Papa John's (PZZA) Gains From Focus on Expansion, Debt High

·5 min read

Papa John’s International, Inc. PZZA is benefiting from continued international expansion plans, strategic partnerships, a strong digital platform and various sales initiatives. Moreover, features like early access to new products along with better targeting of offers and promotions have been adding to the positives.

However, the impact of the coronavirus pandemic, a continuous rise in the price of key input and high debt remain potent headwinds.

Factors Driving Growth

Focus on Franchising and Cross-Border Expansion: Many of Papa John’s restaurants are located in international markets like the U.K. and Chile continue to perform strongly. The upside can be primarily driven by the company’s optimized restaurant model, brand design enhancements and increased integration with third-party aggregators to boost its accessibility channels.

Papa John’s is committed to developing and maintaining a strong franchise system. The company is continually striving to eliminate barriers to expansion in existing international markets and identify new market opportunities. Over the next several years, the company plans to increase its international units, a large portion of which will be franchised. Under the development plan, the company will open 49 new stores between 2021 and 2028. Moreover, the company intends to tap growth opportunities in France and Italy. For fiscal 2021, Papa John’s expects to open between 220 and 260 net new restaurants globally.

This includes more than 170 stores across Latin America, Spain and Portugal. Also, Drake Food Service plans to open 50 new restaurants in the U.K. over the next four years. The company has already purchased 60 Papa John’s restaurants in London, making it the brand’s largest franchisee in the country. Under the terms of this expanded partnership, Drake Food Service will operate more than 560 Papa John’s restaurants by 2025.

Technology-Driven Growth: Investing in technology is one of the major growth strategies of Papa John’s. The company’s online and digital marketing activities have increased significantly over the past several years in response to the increasing use of online and mobile web technology. In fact, Papa John’s continues to reinforce its commitment toward providing a better customer experience with enhancements to its digital ordering process. During second-quarter fiscal 2021, the company integrated Grubhub into its system in addition to the likes of Uber Eats, Doordash and Postmates. Meanwhile, Papa John’s continues to invest in direct customer delivery. The company’s loyalty program continues to witness a rise in digital transactions during second-quarter fiscal 2021. Notably, features like early access to new products coupled with better targeting of offers and promotions as well as higher frequency and ticket have been benefitting the company.

Continuous Product Launches: Papa John’s is continuously focusing on product introduction to drive growth. Notably, menu innovation like toasted handheld Papadias and Epics Stuffed Crust continues to witness solid popularity among customers, boosting the top line. Backed by better brand positioning, the new products have driven higher ticket and traffic across dayparts without cannibalizing core premium products and making operations complex at other stores. Notably, the easy-to-eat food addition was well received by customers, strengthening its possibility of being a permanent menu item. Meanwhile, the company brought back double cheeseburger pizza and double cheeseburger Papadia. Markedly, the items comprising high-quality ingredients and taste set it apart from other similar products in the market. During second-quarter fiscal 2021, the company launched Parmesan Crusted Papadias. Given the solid consumer acceptance concerning the Papadias platform and Epics Stuffed Crust, the company expects the products to drive ticket and customer traffic in the second half of 2021.

Robust Comps Growth: Papa John’s recorded positive comparable sales growth in the second quarter of fiscal 2021, marking the seventh straight quarter of comps growth. The company continues to impress investors with robust comparable sales growth. Total comparable sales rose 9% year over year in the fiscal second quarter compared with 22.2% growth reported in the prior-year quarter. Domestic company-owned restaurant comps in the reported quarter increased 5.6% year over year compared with 22.6% growth in the year-ago quarter. In the North America and international segment, the company’s comp sales have been rising for the eighth and ninth consecutive quarters, respectively. At North America franchised restaurants, comps rose 5.2% year over year compared with 29.7% growth in the year-ago quarter. Also, comps at North America restaurants increased 5.2% year over year compared with 28% growth in the year-ago quarter.

Concerns

Papa John’s, which shares space with Jack in the Box Inc. JACK, Chipotle Mexican Grill, Inc. CMG and McDonald's Corporation MCD in the Zacks Retail - Restaurants industry, has been grappling with the coronavirus pandemic. First reported in India, the Delta variant has been rapidly spreading to other parts of the world, increasing the risk of infections.

Notably, as of Jun 27, 2021, the company’s long-term debt came in at $403.8 million compared with $328.5 million as of Mar 28, 2021. A high debt level may negatively impact the company’s liquidity. Also, the company’s current liquidity position might not be sufficient to meet debt obligations if the economic situation worsens.

Moreover, during the fiscal second quarter, the company witnessed high costs associated with product launch, marketing campaigns and other sales-building initiatives. The rise in commodity and other operating costs took a toll on margins.


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