Papa John's sold more pizza but consumers pulled back on sides and drinks

By Tomi Kilgore

Revenue at the pizza chain missed expectations by the widest margin in more than 5 years, as deliveries declined

Shares of Papa John's International Inc. sank toward a four-year low Thursday, after the pizza chain reported the biggest quarterly revenue miss in more than five years, amid a decline in the number of transactions and deliveries.

Interim Chief Executive Ravi Thanawala said on the post-earnings call with analysts, that while the initial customer response and review to new offerings have been positive, "the highly competitive promotional environment has been a headwind to transactions."

"In the current environment, we're also seeing customers become more deliberate in managing their overall order costs," Thanawala said, according to an AlphaSense transcript. "So while our core offering pizza remained higher year over year, sides and beverages were lower."

The stock (PZZA) saw a brief initial bump up in the premarket after results were reported, but was down 7.4% in afternoon trading, to put it on track for the lowest close since April 3, 2020.

It was also headed for the worst one-day, post-earnings performance since it shed 11.6% after fourth-quarter 2020 results were reported on Feb. 25, 2021.

For the quarter to March 31, net income fell to $14.6 million, or 44 cents a share, from $22.4 million, or 65 cents a share, in the same period a year ago.

Excluding nonrecurring items, such as restructuring costs, adjusted earnings per share of 67 cents beat the FactSet consensus of 57 cents, as restaurant margins improved by 2.2 percentage points to exceed the company's estimates.

Meanwhile, revenue slipped 2.5% to $513.9 million, well below the FactSet consensus of $544.5 million. The margin of the miss - 5.6% - was the biggest in more than five years, according to available data from FactSet.

And comparable sales, or sales or restaurants open at least a year, fell 2.0% to miss expectations of a 0.6% decline, with North American sales down 1.8% and international down 2.6%.

In comparison, Domino's Pizza Inc. (DPZ) reported in late-April first-quarter profit, revenue and comparable sales that rose above expectations. The revenue beat snapped a five-quarter streak of misses.

Papa John's said the decline in comparable sales was primarily due to lower transactions. While sales via third-party delivery companies continued to increase, that was more than offset by a drop in organic delivery. The carryout business was about the same as last year.

And Thanawala said he believes North America sales will remain under pressure in the near term, "as the challenging macroeconomic environment continues and consumer confidence softens."

Thanawala was named interim CEO on March 20 to replace Rob Lynch, who left after about five years in the role, to become CEO at Shake Shack Inc. (SHAK)

Chairman Christopher Coleman said the company continues to conduct a "thorough search" for its next CEO. But in the meantime, "the board of directors has great confidence in the work that is taking place under Ravi and the Papa John's leadership team."

Papa John's stock has shed 27% over the past three months, while Domino's shares have rallied 22%, Shake Shack's has run up 31.7% and the S&P 500 has advanced 3.6%.

-Tomi Kilgore

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05-09-24 1435ET

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