Strange Day, Papa John's

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After restaurant operator California Pizza Kitchen (Nasdaq: CPKI) posted healthy same-store gains and offered a dreamy outlook last week, pizza delivery chain Papa John's (Nasdaq: PZZA) served up cheese -- in more ways than one.

Last night, Papa John's reported that while domestic comparable sales increased 0.5% for the first quarter, they actually fell 3.7% in March. And then the company dropped a small bomb: Rising cheese costs will cut into 2004 earnings by about 38%.

In case you haven't considered it, cheese makes up a large chunk of a pizza company's operating costs.

In the fourth quarter 2003, the company began consolidating the financial results of BIBP Commodities, a franchisee-owned entity that allows Papa John's domestic restaurants to lock in the cost of cheese on a quarterly basis. Due to a sharp rise in the market price for cheese (to an all-time high), the impact of the consolidation to operating income will be approximately $1.5 million to $1.8 million for the quarter, and about $25 million for the year, resulting in an $0.86 per-share hit to 2004 earnings.

As a result of the consolidation, 2004 earnings are now expected in the $1.34 to $1.42 per-share range, rather than $2.20 to $2.28.

So why is the stock up today?

It could be that, excluding the impact of that consolidation, the company maintained its 2004 earnings forecast of $2.20 to $2.28 per share -- still ahead of the average analyst estimate of about $2.17 per share. Or maybe, with cheese prices at an all-time high, investors think the effect on Papa John's can only get better from here.

To be sure, following a crusty 2003 showing, it's hard to imagine things getting much worse. Bargain hunters and turnaround investors might be catching on. Heck, it's even possible that at less than nine times trailing cash flow, the stock is a bargain.

Tom Gardner likes Papa John's as a turnaround and has had it on his Motley Fool Hidden Gems watch list for some time.

Fool contributor Jeff Hwang owns none of the companies mentioned above.