In this segment from the Market Foolery podcast, host Chris Hill and Scott Phillips, The Motley Fool's director of research in Australia, slice up the situation at pizza purveyor Papa John's (NASDAQ:PZZA), which is leaving a bad taste in the mouths of shareholders. The stock is down nearly 25% this year, and the fourth-quarter results were another set of worse-than-expected numbers. But despite that, there was a hint of optimism in the market about the company today. Is it misplaced, or are the changes the company has made at the top, and with its NFL sponsorship, going to give it a boost?
A full transcript follows the video.
This video was recorded on Feb. 28, 2018.
Chris Hill: Papa John's wrapping up a tough fiscal year. Their fourth quarter profits came in lower than expected, their same-store sales falling nearly 4%. I get that the stock was up a little bit today, but over the past 12 months, this stock is down around 25%.
Scott Phillips: Yeah, this is bad. They're not only lower-than-expected, but lower than last year, as well, which makes it worse. Sometimes, too bullish an expectation is one thing. This is a business that's in decline. Same-store sales are down, earnings are down from an adjusted $0.69 to $0.65. That's the reverse of Booking Holdings. You have more people coming through the door, that's a good thing. You deal with a margin in the short-term. When you have fewer people coming through the door, and people saying, "No thank you, I'd rather go somewhere else, I'll have something else," that's a tough business to be in. And on a chain basis ... think about retail stores, we talk about unit profitability. If you have same-store sales falling, that really starts to hurt the bottom line pretty badly. I think they've probably done some work to keep the bottom line in decent shape this year. If they have the same problem next year, you're going to see even more losses, I think, from the top line.
Hill: And I think at least a little bit of what we're seeing with Papa John's stock today is, maybe, some optimism that, "We're putting this year in the books. That's done. Among other things, we'll have slightly easier comps in the current fiscal year, in the next 12 months. And, we have a new CEO, so maybe that works." Although, the earnings for Papa John's are taking a backseat in terms of the headlines, because the headlines of Papa John's today is the ending of their relationship with the NFL, or, as the official sponsor of the NFL. And Pizza Hut, which is owned by Yum! Brands, stepped right in and said, "We're happy to be the official sponsor of the NFL."
Phillips: Of course Papa John's should cancel it. The NFL with the entire reason for Papa John's weaknesses. We've heard that from the CEO. He's come out and said, "You know what? Our business would be fine except for that football league over there that's really costing us money." If only it wasn't for the NFL, Chris, we wouldn't be talking about Papa John's today.
Hill: Again, I think a little bit of the outcome with this stock is the founder and now-former CEO John Schnatter stepping aside. I think either he realized pretty quickly, or people around him realized pretty quickly, he made a big mistake by blaming the NFL ratings for falling pizza sales.
Phillips: It wasn't like people ate less dinners because the NFL ratings are down, right?
Hill: That's true.
Chris Hill has no position in any of the stocks mentioned. Scott Phillips has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Booking Holdings Inc. The Motley Fool has a disclosure policy.