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Why Did Papa John’s Revenue Decline in 1Q16?

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Sources of revenue

Papa John’s (PZZA) classifies its operations into four main segments: Domestic Company-Owned Restaurants, Domestic Commissaries and Others, International Operations, and Domestic Franchising. Domestic Company-Owned Restaurants generate nearly 48% of Papa John’s revenue while Domestic Commissaries and Others generate 39.4%.

Why Did Papa John’s Revenue Decline in 1Q16?

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1Q16 performance

In 1Q16, Papa John’s (PZZA) revenue declined by 0.9% compared to 1Q15 due to declining sales in the Commissaries segment. PZZA forms 0.23% of the holdings of the iShares Russell Mid-Cap Growth ETF (IWP). The decline in the use of FOCUS, its point-of-sale system, as well as deflation in commodity prices, led to a fall in Commissary sales of 8.1% from $183.9 million to $169 million.

However, 4.3% growth in Company-Owned Restaurants sales from $197.3 million to $205.7 million offset part of the decline in revenue. Company-Owned Restaurants’ revenue was driven by an increase in the number of units and same-store sales growth of 0.1%.

Despite the strong dollar, the revenue from International Operations grew by 8% from $25.4 million to $26.5 million. Compared to the previous year, the currency exchange negatively affected the revenues by $1.9 million. An increase in the number of domestic franchised restaurants drove the revenue from Franchised Restaurants by 3.3%.

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Peer comparison

In 1Q16, Domino’s Pizza (DPZ), YUM! Brands (YUM), and Starbucks (SBUX) posted revenue growth of 7.4%, -0.1%, and 9.4%, respectively.

Outlook

With unit growth expected to dominate the second part of 2016, analysts are expecting Papa John’s to register a revenue growth of 3.4% from $1.6 billion in 2015 to $1.7 billion in 2016. Analysts expect the company to post $413.3 million, $410.7 million, and $441 million in 2Q16, 3Q16, and 4Q16, respectively.

In the next article, we will discuss PZZA’s revenue drivers.

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