Papa John’s Earnings: Operator Outpaces Pizza Pressure, India Development Prospects Intriguing

Narrow-moat Papa John’s International PZZA reported solid quarterly earnings, with $527 million in revenue and $0.68 in adjusted EPS effectively in line with our $529 million and $0.69 estimates. Encouragingly, the firm maintained its guidance for 2%-4% U.S. comparable store sales growth in 2023, suggesting modest outperformance relative to its largest competitor, wide-moat Domino’s. Further, a recently signed 650-unit development agreement in India should bear fruit, with a more value-oriented approach that focuses on delivering local market density and commensurately better four-wall economics looks more likely to bear fruit than the firm’s previous foray in that market. On balance, we believe that those two factors are responsible for a 4% uptick in share prices during intraday trading, and we expect to raise our own $72 fair value estimate by a similar margin, with similar rationale. Shares continue to trade in a range we’d consider fairly valued.

We believe that the combination of better pricing power than category competitors (derived from more premium menu positioning) and stronger top-line leverage should allow Papa John’s to return to prepandemic profitability levels more quickly than its peers, driving our forecast for a high-teens full-year restaurant margin (18%) for the firm’s company-owned stores and a full recovery to the low-20s over the longer term. We maintain our view that restaurants with strong brand-enabled pricing power, predominately franchised systems, and strong digital acuity are best positioned to succeed in the prevailing environment, underpinning our forecast for 200 basis points of U.S. market share capture for the largest chain restaurants in our coverage over the next five years. CEO Rob Lynch’s commentary corroborated this view on the earnings call, flagging the collection of cost pressures that continue to plague the 40%-50% of the domestic pizza market still held by mom and pop operators.