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Why Did Papa John’s Margins Decline in 1Q18?

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1Q18 EBIT margin

Papa John’s (PZZA) posted an EBIT (earnings before interest and tax) of $27.3 million in 1Q18, which represents an EBIT margin of 6.4%. The company posted an EBIT margin of 9.7% in 1Q17. The decline was due to increased operating expenses of domestic company-owned restaurants, domestic commissaries, and international operations. The rise in G&A (general and administrative) expenses and D&A (depreciation and amortization) expenses led to a fall in the company’s margins.

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The operating expenses for domestic company-owned restaurants increased from 80.0% in 1Q17 to 82.7% due to sales deleverage from negative SSSG (same-store sales growth), increased labor expenses, and a rise in non-owned automobile insurance costs. The operating expenses for domestic commissaries also increased from 93.4% to 93.8% due to the lower sales volume. The operating expenses for international operations increased from 61.6% to 63.2% due to an increased revenue contribution from the United Kingdom’s commissary sales, which operates under lower margins.

The G&A expenses increased from 8.1% of the total revenue in 1Q17 to 9.3% due to increased expenses associated with the implementation of technological advancements, the rise in bad debt, and higher legal costs. The D&A expenses increased from 2.3% to 2.7% due to increased investments in technological advancement and higher depreciation associated with the new Georgia quality control center.

Papa John’s peers

During 1Q18, Domino’s Pizza (DPZ) and Yum! Brands (YUM) posted an EBIT margin of 17.0% and 28.0%, respectively.

Next, we’ll discuss Papa John’s earnings per share in 1Q18.

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