Shares of
Papa John’s International, Inc.
PZZA
have declined 35.6% in the past year compared with the
industry
’s fall of 7%. The downside was primarily caused by inflationary pressures and staffing challenges.
This Zacks Rank #4 (Sell) company reported third-quarter fiscal 2022 results, with earnings missing the Zacks Consensus Estimate. The company posted adjusted earnings per share (EPS) of 54 cents per share, missing the Zacks Consensus Estimate of 59 cents. In the year-ago quarter, PZZA reported an adjusted EPS of 83 cents.
In the past 60 days, earnings estimates for fiscal 2023 have witnessed downward revisions of 5% to $3.22 per share. Let’s discuss the factors hurting the company’s performance.
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Primary Concerns
Papa John’s performance has been affected by higher inflationary pressures in commodity and labor costs, softening economic conditions (in the U.K.), rising interest rates, looming European energy crisis and continued COVID-related lockdowns in China.
Papa John’s is continuously shouldering increased expenses, which are detrimental to margins. It has been facing significant supply-chain challenges and inflation across most commodities and categories. This resulted in cost pressure in the third quarter of fiscal 2022, including costs related to strategic staffing initiatives. In the third quarter, the company’s total costs and expenses amounted to $490.1 million compared with $474.2 million reported in the prior-year quarter. Although the company resorts to strategic price increases to mitigate the impact of inflationary costs, it expects inflationary pressures to persist in the near term.
Dismal comps performance has been hurting investors’ confidence. In the fiscal third quarter, total comparable sales fell 3.4% year over year against a 7.3% growth reported in the prior-year quarter. Domestic company-owned restaurant comps in the quarter under review declined 2.2% year over year against a rise of 7.4% reported in the year-ago quarter. Comps at international restaurants were down 10.1% year over year against growth of 8.3% reported in the prior-year quarter. During the fiscal third quarter, total global system-wide restaurant sales growth came in at 0.5% year over year compared with an 11.2% rise reported in the prior-year quarter.
High debt remains a concern for the company. Long-term debt (less current portion) at the end of the fiscal third quarter came in at $548.8 million compared with $536.4 million reported in the previous quarter. Its debt to capitalization at the end of third-quarter fiscal 2022 came in at 184.1%, up from 173.8% reported in the previous quarter. The company ended the fiscal third quarter with cash and cash equivalents of $36.6 million (compared with $52.7 million in the previous quarter), which may not be enough to manage the high debt level.
Key Picks
Some better-ranked stocks in the Zacks
Retail-Wholesale
sector are
Wingstop Inc.
WING
,
Tecnoglass Inc.
TGLS
and
Yum China Holdings, Inc.
YUMC
.
Wingstop currently sports a Zacks Rank #1. WING has a long-term earnings growth rate of 12%. Shares of WING have lost 19.6% in the past year.
The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.4% and 16.1%, respectively, from the year-ago period’s reported levels.
Tecnoglass currently carries a Zacks Rank #2 (Buy). Shares of the company have gained 27% in the past year.
The Zacks Consensus Estimate for TGLS’ 2023 sales and EPS suggests growth of 11.2% and 9%, respectively, from the year-ago period’s reported levels.
Yum China currently carries a Zacks Rank #2. YUMC has a long-term earnings growth rate of 11%. Shares of YUMC have gained 17.5% in the past year.
The Zacks Consensus Estimate for Yum China’s 2023 sales and EPS suggests growth of 14.3% and 56.5%, respectively, from the year-ago period’s reported levels.
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