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Why Papa John’s Earnings Margin Contracted in 4Q17

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Mar. 5 2018, Updated 9:02 a.m. ET

4Q17 performance

In 4Q17, Papa John’s (PZZA) posted EBIT (earnings before interest and tax) of $34.4 million, which represents an EBIT margin of 7.4%. In comparison, the company posted an EBIT margin of 9.4% in 4Q16.

Papa John’s EBIT margins contracted due to a decline in the operating margins of North America commissary and international operations. During the quarter, the North America commissary operating expenses rose from 37.5% in 4Q16 to 38.6% due to increased costs associated with digital initiatives. The operating expenses of international restaurants rose 0.6% to 4.6%.

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However, some of the declines in EBIT margins were offset by lower G&A (general and administrative) expenses and the decline in operating margins of the domestic company-owned restaurants. The operating costs of domestic company-owned restaurants fell from 37.5% to 37.4%, while G&A expenses declined by 0.5% to 8.7%. The G&A expenses declined due to lower management incentive costs, of which some were offset by higher salaries and benefits and continued investments in technology.

Peer comparison

During the same period, Domino’s Pizza (DPZ) and Yum! Brands (YUM) have posted an EBIT margin of 19.7% and 30.4%, respectively.

Outlook

In 2018, analysts are expecting Papa John’s EBIT margins to fall from 8.3% in 2017 to 7.6%. The increased investments in technological advancements and negative SSSG (same-store sales growth) are expected to lower the company’s EBIT margin in 2018.

Next, we’ll look at Papa John’s 4Q17 EPS.

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