Having declined 20% in the last year, Papa John’s (PZZA, Financial) stock could post a successful recovery.
The takeout pizza company is forecast to record improved profitability in the next fiscal year, with investment in technology and a refreshed marketing program expected to enhance its competitive position. The business is also seeking to become more efficient in order to offset increasing labor costs, while a revised loyalty program and investment in its employees could lead to an improved customer experience.
The stock has underperformed the S&P 500 by 29% in the last year, poising it for outperformance.
Investing in the customer experience
Increasing investment in technology could improve the customer experience and lead to higher sales growth. Papa John’s has deployed mobile-first design improvement on its website, while it also added intelligent chatting technology to its website in order to improve customer engagement. Apple Pay and Google Pay have been integrated on its mobile apps, while a simplified user experience is expected to lead to a higher representation of its mobile channel in total sales. Further improvements in the delivery experience and innovative partnerships are expected to enhance the online and mobile ordering experience.
The relaunch of the company’s loyalty program has seen a surge in membership. It is expected to provide greater variety and value for customers, while offering the company significant consumer insights. This will allow it to engage in increasingly personalized marketing with customers, which could lead to increasing traffic without relying on blanket discounts across all channels. Exclusive perks for program members may build brand loyalty and help to improve the company’s competitive position.
Changing strategy
Papa John’s is seeking to increase its differentiation versus peers through a refreshed marketing strategy. It is launching TV and digital campaigns that focus on its use of superior ingredients versus rivals in a way that is relevant to millennial and Gen Z consumers. As part of this, it will offer specialty pizzas that are unique in the market, with a number of new products expected to be released over the medium term.
Alongside refreshed marketing, it is seeking to improve customer service levels through an investment in its employees. It has conducted a cultural audit using outside experts and will seek to improve working conditions for staff under its first chief people officer. It will also offer a higher education benefit program for employees, which covers 100% of the tuition costs for online degree programs for its 20,000 corporate team members. This allows employees to expand their skill sets and could increase employee retention. It may also improve the customer experience.
Risks
A risk facing Papa John’s is increasing labor costs. The Employment Cost Index increased 0.7% in the fourth quarter of 2018, having risen 0.8% in the third quarter. This lifted the year-on-year rate of increase to 2.9% from 2.8% in the 12 months through September 2018. This makes it the biggest annual gain since June 2008. A tightening labor market is pushing wages higher, which could lead to challenges in filling staff positions in the U.S. It may also put pressure on Papa John’s margins over the medium term.
In response, the company is seeking to become increasingly efficient. It is working with third-party efficiency experts and food aggregators to improve productivity in restaurant-level operations. For example, it has identified procedures to improve food cost controls and made improvements to its labor management system to better align labor goals with individual restaurant characteristics. Alongside this, additional technology solutions are expected to be introduced across its restaurants, with increasing automation likely to be a feature of the company’s evolving business model.
Outlook
In the 2020 fiscal year, Papa John’s is forecast to post a rise in earnings per share of 46%. Since it trades on a forward price-earnings ratio of 45 using fiscal 2019’s forecast earnings per share, it seems to offer growth at a reasonable price.
The increasing use of technology and a focus on improving its loyalty program could enhance the customer experience. The investment it is making in its employees and in a refreshed marketing program may also lead to improving financial performance in the long run.
Although there are risks ahead from increasing labor costs, a revised efficiency program could offset them to a large degree. This may help its stock price to deliver capital growth after what has been a disappointing 12 months when compared to the S&P 500.
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