Papa John’s International Inc. addressed customer inflation concerns during its first-quarter earnings call, noting that it offers an affordable family meal at a time when budgets are being stretched thin.
“At Papa John’s you can feed a family of four a delicious premium meal, with a pizza and a side for under $7 per person,” said Chief Executive Rob Lynch on the Thursday call, according to a FactSet transcript.
Analysts have chimed in on this topic, saying that pizza is the most budget-friendly way for a family to dine out. (Eating at home is less expensive.)
Still, inflation isn’t sparing the pizza sector, with Papa John’s
raising prices to cover the higher cost of ingredients.
“Last quarter we were able to successfully raise prices by approximately 7% on average in our corporate stores to offset inflation in our food basket,” he said.
“This contributed to higher ticket as did the continued mix benefits of premium innovation like New York Style Crust. While higher pricing marginally impacted transactions last quarter, we will continue to pursue a balanced approach, weighing short-term margin optimization against the retention of the significant customer base and momentum that we have built over the past two years, which is key to our brand’s long-term success.”
In addition to New York Style Crust, Papa John’s launched a limited-time Epic Pepperoni Stuffed-Crust pizza. Lynch notes that pepperoni is the chain’s most popular topping.
“We believe it’s noteworthy that the past two product launches, New York Style pizza at $13 and Epic Pepperoni at $14, have been premium-priced products, so there is little evidence that consumers want to trade down to value,” wrote Stifel analysts.
“The company has used its loyalty program to target consumers with value propositions, so price-value sensitive consumers have affordable options. We expect the company to continue introducing new products to drive same-restaurant sales gains.”
Stifel rates Papa John’s stock buy and cut its target price to $130 from $145.
Like other pizza chains, Papa John’s is also facing staffing challenges. The company has invested, and says it will continue to invest, in technologies and other solutions to help. But Lynch said finding enough delivery drivers in particular has been a challenge for more than a year. And the situation was more pressured by omicron.
“Do we think that our comps could be even higher if we had more staffing? Absolutely,” Lynch said.
But he drew comparisons with unnamed competitors to demonstrate the stronger position that Papa John’s is in.
“Our premium positioning is a different model than the folks who are talking about staffing being such a challenge,” he said.
“[T]heir staffing challenges are exacerbated because their model is low priced, more transactions. We’re premium priced. We don’t need quite as many transactions and therefore we’re less impacted by the staffing challenges we’re all seeing.”
And Yum Brands Inc.
which is parent company to Pizza Hut, said it was hurt by staffing deficiencies.
“While consumer demand remained strong, sales softness in the quarter stems from our delivery channel, where capacity constraints limited our ability to meet demand,” said Yum Chief Executive David Gibbs on the first-quarter earnings call on Wednesday, according to FactSet.
“This was driven by staffing challenges, mainly from delivery driver shortages, that have been felt across the industry.
Yum reported an earnings miss. Pizza Hut’s same-restaurant sales came in at break-even for the quarter with U.S. sales down 6%.
“Similar to what we heard from Domino’s, Pizza Hut U.S. delivery business weakened during the quarter, as a result of a shortage of delivery drivers,” wrote BTIG in a Yum note.
“Our conversation with other restaurant operators suggests that third-party delivery aggregators that utilize a subscription service could be gaining an edge over the traditional delivery model. With that said, Pizza Hut U.S. indicated that it is
considering / testing partnerships with aggregators to provide more access to
drivers similar to what Papa John’s is doing.”
BTIG rates Yum stock neutral.
“It’s not difficult to notice that both Domino’s U.S. and Pizza Hut U.S. generated negative same-store sales in Q1 (at -3.6% and -6%, respectively), with both concepts calling out staffing issues with regard to delivery drivers,” wrote Mark Kalinowski in a Papa John’s note for Kalinowski Equity Research.
“Papa John’s successful Q1 lap of an even more challenging comparison than either of these two rivals faced is a good argument for Domino’s U.S. to start using third-party delivery in a meaningful way.”
Kalinowski rates Papa John’s stock buy with a $115 price target.
Papa John’s reported first-quarter earnings that beat the Street.
“We view Papa John’s strategic and operational focus on its menu and marketing approaches, partnerships with aggregators and its franchisees, growth and capital moves as prudent and supportive of their go forward model,” wrote MKM Partners in a note.
MKM rates Papa John’s stock neutral with a fair value estimate of $108, down from $112.
Papa John’s stock has slumped 34.2% for the year to date. Domino’s is down 40%. And Yum Brands shares have fallen 17.7% for 2022 so far. Yum Brands is also the parent company to Taco Bell and KFC.