Let’s face it – when you’re low on funds but want a filling meal, nothing cures ravenous hunger more than a piping hot slice of pizza. Thanks to the amount of starches integrated in traditional pies, the human stomach may take about six or eight hours to fully digest an average serving. By that token, enterprises like Papa John’s (PZZA) should perform relatively well, even under tough economic conditions.
True, consumers naturally fade their discretionary spending in the face of financial pressures. With the economy struggling against stubbornly high inflation and major corporations issuing mass layoffs, people are inclined to watch their expenditures. Nevertheless, circumstances have to get pretty darn awful for consumers to order fewer Papa John’s pizzas.
Without casting aspersions, Italian culinary artists aren’t exactly flying over to the U.S. to reverse engineer the company’s pies. Typically, you’re ordering Papa John’s because you’re inebriated or under the influence of botanicals (not speaking from personal experience, of course). So, the underperformance of PZZA stock is a curious sight despite commendable efforts of management to right the ship.
PZZA Stock Sees Bearish Options Volume Despite Earnings Beat
In an interview with Yahoo Finance, Papa John’s CEO Robert Lynch expressed enthusiasm about the direction the company was going. “Yeah, I think we've definitely turned around this company. We've gone from about 850,000 to 900,000 per-year sales per unit, and today our system averages almost 1.2. Our franchisees are healthy. Our franchisees are developing,” Lynch stated in part.
To be sure, Lynch should be proud. Obviously, the company overcame a severe controversy that – from this author’s perspective – seemed terminal, especially in the modern age of recognizing prior errors and attempting to forward social equity.
Just as importantly, in the pandemic-disrupted year of 2020, Papa John’s generated revenue of $1.81 billion, a conspicuous gain from the $1.62 billion posted the year prior. Further, the company carried momentum forward, ringing up sales of $2.07 billion in 2021 and $2.1 billion in 2022.
Unfortunately, the narrative went a little bit sideways in the first quarter of 2023. On the positive side, Papa John’s printed adjusted earnings per share of 68 cents, beating Wall Street’s consensus target of 66 cents. However, revenue disappointed, posting $527 million and missing the consensus target of $534 million. Also, the latest tally dropped 2.9% on a year-over-year basis.
Adding to the concerns, PZZA stock entered the list of Barchart’s unusual stock options volume, though for unfavorable reasons. Following the close of the May 19 session, total volume reached 5,001 contracts against an open interest reading of 25,474. Further, the delta between the Friday session volume and the trailing one-month average volume came out to 287.67%.
Drilling down, put volume hit 3,406 contracts while call volume mustered 1,595. This pairing yielded a put/call volume ratio of 2.14, on paper favoring the bears. While Papa John’s can always make a turnaround from its present slump, the increased bearishness might be a warning for the broader economy.
Disappointing Metrics for Papa John’s
Since the beginning of this year, PZZA stock lost more than 7% of market value. This significantly underperforms the benchmark S&P 500 index, which gained nearly 10% during the same time period. Further, 2022 overall has been a disappointment. In the trailing 365 days, PZZA is down almost 5%.
Tellingly, PZZA stock performed well up until the tail end of 2021. Once 2022 rolled in, ushering in blisteringly high inflation followed by crushing interest rate hikes, the market value of Papa John’s proceeded to crumble.
To be fair, that’s not a company-specific problem but rather an industry headwind. According to data compiled by Statista, consumer spending on pizza delivery in the U.S. hit $19.8 billion in 2021. However, in the following year, this metric dropped to $17.3 billion or a 12.6% decline.
With troubling data clouding the overall consumer economy, many folks may have pivoted to store pickups over deliveries. That may help explain Papa John’s 2022 revenue increase against the prior year. However, with the Q1 YOY sales shortfall, the consumer might be cutting back on pizza altogether.
That’s not just a bad sign for PZZA stock but for the economy as a whole.
Key Stats for PZZA
According to the Barchart Technical Opinion indicator, PZZA stock rates as an 88% sell. Nevertheless, market participants should note that shares appear oversold. Therefore, it’s possible that a reversal might materialize.
Currently, analysts remain very bullish on PZZA stock. Out of 12 experts, nine of them rate it a strong buy while the others peg it a hold. Three months ago, the consensus was a moderate buy, breaking down as eight strong buys and four holds.
Still, investors will want to be cognizant of the bigger picture. With consumer dynamics negatively impacting the U.S. pizza market, PZZA stock faces a difficult road ahead.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
