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Papa John's: This Pizza Chain Looks All Set for Long-Term Growth

June 12, 2014 | About:
Rustic Nomad

Rustic Nomad

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Pizza chain Papa John’s (PZZA) strong fundamentals and strategy of “Better Ingredients” helped it post pretty impressive results despite a weak economy. The pizza chain posted fantastic results, which indicate solid demand. Further, Papa John’s is making aggressive investments to maintain this momentum by ensuring its highest quality standards.

The strategies of the company are reaping results, supported by the fact that it was rated highest on the American customer satisfaction Index for the 12th time in 14 years recently. It is a great achievement by Papa John’s, and it also reflects its strong position in the market. However, the pizza chain is seeing weakness in China and Asian markets. The company is trying hard to gain market share in these countries.

On the other hand, in China, its rival Yum Brand’s Pizza Hut is already enjoying a profitable position. Papa John’s should also keep an eye on Dominos Pizza, which is also a tough competitor to beat and can be a threat to Papa John’s in the long run.

Solid results

Papa John’s is doing well despite challenges. It posted good results, with its quarterly revenue growing 5.6% to $387.9 million in the previous quarter. Papa John’s saw good demand for its pizzas, which resulted in net income growth to $18.8 million from $17.4 million last year. There was an extra week in the last quarter, which was well utilized by the company. It accounted for $21.5 million in additional revenue from this extra week.

So, even after excluding this extra week, Papa John’s performance was terrific. In addition, Papa John’s system-wide comparable sales increased 9% for its North American business, and 7% in the international segment. So, the company has seen good growth so far. But how will the future look like?

The road ahead

Papa John’s objective of providing quality services and service standards proved a key growth driver for it. With a class dining experience, Papa John’s attracted many customers to its joints. The company believes in delivering high customer attraction and maintain its services and standard.

Papa John’s has also expanded its business greatly. It is already running 4,500 restaurants all over the world, and has further expansion plans with 1,200 joints about to come up in six years. Papa John’s is supporting this move with investments in promotion and improving its brand image all over the globe.

Papa John’s has also entered into a partnership with Peyton Manning, which is expected spur growth. Also, the company is the official pizza sponsor of the NFL.

Key investments and competition

Papa John’s is also taking advantage of technology. Its digital ordering system has gained traction. Digital ordering contributed about 45% to the total sales of the company in the previous quarter. Over the years, Papa John’s has shown its digital leadership through various initiatives, and it will continue to do the same going forward through a new point-of-sales system.

Papa John’s needs to maintain high digital ordering rates, as one of its prime competitor, Dominos, is seeing growth in its online orders. Dominos has plans to bolster its digital platform. It had invested $40 million last year to improve its sales. So, Papa John’s needs to stay ahead of Domino’s in digital orders if it is to keep its dominance intact.

Papa John’s is focused on maintaining its standard and quality services to customers. It is improving its production through a fully-automated dough production mechanism. On the other hand, Papa John’s has also come up with new pizzas.

Conclusion

Papa John’s is trading at a trailing of 32.84, which is the highest among peers. But a good forward P/E of 25.45 indicates that the company is growing and there is great potential for earnings growth in the future. The company’s focus on maintaining high quality standards and service should prove to be a growth driver. So, despite being expensive, Papa John’s could be a good buy.


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