uploads/2017/05/5-10.jpg

Why Papa John’s EBIT Margin Declined in 1Q17

By

Updated

1Q17 EBIT margins

In 1Q17, Papa John’s (PZZA) posted EBIT[1. earnings before interest and tax] of $43.7 million, which translates to an EBIT margin of 9.7%. Comparatively, the company posted an EBIT margin of 10% in 1Q16.

Article continues below advertisement

Factors that led PZZA’s margins to decline

The decline in Papa John’s 1Q17 EBIT margins was due to decline in operating margins of company-owned restaurants and North American commissaries. However, some of the declines were offset by lower SG&A (selling, general, and administrative) expenses and improved margins from international operations.

During the quarter, the restaurant margins of company-owned restaurants declined 1.6% due to increased labor expenses from a wage increase, higher non-owned automobile claim costs, and increased reimbursement from higher fuel prices.

The margins of North American commissaries fell 0.5% due to higher delivery expenses. However, improved margins from its online and mobile ordering business offset some of the declines.

The margins from international operations rose 1% due to a rise in royalties from same-store sales growth of 6% and the addition of new restaurants. The SG&A expenses fell from 9.4% of total revenues to 8.5% of total revenues. The SG&A expenses declined due to lower bonuses, lower franchise incentives, and the timing of international marketing spending.

Article continues below advertisement

Peer comparisons

During 1Q17, Domino’s Pizza (DPZ) and Yum! Brands (YUM) posted respective EBIT margins of 18.6% and 27.2%, compared to respective EBIT margins of 18.3% and 22.1% in 1Q16.

Outlook

For the next four quarters, analysts expect Papa John’s (PZZA) to post a 9.4% EBIT margin compared to 8.9% in the corresponding quarters in 2016. This expansion is expected to be driven by sales leverage from positive same-store sales growth.

Next, we’ll look at Papa John’s 1Q17 earnings.

Advertisement

More From Market Realist