Papa John's (Nasdaq: PZZA) would prefer to have you focus on this quarter's rising earnings. But taking a closer look at the top line, or even looking further out beyond this period, may well leave you with an unappetizing feeling.
Yes, earnings for the current quarter did rise almost 18%, to $0.40. That figure excludes a loss this year, as well as a gain last year from the consolidation of its franchisee-owned cheese-purchasing company, BIBP Commodities. And while revenues climbed by 6.1%, the overwhelming majority of that increase came from the acquisition of new restaurants.
A better reflection of how things are looking is same-store sales -- and this is where the company left me wanting more. Comps decreased 1.1% systemwide, and both franchises and company-owned restaurants experienced declines. But hey, don't worry -- the company wants us to look at the quarter on a two-year combined basis, where comps have increased 3.6% and 9.7%. Well, gee, that makes me feel much better! We may call ourselves Fools here, but we don't appreciate being treated like fools of the small-f variety.
Since the company beat expectations this quarter, it increased its guidance for the year, from $1.52-$1.58 a share to $1.56-$1.60. However, the road gets more difficult after that. Management has lowered its comps estimate, from a range of 1.5% to 2.5% to a spectrum that leaves us 1% positive on one end and 1% in the hole at the other. To help deal with the more challenging times ahead, Papa John's will slash its general and administrative budget by at least $14 million. The company is also increasing its buyback activity.
There is nothing wrong with this approach, per se, but I wonder whether the company is sacrificing future growth at the expense of short-term earnings. This year, it will cut down on the number of new restaurant openings and spend $5 million to $10 million less on capital expenditures than it had previously budgeted.
Restaurants are having to find ways to deal with higher commodity costs and increasingly stretched consumers. But Papa John's is also taking on more risk by operating more company-owned restaurants, at a time when things may be heading in the wrong direction. I'd advise not ordering Papa John's shares just now -- unless you want to wait a few quarters for delivery.
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Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at rothmanviews@comcast.net. He doesn't have any positions in the companies mentioned.
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