Papa John's International, Inc. ( PZZA ) recently posted strong third-quarter results wherein earnings and revenues beat the Zacks Consensus Estimate. Also, the company increased its earnings guidance for 2014. Share price of the company surged 6% in response.
Adjusted earnings of 39 cents per share beat the Zacks Consensus Estimate of 37 cents by 5.4% and increased 22% year over year owing to an improvement in revenues and higher margins.
Revenues of $390.4 million also beat the consensus mark of $380 million by 2.7% and increased 12.7% year over year owing to improved comps. Comps at system-wide North America restaurants were up 7.4% that compared favorably with the year-ago comps growth of 1.8% and the prior quarter comps growth of 6%.
Meanwhile, comps at system-wide international restaurants increased 5.5% comparing unfavorably with the year-ago comps growth of 8.1% and prior quarter comps growth of 8.6%.
Strong performance in the UK, Russia, Middle East and Latin America was dampened by weak performance in China owing to meat supplier issues. Shanghai Husi Food Co, a unit of U.S.-based OSI Group LLC and a meat supplier of Papa John's was found reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat. This lowered consumer confidence, thereby lowering the company's comps in the region. Other restaurants which saw weak results in China due to the same incident include Yum! Brands, Inc. ( YUM ) and McDonald's Corp. ( MCD ).
North America: Domestic company-owned and franchised restaurant comps improved year over year as well as sequentially.
Domestic company-owned restaurant sales increased 10.8% to $169.1 million owing to an 8.3% increase in comparable sales. Comps improved year over year as well as sequentially. North America franchise royalty revenues increased 14% to $22.1 million, thanks to a 7.1% increase in comps and lower performance-based royalty incentives.
Franchise and development fees declined 17.5% to $0.2 million. Domestic commissary sales were $149.2 million, up 8% year over year owing to an increase in the prices of certain commodities, primarily cheese. Other sales were $23.4 million, up 72% year over year due to point-of-sale system ("FOCUS") equipment sales to franchisees.
International: International revenues were $26.4 million, up 18% year over year, which reflects 5.5% increase in comps.
Behind the Headline Numbers
Total costs and expenses were $365.2 million, up 12.4% year over year due to a 9.7% increase in total domestic company-owned restaurant expenses and a 7.5% increase in total domestic commissary expenses.
Operating income was $25.2 million, up 17.4% year over year while margins were 6.5%, up 30 basis points.
Guidance for 2014 Upped
Despite higher costs related to FOCUS, a new point-of-sale system, Papa John's increased its earnings guidance for 2014.
The company expects earnings per share in the range of $1.68 to $1.74 compared with the previous expectation of $$1.64 to $1.72 per share. Also, the company increased its comps guidance for North America and expects it to increase in the range of 5% to 7% in 2014 versus the previous expectation of 4% to 6% increase.
Papa John's has been consistently delivering positive comps domestically as well as in the international markets over the past few quarters. The company's brand revitalization initiatives such as unit expansion and international expansion have contributed significantly to its comps growth. Also, the company is investing in technology-driven initiatives like digital ordering in order to capitalize on the digital wave that has hit the U.S. fast casual restaurant sector. Moreover, limited time offerings and menu innovation continue to play an important part in generating revenues.
However, a continuous rise in food costs and costs related to FOCUS would likely offset the benefits derived from these sales initiatives. Papa John's presently has a Zacks Rank #3 (Hold). BJ's Restaurants, Inc. ( BJRI ) is a better-ranked stock in the restaurant industry, sporting a Zacks Rank #1 (Strong Buy).
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