Papa John's (PZZA) Q4 Earnings Miss Estimates, Revenues Beat

Papa John's International, Inc. PZZA reported mixed fourth-quarter 2018 results, wherein earnings missed the Zacks Consensus Estimate but revenues surpassed the same. Adjusted earnings of 15 cents per share fell short of the Zacks Consensus Estimate by a penny. The bottom line also fell 72.2% from the year-ago quarter figure due to weak operating results.

Revenues totaled $374 million, which marginally outpaced the Zacks Consensus Estimate of $373.5 million. However, the top line declined 20% on a year-over-year basis. The downside can be attributed to dismal domestic company-owned restaurant sales, a decline in North America commissary sales on weak volumes and soft international sales.

Apart from witnessing a persistent decline in revenues, the company has been under the spotlight of negative publicity after its ex-CEO, John Schnatter, was publicly denounced for using racist term. Also, labor costs coupled with increased operating costs from digital initiatives and marketing expenses put substantial pressure on the company’s bottom line. In the past three months, shares of the company have declined more than 19%.

Global Restaurant Sales & Comps

In the fourth quarter, global restaurant sales decreased 13% comparing unfavorably with the third quarter's decline of 6.6% and the year-ago quarter’s growth of 9.9%. Excluding foreign currency impact, global restaurant sales declined 11.7% compared with the previous quarter’s decrease of 5.9%. In the year-ago quarter, the metric increased 9.6%.

Domestic company-owned restaurant comps were down 10.2% in the reported quarter compared with a comps decline of 4.7% in the year-ago quarter.

At North America franchised restaurants, comps fell 7.4% compared with a comps decline of 3.5% in the fourth quarter of 2017. Also, comps at system-wide North American franchised restaurants decreased 8.1% compared with 3.9% decline in the year-ago quarter.

Comps at system-wide international restaurants were down 2.6% against comps growth of 2.6% in the prior-year quarter.

Operating Highlights

Total operating loss was $8.3 million in the fourth quarter compared to operating income of $36.6 million in the year-ago quarter. Total costs and expenses amounted to $383.9 million, up 10.6% from fourth-quarter 2017.

Balance Sheet

As of Dec 30, 2018, cash and cash equivalents totaled $19.5 million compared with $22.3 million as of Dec 31, 2017. Long-term debt was $601.1 million at the end of the fourth quarter of 2018 compared with $446.6 million at the end of 2017.

Inventories at the end of the reported quarter decreased to $27.2 million from $30.6 million at the end of Dec 31, 2017. Free cash flow in 2018 summed $30.8 million compared with $82.4 million at the end of 2017.

Papa John's had repurchased any shares since Aug 9, 2018. However, in 2018, the company had repurchased 2.7 million shares for $158 million. Management declared a dividend of 225 cents per common share for the first quarter of 2019, paid on Feb 22, 2019, to its shareholders of record at the close of business as of Feb 11, 2019.

2019 Guidance

Papa John's issued an outlook for 2019. Management expects adjusted earnings per share (EPS) of $1.00-$1.20 compared with $1.34 reported in 2018. The Zacks Consensus Estimate for 2019 earnings is currently pegged at $1.20. Adjusted earnings are expected to be impacted by lower operating results primarily due to expected pressure on domestic restaurants’ sales, and higher costs pertaining to technology and marketing investments.

While North America comps are expected to decline by 1-5%, International comps are anticipated to be flat to up 3%. Capital expenditure of $45-$50 million is expected during 2019.

Zacks Rank & Stocks to Consider

Papa John's has a Zacks Rank #5 (Strong Sell).

Better-ranked stocks in the same space include Brinker International, Inc. EAT, El Pollo Loco Holdings, Inc. LOCO and Darden Restaurants, Inc. DRI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Brinker International has an impressive long-term earnings growth rate of 14.5%.

El Pollo Loco Holdings delivered positive earnings surprise in three of the trailing four quarters, the average beat being of 5.5%.

Darden Restaurants reported better-than-expected earnings in three of the trailing four quarters, the average beat being 4%.