Papa John's Banks on Expansion & Technology, Risks Remain

On Jun 12, we issued an updated research report on Papa John's International, Inc. PZZA, which operates and franchises pizza delivery as well as carryout restaurants in the U.S and internationally.

Key Growth Drivers

Papa John's is the third largest take-out and pizza delivery restaurant chain in the world. The company's commitment to provide quality food and deliver better ingredients to its customers is commendable and should appeal to the health conscious customers.

We note that international expansion has been the backbone of Papa John's operations for quite some time now. In fact, the first quarter of 2017 marked the 29th consecutive quarter of positive comps in the international segment. Currently, the company has more than 1650 international restaurants in 45 countries.

It is also planning to expand in Brazil, Honduras, Uruguay and the Bahamas. Additionally, the brand has started to move into the Northern Africa region, anticipating opportunities there, and eventually wants to enter South Africa as well.

Since nearly 85% of the company's restaurants are franchised, we believe re-franchising efforts will help the company reduce its capital requirements and facilitate earnings per share growth and ROE expansion, over the long term.

Meanwhile, the company's online and digital marketing activities have increased significantly over the past several years in response to increasing use of online and mobile web technology. In fact, in the first quarter of 2017, Papa John's recorded 60% online sales mix and has a long-term target of reaching 80%, eventually.

Going forward, the company aims to continue making investments in technology which will be focused on foundational improvements to their digital channels to increase order conversion rate, frequency and ticket average.

Besides, Papa John's is also the official pizza sponsor of the Major League Baseball (MLB) and National Football League (NFL). Notably, these sports partnerships continue to drive growth on the local and national levels as it increases the company's visibility as a brand and attracts customers through digital and social media. Currently, Papa John carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Bottom Line

However, owing to its large international presence, Papa John's is exposed to risks of fluctuations in currency exchange rates, which impacts the company's top line. Moreover, an increasing wage rate environment and a challenging industry backdrop remain concerns for most restaurant chains like Jack in the Box Inc. JACK and The Cheesecake Factory Incorporated CAKE.

But we note that pizza giants like Domino's Pizza, Inc. DPZ and Papa John's are riding on the certitude that demand for pizzas is unlikely to go down in the coming days. Evidently, shares of the company have rallied 22.9% in the last one year, outpacing the Zacks categorized Retail–Restaurants industry's gain of 12.2%.