Papa John’s stock under pressure as pizza demand cools
Top pizza stocks like Papa John's, Domino's Pizza, and Yum! Brands (Pizza Hut) are plumbing fresh one-year lows as the entire pizza category continues along a post-pandemic slowdown.
Investors may be right to cool on pizza stocks as consumers become more mobile and dine out again, Stifel analyst Chris O'Cull suggested in a new note on Tuesday. And as the pizza chains ramp up promotions to lure back diners, it could put pressure on profits.
O'Cull was most cautious on Papa John's on the assessment that new products may not do much to lift sales.
Here's what O'Cull had to say on Papa John's:
Price Target: $100 (down from $120 previously)
Rating: Buy (reiterated)
Stock price movement assumed: +32%
Pizza demand is weakening, per O'Cull's research.
"We estimate that the pizza category has been experiencing transaction declines since the beginning of the year, and our checks indicate consumer spending in the category has been more challenging recently," O'Cull wrote. "It's unclear what might be driving the weaker pizza consumption; we surmise it's a combination of consumer fatigue toward pizza, more delivery and take-out options as restaurants have pivoted toward these channels, and a lack of pizza delivery drivers limiting capacity."
On pizza promotions, the analyst added: "We believe another indication of weaker consumer demand is the increasing use of discounts (e.g., Domino's 20% off All Items promotion) and value platforms (e.g., Papa Pairings). On its second quarter conference call, Papa John's management indicated discounts and aggressive incentives would be delivered locally rather than through a national platform. So, we surmise the decision to introduce Papa Pairings (2 or more items for $6.99 each) in September was in response to significantly weak transaction performance in August/September."
Putting it all together, O'Cull said, "we felt it was prudent to lower our third quarter same-restaurant sales projection to -4% from flat comps (Street +1.4%)."
Papa John's product launches 'have not been great,' O'Cull says
O'Cull questioned whether Papa John's new pizza bowls and other product launches would have much of an impact on sales growth.
"During 3Q, the company introduced Papa Bowls (Chicken Alfredo, Garden Veggie, Italian Meats Trio, and create your own), which are bowls of pizza toppings with no crusts," O'Cull wrote. "The product is intended to eliminate the veto vote of the low-carb consumer in the party (i.e., LSD mix) rather than being a broad-based traffic driver, like the Epic Stuffed Crust pizza. Unfortunately, reviews of the product have not been great. In our opinion, the execution of the concept was poor—moisture from the toppings is released as the bowls are baked, so the dish is often a bit waterlogged."
O'Cull didn't write off Papa John's product development efforts completely, however.
"Although we are disappointed with Papa Bowls, it does not indicate a problem with the company's product innovation," the analyst said. "We see several opportunities for the company to introduce new products, especially ones targeting the underutilized lunch daypart; for example, the company could introduce a line of oven-baked sub sandwiches."
Overall, "we suspect the company was caught a bit off-guard by the category weakness and need for aggressive value," O'Cull continued, "but we expect product innovation will be an important same-restaurant sales driver in 2023 for Papa John's."
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
Click here for the latest trending stock tickers of the Yahoo Finance platform
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app for Apple or Android
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube
