A popular staple within the broad fast-food category, Papa John’s (NASDAQ:PZZA) now faces a significant post-pandemic challenge: getting consumers back either through the doorway or ringing the phone. Noting weakness in the pizza segment, an analyst cut their price target for PZZA stock. While shares popped higher in the early afternoon session, they remain embattled so far this year.
Specifically, Stifel Nicolaus analyst Chris O’Cull cut his price target of PZZA stock to $100 from $120, according to MarketWatch. O’Cull noted that Papa John’s was “not delivering” in recent months, posing concerns about consumer sentiment for the category.
“We believe quick-service pizza may report the weakest SRS [same-restaurant sales] performance of any restaurant category during 3Q,” O’Cull wrote in a note to clients.
While the analyst stated that what ailed the quick-service pizza segment was “unclear,” he cited several possible headwinds. These include consumer fatigue toward pizza, more delivery and take-out options and a lack of pizza delivery drivers.
Further, O’Cull expressed anticipation that Papa John’s same-restaurant sales trend toward the “negative low- to mid-single digit percentage range from a year ago,” per MarketWatch’s description. In comparison, the FactSet consensus for third-quarter SRS calls for 0.3% growth.
PZZA Stock Faces Potential Margin Cuts
According to a Sept. 20 article on Yahoo Finance, PZZA stock, along with competitors Domino’s Pizza (NYSE:DPZ) and Yum! Brands (NYSE:YUM) – which owns Pizza Hut – hit fresh one-year lows as the broader pizza category suffers a post-pandemic slowdown.
Not helping matters is Covid-19 itself. Previously, with lockdowns and other restrictions, Covid-19 effectively created a hostage audience for Papa John’s. Naturally, this dynamic significantly bolstered PZZA stock. However, with mobility mostly restored, O’Cull suggested that people are dining out again.
Moving forward, one major concern focuses on profitability margins. To convince consumers to return, Papa John’s may have to roll out discounts. Additionally, this effort may inspire other companies to do the same. The net result could be margin-killing promotions against an increasingly competitive ecosystem.
According to data from Gurufocus.com, Papa John’s posted revenue of $523 million in Q2 of this year. This tally represented a gain of about 1.6% against the year-ago level. On the bottom line, the company posted net income of $25 million in the most recently reported quarter. However, in this case, the metric slipped nearly 22% from one year ago.
Therefore, the main concern regarding PZZA stock is a continuation of arguably necessary business activities that can end up constraining earnings.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
