KeyBanc Downgrades Papa John’s International

Date: Thursday
Source: Investing.com

KeyBanc Capital Markets downgraded Papa John’s International (PZZA) from Overweight to Sector Weight, citing a prolonged recovery path for the pizza chain.

The downgrade follows discussions at the Restaurant Finance & Development Conference in Las Vegas, indicating that Papa John’s recovery in sales and profitability may take longer than anticipated.

KeyBanc stated, "Following a series of meetings with key stakeholders, we believe the road to a sales and profit recovery in the domestic business could be longer and windier than previously expected."

Despite modest improvement in recent same-store sales (SSS) trends, analysts noted a difficult quarter ahead for the brand. Analysts expressed that the fourth quarter is likely to be challenging, and the improvement in SSS results is due largely to broader industry recovery and a $3.5 million advertising push by the company in late October.

However, this initiative indicates that "fixing Papa John’s may require additional co-investment," suggesting possible changes to the “Back to Better 2.0” strategy.

KeyBanc pointed out that this strategy already reduced franchisee contributions to advertising and might need to be reversed to generate more brand support. Furthermore, they believe adjustments to supply chain commissions could negatively impact Papa John’s finances, complicating the recovery.

Despite these challenges, KeyBanc remains optimistic about the company’s new leadership team, which includes former Wendy’s CEO Todd Penegor, and sees potential in Papa John’s new loyalty program to drive more visits. However, with a stock valuation of 21x 2025 EPS, higher than peers like Wendy’s and Restaurant Brands (NYSE:QSR), they expressed concerns about near-term earnings growth potential.

KeyBanc lowered its 2024 and 2025 earnings-per-share estimates to $2.20 and $2.38, respectively, due to more conservative sales and margin assumptions.