Investors cooled to shares of Papa John's International (NASDAQ:PZZA) in the weeks leading up to its third-quarter earnings release. After notching year-to-date gains of over 60% by late August, the pizza delivery giant saw its stock drop over the next two months while Domino's Pizza (NYSE:DPZ) pulled back ahead for 2020.

But Papa John's earnings update showed that it is still challenging the market leader during this period of elevated demand for home meal delivery. That success is lifting operating returns higher, too.

Let's take a closer look.

Five young friends sharing a pizza.

Image source: Getty Images.

Market share updates

Papa John's sales volumes impressed for a second straight pandemic-driven quarter. Comparable-store sales were up 18% in the core U.S. market. That result stacks up well against Domino's 17% boost and the 5% uptick that McDonald's posted.

But the two pizza businesses are on different trajectories as the pandemic wears on. Domino's achieved a slight increase in sales gains between the second and third quarters, while Papa John's expansion rate slowed slightly.

Still, management found plenty to celebrate about Papa John's growth streak that started in late 2019. CEO Rob Lynch credited the strong third-quarter financial results to "a winning strategy and execution that have helped us outperform our competition and deliver five straight quarters of same-store sales growth."

Cash flow

Papa John's had good news to report on earnings. The surging revenue figure helped lift profits even though the chain spent more on labor and on maintaining its supply and delivery platforms. Operating income shot up to $25 million from $5 million a year ago, and net income rose to $11 million from a $3 million loss. That translated into $0.35 per share of earnings compared with a $0.10 per share loss.

Cash generation looked just as strong, with free cash flow improving to over $130 million over the last nine months, up from $16 million a year earlier. Papa John's is aiming to direct some of that haul toward maintaining its growth rate. Executives said they have a "robust innovation pipeline and a vast global development opportunity" to support that initiative.

Papa John's is directing more cash toward shareholders, too, with dividend payments crossing $10 million so far in 2020 and a new share repurchase program targeting $75 million of stock buybacks.

Looking ahead

The competitive struggle with Domino's is likely to show up more clearly over the next few earnings reports. The market share leader is pouring cash into its own innovation and delivery platforms, after all. And it is still busily launching new locations even in well-covered neighborhoods. That "fortressing" strategy might get more aggressive now that Domino's is considering scaling back on its global expansion rate.

That all means investors will be watching comparable-store sales numbers through early 2021. Domino's had been on a streak of over 10 years of rising market share in the pizza delivery niche, but the pandemic, while speeding industry growth, might have opened the door for Papa John's to make its own gains. Both companies can point to factors that could give them an edge in the fight, but the real test might be how fast-food fans respond to their offerings as the COVID-19 threat fades.

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