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What to Expect for Papa John’s Second-Quarter Earnings

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Aug. 5 2019, Published 9:16 a.m. ET

Papa John’s (PZZA) is set to report its second-quarter results after markets close tomorrow. Analysts expect its revenue and EPS to fall during the quarter.

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A decline in Papa John’s revenue

In the second quarter, analysts expect Papa John’s revenue to fall 3.3% to $394.4 million due to lower same-store sales and the refranchising of company-owned restaurants. Since July of last year, when it was reported that founder John Schnatter had used a racial slur at a conference, the company has been struggling with its SSSG (same-store sales growth).

However, Papa John’s is focusing on improving its image. In March, the company announced the appointment of former NBA player Shaquille O’Neal to its board. The company has also rolled out comprehensive diversity, equity, and inclusion training for its employees.

Papa John’s is focusing on its delivery service, value propositions, and new loyalty program to drive sales. In March, it announced a national partnership with DoorDash to offer delivery service at more than 1,400 restaurants. The company has also launched six specialty pizzas at a promotional price of $12, and started its Papa Rewards loyalty program in last year’s fourth quarter. The program has boosted customer satisfaction by offering more personalized offerings.

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PZZA’s EPS expected to fall

In the second quarter, analysts expect Papa John’s adjusted EPS to fall 39.8% YoY (year-over-year) to $0.30 from $0.49, dragged down by lower sales and a narrower net margin. They expect its net margin to contract YoY from 3.9% to 2.4% due to its gross margin narrowing and its selling, general and administrative expenses rising. This contraction could be offset by the company’s lower average number of weighted shares outstanding due to share repurchases.

Dividends

On July 31, Papa John’s announced a quarterly dividend of $0.225 per share at an annualized payout of $0.90 per share. The dividend is set to be paid on August 23 to shareholders recorded on August 12.

As of August 2, Papa John’s dividend yield was 2.05%, and its stock was trading at $43.89. Meanwhile, peers Yum! Brands (YUM) and Domino’s Pizza (DPZ) had dividend yields of 1.43% and 1.06%, respectively.

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Papa John’s outlook

This year, Papa John’s expects North American SSSG of 1%–5%, and international SSSG of 0%–3%. The company expects adjusted EPS of $1.00–$1.20.

PZZA’s stock performance and valuation

Since Papa John’s first-quarter earnings announcement, its stock price has fallen 14.6%. Although the company’s first-quarter earnings were better than expected, its stock fell as John Schnatter reduced his stake in the company. By May 23, Schnatter had reduced his stake in Papa John’s to 19% from 31% but has stayed the largest shareholder of the company.

After losing 40.9% of its value last year, Papa John’s stock has returned 10.2% this year. In comparison, the S&P 500 has risen 17.0%, and Yum! Brands, which reported better-than-expected second-quarter earnings on August 1, has returned 27.7%. Domino’s Pizza stock has fallen 1.3%. Its second-quarter sales were lower than expected.

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Valuation multiple

Papa John’s stock decline since its last earnings release has lowered its valuation multiple. As of August 2, its forward PE multiple was 31.1x, compared with 39.6x before its first-quarter earnings announcement.

Customers’ negative reaction to Schnatter’s alleged comments and the subsequent battle between the Schnatter and PZZA’s board for the control over the company prompted analysts to lower their EPS expectations and boosted its valuation. On August 2, Yum! Brands’ and Domino’s Pizza’s forward PE multiples were 28.7x and 23.8x, respectively.

Analysts’ recommendations

Ahead of Papa John’s second-quarter results, 50% of the eight analysts tracking the stock recommend “buy,” and 50% recommend “hold.” Their average 12-month price target of $54.67 for the stock implies a 24.6% return.

Since Papa John’s last earnings release, Jefferies has increased its stock’s price target from $53 to $58, while Stifel has lowered it from $45 to $42. On June 25, Credit Suisse initiated coverage of the stock with a “neutral” rating and price target of $45.

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