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Papa John’s Earnings: How Did Its Margins Expand in 4Q15?

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Earnings

In 4Q15, Papa John’s International (PZZA) reported EBITDA (earnings before interest, tax, depreciation, and amortization) margins of 12%, compared with 10.3% in 4Q14. This beat the analysts’ estimate of 10.6%.

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EBITDA drivers

PZZA’s 4Q15 EBITDA margins expansion was led by sales leverage achieved though system-wide same-store sales growth of 2.9%. The lower commodity prices, primarily those for cheese, also increased the company’s margins. In 4Q15, the average price of a block of cheese was $1.60, compared with $2 in 4Q14. In 4Q15, the costs for non-owned auto insurance for the company was also less than it had been the year prior. However, an increase in labor wages and benefits offset some of the increase in the margins.

You can gain exposure to Papa John’s by investing in the iShares Russell 2000 ETF (IWM), which has invested 0.1% of its portfolio in PZZA. IWM has also invested 0.2% in Buffalo Wild Wings (BWLD), 0.18% in Texas Roadhouse (TXRH), and 0.17% in The Cheesecake Factory (CAKE).

Outlook for 2016

With system-wide same-store sales growth expected to be 3% and commodity inflation expected to be flat, analysts are expecting the EBITDA margin for fiscal 2016 to increase marginally from 10.8% to 11%. With many US states planning to increase minimum labor wages, some of the gains in the EBITDA margins are expected to be offset.

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