Will Revenue Growth Favor Papa John's (PZZA) Q4 Earnings?

Papa John’s International, Inc. (NASDAQ:PZZA) is scheduled to report fourth-quarter 2017 results on Feb 27, after market close.

The company’s continued international expansion plans, strategic partnerships and strong digital platform are likely to reflect in fourth-quarter results encouraging top-line performance. However, higher costs associated with labor, startups and transition might dent earnings in the to-be-reported quarter.

Notably, shares of Papa John’s have declined 33.3% in the past year, underperforming the industry’s gain of 9.4%.

Let’s take a detailed look at the factors that will shape up the company’s fourth-quarter results.

Top Line to Benefit From Sales Building Initiatives

The Zacks Consensus Estimate for fourth-quarter revenues is pegged at $469.48 million, reflecting a 6.8% year-over-year increase. The upside trend in revenues is expected to continue given Papa John’s robust sales building strategies and international expansion plans. In the last reported quarter, the company’s revenues of $431.7 million improved 2.2% year over year.

To boost sales, the company is investing heavily in technology-driven initiatives like digital ordering. Recently, Papa John’s expanded its digital ordering capabilities with the launch of Facebook (NASDAQ:FB) Instant Ordering and became the first national pizza chain to do so. It is also the foremost national restaurant chain to launch a custom ordering app for Apple (NASDAQ:AAPL) TV, commence a nationwide digital rewards program and surpass 60% of total U.S. sales via digital channels. Moreover, Papa John’s is the only pizza chain in the United States with an e-Commerce help desk, which it extended to social channels as well.

Meanwhile, the company’s domestic proprietary point-of-sale technology – FOCUS – facilitates fast and accurate order-taking and pricing, and reduces waiting times, expanding margins for both company-owned and franchised units. FOCUS is also integrated with digital ordering solutions in all domestic traditional Papa John’s restaurants, enabling the company to offer nationwide digital ordering. All in all, the company aims to continue making investments in technology, which will be focused on foundational improvements in their digital channels to increase order conversion rate, frequency and ticket average.

As part boosting sales, Papa John’s is 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. The company also undertakes strategic partnerships to build traffic and sales.

Costs to Affect Bottom Line

Despite every cost control efforts, Papa John’s is expected to have incurred high expenses related to several start-ups and transitions. The company expects its operating margin to decline in the fourth quarter. Moreover, increased labor costs from The Affordable Care Act, commonly known as Obamacare, is expected to hurt the company’s margins and thereby earnings.

Despite year-over-year earnings growth in the third quarter, Papa John’s expects 2017 adjusted earnings per share growth of 3-7%, below the previously guided range of 8-12% . Particularly, the consensus estimate for fourth-quarter earnings is 68 cents, reflecting a 1.5% decline from the year-ago quarter.

Our Quantitative Model Does Not Predict a Beat

Papa John’s does not have the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: The company has an Earnings ESP of -3.68%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: The company has a Zacks Rank #3.

Meanwhile, 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.

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

Stocks to Consider

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

Domino’s (NYSE:DPZ) has an Earnings ESP of +0.37% and a Zacks Rank #2 (Buy). The company is slated to report quarterly numbers on Feb 20. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cheesecake Factory (NASDAQ:CAKE) has an Earnings ESP of +0.82% and a Zacks Rank #3. The company is slated to report quarterly results on Feb 21.

Zoe's Kitchen (NYSE:ZOES) has an Earnings ESP of +13.16% and a Zacks Rank #3. The company is slated to report quarterly numbers on Feb 22.

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