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Papa John's Delivers a Big Sales Boost

Source: Papa John's.

Papa John's International (NASDAQ: PZZA  ) is gearing up for a busy fall and winter this year. The pizza-delivery giant posted second-quarter results that just barely met Wall Street's expectations. So no surprises there. But the announcement also included a new earnings outlook that calls for big gains for the business over the next six months.

Spicy results
As for the second quarter, sales improved by 9% to $381 million. Earnings clocked in at $0.40 per share, or about even with last year's result. 

The good news for investors is that the restaurant chain kept up its strong sales momentum: Comparable-store sales were up a healthy 6% in the United States. That's better than the 5% comps that Domino's Pizza could manage, and it trounced Pizza Hut's 1% decline. Papa John's had a hit with its limited-time double cheeseburger pizza promotion last quarter, and it looks as if its sweet chili chicken pizza offer did the trick for the second quarter. 

With some exceptions
But there was also some not-so-good news for investors in the results. Commodity costs continued to rise, which dragged profitability lower. Cheese prices, for example, make up nearly half of Papa John's food costs -- and they were 20% higher in the quarter. Rising commodity costs hurt the company in more than just the bottom line, though. Franchisees tend to struggle with sharp cost inflation, which can end up pushing them out of business in some cases. 

In fact, Papa John's saw an uptick in closings during the quarter: 25 franchisees closed up shop, leaving the total number of locations in the U.S. hardly changed from the year ago period. Yes, those locations were probably weak performers to begin with. But a key ingredient in Papa John's sales growth is an expanding, not contracting, store base.

Good times ahead
That brings us to the company's raised revenue guidance. Papa John's announced a big boost to its outlook for full-year sales growth. Comps are now expected to be up 5% at the midpoint of its guidance, as compared with the 3% it forecast at the beginning of the year. That's particularly good news, considering that the fourth quarter has to overcome a comparison against last year's scorching 9% growth.

Today's upgrade suggests that Papa John's management is feeling confident that it can add growth on top of that strong prior-year result. And given the success that the company has had so far this year, investors have little reason to doubt that Papa John's can keep it up.

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Demitrios Kalogeropoulos

Demitrios covers consumer goods and media companies for, as well as broader moves in the economy.

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8/27/2015 4:00 PM
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Papa John's Intern… CAPS Rating: *****