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Slicing up Papa John’s Costs and Expenses

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Cost and expense analysis

The company’s operating margin is mainly directly affected by the cost of its sales, which includes the following:

  • salaries and benefits
  • advertisements and related costs
  • occupancy
  • other operating related costs such as general and administrative

An increase in commodity costs negatively affects company-owned restaurants and commissary sales, especially in highly competitive markets, where companies can’t easily pass increases in company costs on to costumers.

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Historical breakdown of costs and expenses

From 2010 to 2014, the total costs and expenses of Papa John’s International (PZZA) as a percentage of its total sales hovered between 92.3% and 92.9%. In 2014, it was 92.6%.

In 2014, the company’s total costs and expenses as a percentage of its total sales increased by 0.04%. This can be attributed to higher commodity costs—primarily cheese and meats—as well as to higher operating cost associated with the implementation of its FOCUS system in franchises and to higher infrastructure costs from online operations support. However, some of the company’s increased expenses were covered by higher ticket averages. Average ticket costs are calculated by dividing total sales by the total number of invoices.

Weighing the cheese

The average price of cheese per block was $1.59, $1.8, $1.69, $1.75, and $2.11 in 2010, 2011, 2012, 2013, and 2014, respectively. But in 2014, cheese prices went up by more than 20.5%, compared to nearly 4% in 2013. In 2014, global milk production was heavily affected by bad weather in Europe and New Zealand, in addition to high feed costs.

That year, the demand for dairy products in China increased, which contributed to soaring cheese prices and is the main reason behind the increase in total costs and expenses at Papa John’s restaurants.

Papa John’s total costs and expenses versus peers

In 2014, the total costs and expenses of Papa John’s represented 92.64% of its total revenues. By contrast, YUM! Brands (YUM), which owns Pizza Hut, had costs and expenses totaling 88.27% of revenues, compared to Domino’s Pizza’s (DPZ) 82.67%, and McDonald’s Corporation’s (MCD) 71.03%.

The Consumer Discretionary Select Sector SPDR Fund (XLY) has 1.5% of its portfolio invested in YUM! Brands (YUM) and 4% invested in McDonald’s (MCD). Papa John’s International (PZZA) makes up 2.2% of the PowerShares Dynamic Leisure and Entertainment ETF (PEJ) and approximately 2.3% of the PowerShares Dynamic Food & Beverage ETF (PBJ).

Now that we’ve analyzed revenue, costs, and expenses, let’s size up Papa John’s net margins.

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