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Papa John’s Int’l, Inc. (PZZA): Is This Pizza Stock Rolling in Dough?

Pizza restaurant chain Papa John’s Int’l, Inc. (NASDAQ:PZZA) recently lost a slice of its market share after the Louisville, Kentucky-based company posted fourth quarter results that topped estimates on the top line but missed estimates on the bottom line. To make matters worse, Papa John’s also told investors that it needed to restate its earnings back to 2009 after the company and its auditors found an accounting error stemming from a joint venture agreement. Will this double whammy of bad news end Papa John’s Int’l, Inc. (NASDAQ:PZZA)’s streak of strong performance over the past 12 months?

Sales Growth

Papa John’s Int’l, Inc. (NASDAQ:PZZA)’s same-store sales came in strong, at 5.2% growth in North America and 7% internationally. The company attributed its higher same-store sales to an increased number of stores worldwide. During the quarter, Papa John’s opened 156 restaurants and closed 22 locations — which represents a 7.2% increase over the previous year.

Its North American company-owned restaurants reported 23.6% growth in revenue to $161.6 million. Franchise units reported 4.6% sales growth, which resulted in an 18.3% increase in royalty revenues to $21.2 million. Its domestic commissary segment posted a 15.9% rise in sales to $149.1 million, which it attributed to higher sales volume.

Meanwhile, its international revenues rose 29.1% to $20.7 million, fueled by new store openings and high same-store sales growth.

Room for Improvement

From these figures, I can see two areas where Papa John’s Int’l, Inc. (NASDAQ:PZZA) can improve upon to stabilize its growth.

First, it needs to increase the dependence on franchise stores, rather than company-owned ones. Fast food giants McDonald’s Corporation (NYSE:MCD), Yum Brands, Inc. (NYSE:YUM) and Burger King Holdings, Inc. (NYSE:BKC) have all strongly benefited from a shift towards franchised businesses. This reduces overhead costs, minimizes risks and allows more store openings.

Second, it should strive to increase its international footprint. Although 1,400 of Papa John’s 4,163 locations are located internationally, they are scattered all over the world — in the Middle East, Russia, South America, Europe and Asia — serving a total of 35 countries. That scattershot approach has exposed it to some nasty markets, which offset growth in stronger ones. With a limited number of stores in each country, it also suffers from weaker brand recognition than Yum’s Pizza Hut or Domino’s Pizza, Inc. (NYSE:DPZ). Like its industry rival Yum, it should concentrate its efforts more on China and the rest of Asia to maximize growth potential, while minimizing its exposure to Europe.

Fourth Quarter

For its fourth quarter, Papa John earned 74 cents per share, or $18.4 million – an improvement from the 65 cents per share, or $16.8 million, it earned in the prior year quarter. Its revenue rose from $306.2 million to $367.3 million.

Analysts had expected the pizza chain to earn 75 cents per share on revenue of $355.4 million.

For the full year, Papa John’s earned $2.58 per share, or $66 million — up from $2.16 per share, or $58.5 million, in the previous year. Revenue also rose from $1.22 billion to $1.33 billion.

Cash Reserves and Expenses

Papa John’s finished the quarter with cash and equivalents of $16.4 million. Long-term debt was at $88.3 million. Despite its seemingly low cash reserves, Papa John’s free cash flow and long-term debt have been diverging in the right directions, as seen in this chart.

PZZA Cash and Equivalents data by YCharts

Expenses, though rising, are still under control. However, Papa John’s recently stated that Obamacare measures, which will require the company to pay up to 60% of employees’ health care, could result in an increased cost of 11 to 14 cents per pizza, and a much steeper increase in expenses in 2013.

The ominous “restatement of earnings”

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