Will Papa John's Turnaround Serve Up More Revenue Growth?

Key Points

• Analysts expect an earnings decline for Papa John's this year, but predict a rebound in 2024.
• CEO Robert Lynch recently highlighted new product developments to appeal to the company's core demographic.
• Papa John's is expanding its presence in India and developing regional-specific products around the globe.
• The company aims to open 270 to 310 net new units in 2023.
• Wall Street is optimistic about Papa John's prospects with a "moderate buy" rating and a price target of $95.09.

Investors looking for bargains in the restaurant sector may consider ordering a slice of the pie from Papa John's International Inc. NASDAQ: PZZA. The pizza giant may be ready to deliver more dough to investors as it serves up a corporate turnaround. 

Like all restaurant chains, Papa John’s has been hit by higher input costs, especially in the areas of higher commodity prices and higher wages. However, Papa John’s can’t simply blame inflation for an earnings decline; revenue has been trending lower for the past five quarters. You can track those year-over-year declines using MarketBeat’s Papa John’s International earnings data. 

In recent months, rival restaurant chains such as Chipotle Mexican Grill Inc. NASDAQ: CMG, Darden Restaurants Inc. NYSE: DRI, Wingstop Inc. NYSE: WING and Texas Roadhouse Inc. NASDAQ: TXRH have been in growth mode, despite facing similar labor and cost challenges as Papa John’s.

Growth At Rival Pizza Chains

Yum Brands Inc. NYSE: YUM posted year-over-year revenue growth of 4.1% in its Pizza Hut segment, while Papa John’s saw revenue decline by 3%. Rival Domino’s Pizza Inc. NYSE: DPZ saw revenue grow by 1%, although its year-over-year sales, too, have declined in the past two quarters. 

Meanwhile, Papa John’s price performance has been struggling since late 2021. You can see that on the Papa John’s International chart. 

Domino’s, too, has suffered a similar price decline. 

In previous earnings conference calls, Papa John’s executives alluded to shifting consumer behaviors coming out of the pandemic. Domino’s, meanwhile, mentioned consumer belt-tightening that’s resulting in less home delivery. Lower demand for food delivery may be tough cases to make, as DoorDash Inc. NYSE: DASH grew revenue by 40% in each of the past two quarters. 

Domino’s and Papa John’s compete when it comes to customer discounts, and both are trying to lure back business.

Analysts Eye EPS Rebound

So is there a slice of good news here for Papa John’s?

As a matter of fact, there is. While analysts expect an earnings decline this year, the second in a row, Wall Street is eyeing a rebound of 15%, to $3.19 a share, in 2024. 

In a recent media interview, CEO Robert Lynch highlighted new product developments designed to appeal to the company’s core demographic of 18-to-25-year-old males. For example, the company recently teamed up with PepsiCo Inc. NYSE: PEP to launch Doritos Cool Ranch papadias. 

The company is also developing products for specific regions, such as butter chicken pizza in Canada. It’s also expanding its footprint in India by partnering with a longtime franchise group, PJP, which operated Papa John’s restaurants in the Middle East. The company aimes to open 650 new locations in India in the next decade. 

International Expansion

In its first-quarter earnings release, the company highlighted international expansion. It noted  27 net unit openings in the first quarter “driven by International growth.” 

The company said it’s on track to open 270 to 310 net new units in 2023.

In the first-quarter earnings conference call on May 5, Lynch acknowledged that the company hasn’t seen the level of U.S. development that it hoped for. He noted that Papa John’s is making efforts to turn that around, using measures in addition to new product development. 

To help expedite domestic development, he said, the company is partnering with franchisees on providing construction services, including permitting, architectural designs and general contractor management. 

Wall Street Sees Upside

Papa John’s International analyst ratings show that Wall Street is optimistic about the stock’s prospects. The consensus rating is “moderate buy,” with a price target of $95.09. That’s a potential upside of 29.98% in the next 12 to 18 months, which indicates conviction that the company can indeed resume robust growth. 

The company is also endeavoring to entice investors with a dividend. The Papa John’s International dividend yield is 2.30%. The company increased its dividend in each of the past two years.

Share Buyback Program

In March, the company agreed to buy back 2,176,928 shares of its common stock, owned by activist invment firm Starboard,  at a purchase price of $82.52 per share. Following the repurchase, Starboard will continue to own 582,432 shares, representing approximately 2% of Papa John’s’ outstanding shares.

In November 2021, Papa John’s announced a share repurchase program for up to $425 million, in addition to a $75 million share repurchase authorization announced in 2020. As of March, the company had approximately $90 million remaining available under its current authorization.

Together, the dividend and buyback yields total 15.10% in the past 12 months.