PZZA PAPA JOHN’S INTERNATIONAL
Sector financial performance:
This company, who operates (primarily) and franchises pizza delivery and carryout restaurants, has been grouped into pizza-quick service restaurants sector in foodservice industry.
It seems that the slowing down traffic was the major reason contributing to slowing down increase in comparable sales of fast-service restaurants between 2015 and 2017. Data indicates that the average increase in comparable sales all across this sector went down from around 5% of 2015 to around 1% of 2017 except the Mexican restaurants, which presents consistent 5-6% increase in comparable sales during this period. (Hamburger-QSR went down from 5% to 1%; chicken-QSR down from 4% to 2%; sandwich-QSR down from 4% to -2%; pizza-QSR down from 4% to 0%). Correspondingly, accompanied with declining sales, the traffic has been down for most of companies in this sector since 2015. For example, our data indicates that the average decrease in traffic of hamburger restaurants was 2% and 1% in 2016 and 2017.
Since 2017, it seems that traffic all across this industry has continued to decline but present signals of slowing down. Traffic in Mexican restaurant started to decrease in 2018 following the trend seen frequently in other types of QSR before 2017. Comps turned into negative range and were down largely in Pizza sector in 2018, which, with sandwich companies present the worst decline among QSR sector in the past two years. Comps in chicken related QSR restaurants seem least impacted by generally slowing down in traffic all across industry probably due to relatively stronger demand and thus the ability to raise price. Decreasing Hamburgers’ comps seem to be hitting the bottoms as traffic rebounds and price rises.
It seems that the impacts from decrease in traffic have been offset partially by raising menu price/products mix. This is probably why we are seeing positive growth in their comparable sales from many restaurants while decrease in traffic.
For under-performed companies in this industry, franchising their company-operated restaurants obviously has been a better business strategy in dealing with decreasing sales and cash flow. However, all industry has been suffering from general decline in sales. Data indicates that the average cash flow/share of companies in this sector has been declining since 2017.
Our data indicate that, while slowing down comparable sales, there are general improvements in companies’ gross margins in the past several years benefiting from shifting of revenue to re-franchising, rising menu price, and decreasing commodity costs.
Different types of food styles present different gross margins depending on how easy/difficult they can find franchisees for their restaurant concepts. It seems that chicken-QSR demonstrates the best abilities to franchise their concept and thus present the highest average sector gross margin (average 47%). Hamburger QSR then follows, which presents average 36% gross margin. The typical gross margin for Mexican and pizza QSR is around 17% with a low proportion of franchised revenue. Sandwich sector presents the lowest gross margin of about 13%.
Correspondingly, chicken-QSR presents, according our data, the highest operating margin of average 30% with a SG&A as percentage of sales of 16%. Hamburger-QSR has an average 22% operating margin with a SG&A as percentage of sales of 13%. Mexican and Pizza -QSR has an average 8-9% operating margin with a SG&A as percentage of sales of 8-9%.
Comparable sale has increased before 2017 but has grown at slowed down pace and decline largely in company owned restaurants in 2018. Company continued to reduce company owned restaurants by franchising.
The first six months of fiscal 2018 compared with the 2017
Company comparable sales decreased by 6.7% (7.2% for 2Q).
The fiscal 2017 compared with the 2016
Company comparable sales increased by 0.4%.
The first nine months in Fiscal 2017 compared with the same period of 2016
Company comparable sales increased by 2.3%.
Fiscal 2016 compared with 2015
Company comparable sales increased by 4.4%.
Fiscal 2015 compared with 2014
Company comparable sales increased by 5.9%.
Its gross margin (including company-operating expenses, commodity, wages and rent and franchise expenses) went up by about 110 basis points to 18% in 2017as a result of lower commodity costs. Its SG&A as percentage of sales has been flat around 9% in 2017 and its operating margin went up close to 9%. However, gross margin was down to about 17% due to increased expense in company operated restaurants and caused operating margin down below 8% in 2018.
This stock currently has an enterprise price/EBI ratio of 25. We think that its stock is being relatively overvalued considering that its declining demand.
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