% decrease projected earlier. International comps are still anticipated between a negative 2% to up 1%.

High Costs

Apart from high labor costs associated with restaurant operations, Papa John’s has been bearing the brunt of high delivery and insurance costs for the company-owned restaurants. Despite increased focus on franchising, the company’s earnings still remain under pressure. Increased costs for technology and marketing investments might continue to hurt the company’s bottom line, going ahead.

In the last reported quarter, Papa John’s earnings fell 35.1% year over year due to weak operating results. For 2018, the company expects earnings to decline in the range of 4.5-12%. Subsequently, the consensus estimate for 2018 earnings is likely to moved south 43.9% from 2017.

Lackluster ROE

Papa John’s trailing 12-month return on equity (ROE) undercuts its growth potential. The company’s ROE of negative 28% compares unfavorably with ROE of 7.5% for the industry, reflecting the fact that it is less efficient in using shareholders’ funds.

Competitive Environment

A broader look at the pizza space reveals that it has been growing rapidly, overshadowing independent restaurants. Papa John’s, however, is unable to strategize its business and gain from the favorable industry scenario. Consequently, it continues to face competitive pressure from pizza bigwigs like Domino’s (NYSE:DPZ) and Yum Brands’ (NYSE:YUM) Pizza Hut. The company faces competition from Starbucks (NASDAQ:SBUX) and other fast-casual restaurant chains as well.

Zacks Rank

Currently, Papa John’s carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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