Papa John's Earnings: Build Cost and Commissary Progress Are Our Key Takeaways, Not Weak Results

Narrow-moat Papa John's has made progress on a couple of key fronts, as it has lowered its buildout cost in the US by 20% to 25% (to a competitive $500,000) and laid the groundwork to increase its operating margins in its commissary segment from 4% to 8% over the next four years, with only a small projected impact to franchise margins. Quarterly results weren't perfect, with the firm lowering its adjusted operating income forecast by $5 million at the midpoint and with $29 million in adjusted operating income and $0.43 in adjusted EPS missing our $35 million and $0.57 respective estimates, but the outline of recently appointed CEO Todd Penegor's plan looks cogent to us. We expect to raise our $62 fair value estimate by a mid-single-digit percentage after digesting results, providing an attractive entry point for investors.