Papa John's (NASDAQ:PZZA) announced third-quarter results with net earnings of $0.28 per diluted share, coming up just shy of analyst expectations of $0.29. Nonetheless, shares are being hammered in recent trading. Just as magical brownies didn't lead to new highs for Domino's (NYSE:DPZ), Papa's new Sicilian Meats pizza apparently was not enough to please Wall Street.
For the quarter, the top line grew 2.8% to $239.7 million, topping analyst expectations of $234.5 million. Domestic sales for stores open for more than a year were up 4.5%. According to remarks in the conference call, management is pleased with both the number of transactions and the ticket value in its comps metric.
Low-single-digit top-line growth appears unimpressive on the surface, but during the conference call, management pointed out that the industry as a whole saw a decline in sales of 0.9% for the quarter. So while the industry is contracting a bit, Papa John's continues to build its market share -- now up to 20%, from 16% in 2005.
Operating margins rose to 8.5%, up from 7.3% in the year-ago period. Many variables were at play here -- in the domestic market, the leveraging of fixed operational costs was the primary contributor.
A couple of developments are worth mentioning. First, the company launched a Hispanic-focused Papa John's website that is expected to be a big hit, especially in the southern half of the country.
Second, with Arizona benefiting as people flee outrageous real estate prices in California, Papa John's is intent on increasing its presence in the Grand Canyon State. The company acquired 48 franchised units in the Phoenix and Flagstaff markets and is making plans to expand this base.
Finally, on the international front, management identified what it called four "exciting" markets, with three of those coming from China; Seoul, South Korea, was the fourth. The food-service industry in China is benefiting from a burgeoning middle class, as well as a general acceptance of Western-style foods. To capitalize on this remarkable growth opportunity, Papa John's is likely to increase the number of units in China to 90 by the end of 2007.
With international sales increasing 21.4% in October, it's not hard to see why emerging markets are critical to the future of Papa John's, which is finding sales in the domestic market harder to come by -- domestic comps in October are down 1.8%.
Investors are dumping Papa John's shares in part because of weaker domestic comps. However, it is important to not lose sight of the bigger picture, which includes a Chinese nation a billion people strong -- more than three times the size of the now-saturated domestic market.
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Fool contributor Jeremy MacNealy has a player rating of 96.99 and is ranked 362 out of 11,975 participants at Motley Fool CAPS; his profile is listed under jmacn22. He has no financial interest in any company mentioned. The Motley Fool has a nifty disclosure policy.
