Papa John's Pizza Is Positioned for Growth: Should You Buy a Slice?

Papa John's is clearly outgrowing competitors such as Yum! Brands' Pizza Hut and Domino's Pizza thanks to its quality differentiation. This tasty pizza company offers mouthwatering potential for growth.

May 29, 2014 at 9:47AM


Source: Papa John's.

Papa John's Pizza (NASDAQ:PZZA) is generating mouthwatering growth rates because of its quality differentiation in the pizza business, and the company still has a lot of room for expansion before reaching the penetration levels achieved by bigger players such as Domino's Pizza (NYSE:DPZ) or Yum! Brands' (NYSE:YUM) Pizza Hut. Should you buy a slice of this tasty pizza company?

"Better Ingredients. Better Pizza"
Papa John's slogan, "Better Ingredients. Better Pizza" is quite clear when it comes to the company's competitive strategy based on quality differentiation. Papa John's offers fresher and more natural ingredients than the competition; for example, the company uses unbleached flour made from its proprietary formula and fresh-packed tomato sauce as opposed to remanufactured sauce made from tomato paste.

Customers seem to clearly appreciate the better taste that comes with Papa John's special focus on quality. The company has achieved the highest score in the American Customer Satisfaction Index among national pizza chains in 12 of the last 14 years. Papa John's has a score of 82 in the 2013 ranking, versus 80 for Yum! Brands' Pizza Hut concept and 81 for Domino's Pizza.


Source: Papa John's.

The company is an industry leader when it comes to digital ordering and online technologies. Papa John's was the first national pizza company to offer systemwide online ordering at all of its U.S. delivery restaurants back in 2001, and it's still ahead of the pack in that area. Digital sales represented approximately 50% of all domestic systemwide sales and 60% of all delivery sales during the first quarter of 2014.

The company announced a 12% increase in revenues during the first quarter of 2014 to $401.4 million. Systemwide comparable sales increased 9.6% in North America and 6.4% in international markets during the period. In addition, Papa John's increased its number of units by 5.8% year over year.

Rising food costs -- especially cheese prices -- were a drag on profit margins, so net earnings per share rose at slower rate than revenues, increasing by 7.1% to $0.45 versus $0.42 per share in the same quarter of the prior year.

Cost pressures are a relevant risk to monitor; however, as long as demand remains healthy, the company should be able to overcome rising commodity costs via a combination of higher prices and hedging strategies to stabilize costs over the long term.

Delicious growth opportunities
Papa John's is growing much faster than bigger competitors such as Yum! Brand's Pizza Hut and Domino's Pizza, especially in the U.S.

Yum! Brands has built a huge global empire with Pizza Hut, however, it's not growing its revenue as fast as Papa John's. During the first quarter of 2014, the Pizza Hut division at Yum! Brands, which excludes China and India, generated a total increase in same-store sales of 3% in emerging markets and 1% in international developed markets. Same-store sales were materially weaker in the U.S. during the quarter, with a decline of 5% versus the same period in the prior year.

Domino's Pizza is doing better than Yum! Brands, but it's still not growing as fast as Papa John's. Domino's Pizza increased revenues 8.7% during the first quarter of 2014 to $453.9 million. Domestic same-store sales increased 4.9% during the period, while international same-store sales grew at a faster 7.4% pace.

Papa John's has 3,281 units in North America and 1,159 international restaurants as of the end of the first quarter. Management believes it has room for 4,000 restaurants in the U.S., and demand strength is confirming that the company still has considerable potential for growth at home.

Pzza International

Source: Papa John's.

When it comes to international growth opportunities, management is remarkably optimistic:

As in the case domestically, Papa John's is the quality leader in the international markets we serve. While our international markets will have their ups and downs as we gain scale, we are extremely bullish on our long-term prospects across the world. Today, we only have about one restaurant for 3 million people in our international market. So there's a long runway for growth for Papa John's internationally.

Foolish takeaway
Papa John's focus on quality and technological innovation are proving to be strong differentiating factors for the company, as Papa John's is materially outgrowing bigger competitors such as Yum! Brands' Pizza Hut and Domino's Pizza. Demand is notoriously strong in the U.S., and the company has abundant room for expansion in international markets. In addition to tasty pepperoni pizza, Papa John's is well positioned to continue delivering succulent growth for investors over the years to come.

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Andrés Cardenal has no position in any stocks mentioned. The Motley Fool owns shares of Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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