Why Are Analysts Expecting Papa John’s EBITDA Margins to Expand in 2Q16?

Analysts expect Papa John’s (PZZA) to post EBITDA (earnings before interest, tax, depreciation, and amortization) of $43.9 million in 2Q16. This represents an EBITDA margin of 10.6%, compared to 10.3% in 2Q15.

Sales leverage,and favorable commodity prices are expected to boost Papa John’s EBITDA margins in 2Q16. Same-store sales growth increases the company’s revenue without increasing capital expenditure, which results in sales leverage.

In 2Q16, the company is expecting the average price of a cheese block to be $1.47, compared to $1.63 in 2Q15. Further, the company expects favorable commodity prices to increase its EBITDA margins by 0.25% to 0.75% in 2Q16.

However, removing all artificial ingredients should increase the company’s food and packaging expenses. This, along with labor inflation, could offset some of the gains in 2Q16.

In 2Q16, Yum! Brands (YUM) and Domino’s Pizza (DPZ) posted EBIT margins of 16.6% and 19% compared to 15.2% and 18.7%, respectively, in 2Q15.

Sales leverage and favorable commodity prices are expected to expand Papa John’s EBITDA margins in the last two quarters of 2016. Overall for 2016, analysts are expecting the company to post EBITDA margins of 11% compared to 10.8% in 2015.

Moving toward the usage of cage-free eggs, as well as poultry that’s free of human and animal antibiotics and fed on a 100% vegetarian diet, is expected to increase the company’s food and packaging expenses. This could be the reason for analysts lowering their 1Q17 to 12.1% from 12.3% in 1Q16.

Next, we’ll look at Papa John’s 2Q16 EPS.