Papa John’s Earnings: Macro Headwinds Linger, but Long-Term Growth Algorithm Remains Alluring

Narrow-moat Papa John’s PZZA International delivered unsavory fiscal 2023 second-quarter results—$515 million in revenue and $0.59 in diluted EPS trailed our $527 million and $0.71 estimates before the earnings call, respectively. Given the negative comparable store sales growth in its U.S. arm (91% of sales, down 1%), management guided to a flat to 2% full-year U.S. comp growth (from 2%-4%, previously), though this suggests sequential improvement in the back half of the year. Moreover, its long-term annual unit growth expectation (through fiscal 2025) was tempered to 5%-7% (from 6%-8%), and we intend to adjust our forecast into the guided range. All in, this should reduce our $77 fair value estimate by a low-single-digit percentage, leaving shares a touch overvalued.

Papa John’s weak momentum in its domestic and international franchise stores (comp sales dropped 2.3% and 1.4%, respectively) corroborated the evidence of check management we’ve seen across the industry—traffic and check sizes each declined 2% and 4% over the past quarter, per Revenue Management Solutions. That said, the near-term pricing environment remains challenging, with consumers showing signs of trade-down (Walmart’s first-quarter frozen pizza sales jumped 29%). Still, we see a clear path to healthy top-line growth and profit recovery. We believe Papa John’s affluent clientele and premium offerings (which have proved to bear lower price elasticity), continued product innovation, and unit growth should propel its top line, supporting our mid-single-digit average growth (beyond fiscal 2023). In addition, the cost pressure continued to ease during the quarter, with food and labor costs improving 50 and 100 basis points, respectively. Further, we believe Papa John’s compelling unit economics, heavy franchise model (roughly 90% of its store base), and robust digital penetration (above 85% of sales) competitively position the firm, underpinning our nearly 12% operating margin forecast by fiscal 2032.