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Will Papa John's New CEO Mean Better Results in Q3?

By Rich Duprey - Nov 2, 2019 at 6:04AM

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The pizzeria is starting with new leadership to engineer a turnaround that could begin this quarter.

What a difference a year makes. Heading into Papa John's ( PZZA -0.62% ) third-quarter earnings report a year ago, analysts were forecasting a dismal quarter with sales falling 9% and profits plummeting by nearly two-thirds. The company ended up doing even worse, missing on both the top and bottom lines.

Fast-forward 12 months, and Wall Street has a decidedly different outlook. Sales are expected to rise 6.5% to $388 million, and earnings are expected to soar 15% to $0.23 per share. The pizzeria's stock is up around 20% from last year but is more than 50% higher from where it ended up tumbling to at the lowest.

However, all that last year's dismal performance means is Papa John's has a much lower bar to step over. Let's see whether investors should expect the restaurant stock to go beyond the bare minimum to show gains.

The exterior of a Papa John's restaurant

NBA legend Shaquille O'Neal invested in this Papa John's pizzeria, and the company was ready to start spending $80 million this quarter to tout it. Image source: Papa John's.

Looking to the future

Last year's turmoil continues to fall further behind in the rear-view mirror as Papa John's distances itself from the struggles. While founder John Schnatter separated himself from the company a while ago (though he remains the largest shareholder), the pizzeria also ousted CEO Steve Ritchie, who clashed with Schnatter, and replaced him with Arby's president Rob Lynch, tasking him to effect a fast turnaround

With a new marketing head, a new restaurant operations chief, and now a new CEO all hired in 2019, Papa John's is looking to start with a clean slate.

One of the most important tasks Papa John's has is making sure its franchisees can thrive, not just survive. This past summer, it committed to spending $80 million on royalty relief for franchisees and new marketing, relying heavily upon Shaquille O'Neal, the former NBA great it hired earlier this year to be its new brand ambassador

Spending was to begin in the third quarter and would run through next year's fourth quarter, but Papa John's expected half of the money would be spent in 2019. We'll get to see whether that helped lift sales, but having to provide succor for franchisees suggests it's not expecting any real sales expansion this quarter or next. Indeed, the pizza shop still expects comparable-store sales to fall for the full year, though last quarter, it blunted the extent of the decline by reducing the bottom-end estimate to a 4% drop instead of 5%.

Investors will also see whether third-party delivery through Papa John's partnership with DoorDash will supplement existing employee drivers enough to grow sales, improve the customer experience, and help it challenge Domino's dominance, as it steadfastly refuses to go the third-party delivery route. It said such delivery services hurt its sales last quarter, and it doesn't see that changing anytime soon.

Big things in the oven?

Papa John's did beat analyst sales expectations last quarter even though it came up short on earnings, and that was on top of better-than-expected first-quarter sales, too. Again, the hurdle it's had to get over has been set pretty low, so it just may be that it took analysts some time to catch up with how quick the pizzeria could rebound.

Although it's still early, people will look to the third quarter for clues as to whether Lynch can engineer a rebound like the one Chipotle Mexican Grill has enjoyed since bringing on Brian Niccols from Taco Bell to serve as CEO. New leadership, fresh marketing, and new products have helped the Mexican food chain's stock triple in value since the executive took the reins, but it may be a tall order for Papa John's to emulate that success -- at least so soon.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Papa John's International, Inc. Stock Quote
Papa John's International, Inc.
PZZA
$124.29 (-0.62%) $0.78
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,592.10 (-1.20%) $-19.34
Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
DPZ
$521.77 (-0.61%) $-3.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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