Down 32% in 2017, What Comes Next for Papa John's?

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Investors did not take kindly to the disappointing third quarter earnings from Papa John's International (NASDAQ: PZZA). Diluted earnings per share came in at $0.60, a 5.3% year-over-year increase, on the back of 2.2% revenue growth to $431.7 million. But the most worrisome metric was the paltry 1% North American comparable-store sales increase, which fell short of analyst expectations. To make matters worse, full-year comps guidance was lowered from a range of a 2% to 4% growth to just 1.5%, while diluted EPS growth was lowered from 8% to 12% to 3% to 7%.

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With the third quarter in the bag and Papa John's stock down over 30% year to date, here's what investors should keep in mind as management attempts to right the ship.

Realize what business the company is in

It's easy to underestimate the pizza industry, but do so at your own peril. Think of Papa John's and competitors like Domino's as technology companies that happen to deliver pizza. Powered by advancements in smartphones and mobile connectivity, the industry has poured significant resources into making your next pizza order as seamless as possible.

In the iOS store, Domino's has the No. 5 most downloaded app in the food and drink category. Meanwhile, Papa John's claims the No. 15 spot. When retailers speak to the importance of their omnichannel efforts, they point to the pizza industry as inspiration.

Realize what business the founder is in

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Few major companies are inextricably linked to their founder the way Papa John's is. Not only is the company named after founder John Schnatter, but its media strategy has also made him the face of the brand. But Schnatter stumbled during the latest earnings call by laying blame for the company's underperformance on NFL protests.

"Papa John" needs to realize what he is and what he isn't. He's the brand ambassador for a massive chain that serves millions of customers with diverse political opinions and moral values. What he isn't is a politician or polemicist. As the CEO and biggest shareholder, he would be well served to avoid similar PR blunders. 

Realize what the market needs to hear

Though short-term focused, Wall Street analysts and investors are usually forgiving of a single disappointing quarter as long as:

  • The reasons behind the underperformance are disclosed and factually accurate.
  • Management has outlined plans to improve results going forward.

It certainly didn't help that the day after the Papa John's earnings call, Yum! Brands pointedly stated that the NFL protests were a non-factor for sales at Pizza Hut. And last month, Domino's posted impressive 8.4% domestic comps growth. While neither brand is as committed to NFL marketing as Papa John's -- the official pizza of the league -- Schnatter's comments ring especially hollow with zero support from its biggest rivals.

Where does the stock go from here?

Because of the stock's poor year-to-date performance, shares are now cheaper than the S&P 500 on a trailing price-to-earnings basis -- 24x versus 26x. But while the company expects to deliver just 3% to 7% bottom-line growth for the full year, S&P Capital IQ forecasts 12% earnings growth from the broad index.

To deliver on guidance and reassure investors, the company is best served focusing on investments in technology with the goal of serving customers whenever, wherever, and however they want.

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Jamal Carnette, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.