Is Papa John’s Primed for a Breakout?

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Written By Kevin MacDonald

Papa John’s International is a prominent name in the global pizza delivery industry. Ranked #22 in Franchise Times Top 400 list, it is the second-largest pizza franchise after Domino’s (DPZ).

Established in 1983 by John Schnatter, Papa John’s has grown significantly, boasting nearly 6,000 restaurants worldwide. Despite Schnatter’s controversial departure, the company has maintained its position as the third-largest pizza delivery company globally.

Current Market Position and Challenges

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Recently, Papa John’s stock has appeared on value investor screens, trading at levels not seen since the early days of the COVID-19 pandemic. This has been attributed to stagnant same-store sales growth and a lackluster value proposition.

The company’s management has focused on improving corporate margins, potentially at the expense of franchisee profitability, which may negatively impact long-term growth prospects.

Growth Strategy and Market Dynamics

The key to creating shareholder value in the restaurant franchise industry lies in consistent same-store sales growth and expansion of the franchise network. Historically, Papa John’s has followed this growth formula successfully.

However, over the past two years, the company has faced challenges, leading to a stock price decline of over 60% from its peak in 2021.

Papa John’s has continued to expand its network, adding 208 restaurants in 2023 and 48 in 2022. Despite this, global comparable sales growth has stalled since early 2022.

In contrast, competitors like Domino’s have managed to maintain stronger sales growth under similar market conditions, indicating potential issues with Papa John’s product or value proposition.

Factors Affecting Same-Store Sales Growth

Several factors have contributed to the stagnant same-store sales growth at Papa John’s:

  1. Inferior Ordering App: Papa John’s has acknowledged issues with its proprietary ordering app, which has lagged behind competitors. The company has seen growth in orders through aggregator channels like Uber Eats, but a decline in organic delivery via its app.
  2. Commissary Business Restructuring: The Back To Better 2.0 program aims to improve margins in Papa John’s commissary business, which supplies franchisees. The plan involves increasing operating margins from 4% to 8% by 2027. While this may boost short-term profitability, it could strain franchisee relationships and impact long-term growth if franchisee profitability is compromised.

Valuation and Market Comparison

Currently, Papa John’s stock trades at 16.9 times forward P/E, a significant discount compared to Domino’s at 27.8 times. This valuation gap reflects concerns about Papa John’s ability to reignite same-store sales growth and sustain long-term profitability.

Unless the company can address its sales growth issues, its shares may continue to trade at a discount.

Potential Risks and Future Prospects

While Papa John’s stock is deeply oversold and could experience a rebound, the fundamental issues affecting sales growth need to be addressed for a sustained recovery. The company’s new marketing strategy, including new visuals and media mix, might help, but its effectiveness remains to be seen.

Cautious Investment Approach Warranted

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Papa John’s faces significant challenges in reigniting its growth trajectory. The company’s focus on improving commissary margins should be balanced with efforts to enhance franchisee profitability and address stagnant same-store sales growth.

Until there is clear evidence of a turnaround in sales growth, Papa John’s stock may continue to struggle. As such, a cautious approach may be warranted.


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