Papa John's (PZZA)

Fast-food pizza chain Papa John’s (NASDAQ:PZZA) beat Wall Street’s revenue expectations in Q1 CY2025, but sales were flat year on year at $518.3 million. Its non-GAAP profit of $0.36 per share was 4.1% above analysts’ consensus estimates.

Company Overview

Founded by the eclectic John “Papa John” Schnatter, Papa John’s (NASDAQ:PZZA) is a globally recognized pizza delivery and carryout chain known for “better ingredients” and “better pizza”.

Traditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Fast-food pizza competitors include public companies Domino’s (NYSE:DPZ) and Pizza Hut (owned by Yum! Brands, NYSE:YUM) as well as private company Little Caesars.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $2.06 billion in revenue over the past 12 months, Papa John's is a mid-sized restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale.

As you can see below, Papa John's grew its sales at a sluggish 4.5% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts).

This quarter, Papa John’s $518.3 million of revenue was flat year on year but beat Wall Street’s estimates by 0.6%.

Looking ahead, sell-side analysts expect revenue to grow 2.4% over the next 12 months, a slight deceleration versus the last six years. This projection is underwhelming and suggests its menu offerings will face some demand challenges.

Number of Restaurants

The number of dining locations a restaurant chain operates is a critical driver of how quickly company-level sales can grow.

Papa John's operated 6,019 locations in the latest quarter. It has opened new restaurants quickly over the last two years, averaging 2.8% annual growth, faster than the broader restaurant sector. Additionally, one dynamic making expansion more seamless is the company’s franchise model, where franchisees are primarily responsible for opening new restaurants while Papa John's provides support.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Same-Store Sales

A company's restaurant base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales gives us insight into this topic because it measures organic growth at restaurants open for at least a year.

Papa John’s demand has been shrinking over the last two years as its same-store sales have averaged 1.6% annual declines. This performance is concerning - it shows Papa John's artificially boosts its revenue by building new restaurants. We’d like to see a company’s same-store sales rise before it takes on the costly, capital-intensive endeavor of expanding its restaurant base.

In the latest quarter, Papa John’s same-store sales fell by 1.3% year on year. This performance was more or less in line with its historical levels.

Gross profit margins are an important measure of a restaurant’s pricing power and differentiation, whether it be the dining experience or quality and taste of food.

Papa John's has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 19.6% gross margin over the last two years. That means Papa John's paid its suppliers a lot of money ($80.36 for every $100 in revenue) to run its business.

In Q1, Papa John's produced a 29.3% gross profit margin, down 2.2 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as ingredients and transportation expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Papa John's was profitable over the last two years but held back by its large cost base. Its average operating margin of 6.9% was weak for a restaurant business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, Papa John’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Papa John's generated an operating profit margin of 4.6%, down 1.9 percentage points year on year. Since Papa John’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, and administrative overhead expenses.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Papa John's has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 3.5% over the last two years, slightly better than the broader restaurant sector.

Taking a step back, we can see that Papa John’s margin dropped by 1.7 percentage points over the last year. This decrease came from the higher costs associated with opening more restaurants.

Papa John’s free cash flow clocked in at $19.11 million in Q1, equivalent to a 3.7% margin. This result was good as its margin was 3.9 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Papa John's hasn’t been the highest-quality company lately because of its poor top-line performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 40.1%, splendid for a restaurant business.

Papa John's reported $44.01 million of cash and $984.3 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $206.3 million of EBITDA over the last 12 months, we view Papa John’s 4.6× net-debt-to-EBITDA ratio as safe. We also see its $41.59 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Papa John's narrowly top analysts’ same-store sales expectations this quarter. We were also glad its full-year EBITDA guidance slightly exceeded Wall Street’s estimates. On the other hand, its EBITDA slightly missed. Overall, this print had some key positives. The stock traded up 3.5% to $34.50 immediately following the results.

Updated: May 15, 2025 at 10:34 PM EDT

When considering an investment in Papa John's, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Papa John's isn’t a terrible business, but it doesn’t pass our bar. First off, its revenue growth was uninspiring over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its stellar ROIC suggests it has been a well-run company historically, the downside is its projected EPS for the next year is lacking. On top of that, its shrinking same-store sales tell us it will need to change its strategy to succeed.

Papa John’s P/E ratio based on the next 12 months is 19.7x. While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $48.45 on the company (compared to the current share price of $38.50).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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