On Friday, Deutsche Bank (ETR:DBKGn) updated its outlook on Papa John's International Inc. (NASDAQ:PZZA), increasing the price target to $55.00 from the previous $45.00 while keeping a Hold rating on the stock. The firm's analyst noted that Papa John's third-quarter performance met market expectations, but the fourth-quarter operating income guidance was broader than anticipated, allowing the company flexibility for investment and testing.
The company reported a 5.6% drop in North America same-store sales (SSS) for the third quarter. Although there has been a slight improvement with quarter-to-date SSS at -4%, the analyst anticipates near-term pressures to continue. For the fourth quarter, Papa John's has forecasted a low single-digit to mid-single-digit decline in SSS.
Papa John's also announced an increase in the technology fee charged to franchisees, which will go up from 1.5% to 2% starting November 1, to back further investments in its digital platform. Additionally, the company is set to contribute an extra $3.5 million to advertising in the fourth quarter.
The analyst from Deutsche Bank believes that Papa John's will likely need to make further investments in 2025, especially in light of the recent hike in commissary and technology fees for franchisees and a reduced marketing budget, which is now 6% of sales compared to the previous 8%.
Papa John's is at the beginning stages of developing a more effective strategy to drive sustainable same-store sales, which will be discussed in more detail at the upcoming Analyst/Investor Meeting next month. However, the analyst flagged potential risks to the company's financial projections due to the uncertain timing of an upturn in same-store sales, the outlook for unit growth, and additional investments.
In other recent news, Papa John's International has seen a series of developments. The company has appointed Kevin Vasconi as Chief Digital and Technology Officer, whose prior experience is expected to bolster the company's digital and technology strategy. The company also announced the extension of its partnership with PepsiCo (NASDAQ:PEP) as the exclusive beverage supplier for its North American restaurants for another decade.
Papa John's reported a 3.6% decrease in North American same-store sales for the second quarter of 2024, but maintained its operating income. Internationally, the company saw a 3% rise in comparable sales, excluding the Middle East, and reported an adjusted operating income of $38 million for the quarter, a 4% year-over-year increase.
As part of its growth strategy, Papa John's plans to open over 100 new restaurants, focusing on franchisee health and profitability.
Analyst firms Piper Sandler and BMO Capital Markets have revised their financial outlooks for Papa John's, lowering the price target from $75.00 to $65.00, while maintaining their Overweight and Outperform ratings, respectively. These revisions followed the company's release of its second-quarter 2024 financial results.
These are among the recent developments as the company navigates its current challenges.
InvestingPro Insights
Papa John's recent financial data and market performance offer additional context to Deutsche Bank's analysis. According to InvestingPro, Papa John's has shown a strong return over the last month and three months, with price total returns of 13.21% and 29.74% respectively. This recent positive momentum aligns with the company's efforts to implement new strategies and investments.
InvestingPro Tips highlight that Papa John's has maintained dividend payments for 12 consecutive years and has raised its dividend for 4 consecutive years, demonstrating a commitment to shareholder returns despite current challenges. This could be seen as a positive sign for investors, especially considering the company's dividend yield of 3.31%.
However, it's worth noting that 3 analysts have revised their earnings downwards for the upcoming period, which may reflect the near-term pressures and investment needs mentioned in the article. The company's P/E ratio of 20.09 and PEG ratio of 56.85 suggest that the stock might be trading at a premium relative to its near-term earnings growth potential.
For investors seeking a more comprehensive analysis, InvestingPro offers 5 additional tips that could provide further insights into Papa John's financial health and market position.
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